Inheritance Tax: Make Sure You Don’t Get Caught Out – Part 2
This is the second of two articles on Inheritance Tax (IHT). The first one, available on the news page of our website, discussed how IHT is charged and the main reliefs available.
In this follow-up article, we explain our approach to reviewing your IHT position. We will also consider the planning measures that can help you to reduce your IHT liability and pass your estate on to your loved ones as you intend.
How wealth is taxed remains a contentious issue; although no significant changes were announced by the Chancellor in his Autumn budget, there is still uncertainty over how IHT will be taxed in the future. Since the tax environment and personal circumstances can change quickly, our recommendation is that everyone considers their IHT position and reviews it on a regular basis.
How big is your potential liability?
When reviewing a client’s IHT position, the first thing we do at GWA is to understand what their hopes and plans are for the near and more distant future. This is extremely important, as what might make the most sense from a tax perspective may not be right for you and your individual circumstances.
We then make sure we have information on all the assets owned by our client and on any gifts or chargeable transfers made in the last seven years. Along with details of assets, we will review other documents such as Power of Attorney, Partnership Agreements and the latest Will.
All of this information allows us to evaluate whether any IHT relief is available on existing assets and to calculate the IHT liability on the estate, as things stand.
Consider how to reduce liability
Once we have identified the IHT liability, we will look at any action you could take that may reduce it. This might include:
- IHT Reliefs
We will review your assets to see if we can suggest any changes to capture more of the valuable reliefs available to you.
Gifting assets and/or surplus income can reduce both potential IHT, as calculated now, and the growth in IHT liability due to any natural increase in the market value of assets.
Gifting assets, either directly or via a trust, can reduce the final IHT liability providing the giver survives for seven years afterwards. Gifting assets which are likely to increase in value, not only reduces the estimated IHT liability calculated on the asset’s value now, but also shelters any increase in the asset value from an estate.
Gifts out of income can also be exempt from IHT. It is important however to keep a record of these gifts to show that they are regular, made out of excess income and the level of gifting does not reduce the standard of living of the giver.
There are other opportunities for giving, such as for marriage, which can be IHT exempt depending on the size of the gift and your connection to the newlyweds.
Gifting assets may trigger a Capital Gains Tax (CGT) liability and this should be considered as part of the planning exercise.
- Pensions and IHT Friendly Investments
In general, saving into a pension is a great way to plan for retirement. In addition, unused pension savings can be passed on in your estate with no IHT liability.
Certain investments can also, after a period of time, be exempt from IHT. It is possible to reduce IHT liability by selling or transferring other assets or investments and re-investing the funds into more IHT-friendly investments. Other things, such as CGT and any dependence on the income generated by the asset, should be taken into account.
Of course, it will not always be possible to remove IHT completely. In this case, you could think about who will be responsible for paying the IHT due after your death. Life assurance policies are available which pay out cash on death. This cash can be used to settle IHT, meaning your loved ones will not have to sell any assets.
At GWA, our tax advisers work closely with our Wealth Management team who can look at cover as well as your overall investment strategy.
In summary, asking us to review your estate and estimate your current IHT liability is a positive first step towards understanding your assets and how they will be passed on to loved ones. The review is a great way to start a discussion with family about plans for the future and, hopefully, provide peace of mind for everyone. We can look at the avenues available to you to reduce your liability including simple planning tools, gifting, pensions, IHT-friendly investments, and life assurance policies. Please do not hesitate to get in touch if you would like further information.