Top tips for inheritance tax planning
By Rebecca Williams, client director at Brown Shipley
There is no doubt that talking about Inheritance Tax (IHT) invariably invokes an emotional response. It is a tax on the transfer of wealth to future generations.
When looking at IHT planning the starting point has to be an assessment of the likely IHT liability on death.
Without a crystal ball, an IHT calculation can usually only be a snapshot in time but having established the likely IHT liability on death, there are a variety of options and methods for IHT planning. Here are some of the key points to consider:
1.Make sure you write a Will (and keep it up to date!)
Making a Will ensures those that you wish to benefit from your estate after you die will in fact benefit. It is also important to choose who will administer and distribute the estate on your behalf.
Also consider a Power of Attorney (POA).
A POA is a legal document by which an individual (the donor) gives another person or persons (the attorney) the power to act on his or her behalf during times of incapacity.
A POA may be general, enabling the attorney to do everything the donor can do themselves or it may be limited to certain acts.
2.Use your annual gift allowance
Arguably, the easiest way to start IHT planning is to make gifts. Gifts are outright and unconditional; you can’t have the money back or benefit from the gift if it is to be effective for IHT planning. Gifting up to £3,000 each tax year is exempt from IHT and any unused allowance from the previous tax year can be carried forward. This means married couples or civil partners can potentially gift up to £12,000 (£6,000 each) in the current tax year, assuming no gift was made in the previous tax year.
Outside of gifting, a bewildering array of products is available to help with IHT planning. Arguably the simplest is life assurance. Whole of life cover guarantees, in return for a regular premium, to pay a sum assured whenever you die. However, the key to effective planning is not the life assurance policy itself but ensuring that the policy is put in trust for your beneficiaries. Without the trust, proceeds on death will ordinarily form part of your estate and be subject to IHT, which defeats its very purpose!
You may not be aware that your pension offers a tax efficient opportunity to pass wealth on to future generations. Ordinarily, your pension fund is free of IHT on your death so reviewing your beneficiaries regularly makes good sense. In these planning scenarios a prudent approach could be to fund living expenses from other assets that are subject to IHT before drawing income from your pension.
You could also consider making pension contributions on behalf of others as a way of reducing the value of your estate subject to IHT.
5.Tax efficient investment
If you decide not to make outright gifts during your lifetime and/or where life assurance is not appropriate, investing tax efficiently allows you to keep control of your money whilst achieving an IHT saving over time. Typically this is achieved by investing in assets that qualify for Business Relief which reduces the value of the asset when calculating how much IHT has to be paid.
In conclusion IHT, in whatever form it takes, will continue to be an emotive issue. Talking about your objectives and tailoring a solution to meet your personal situation is more important than ever.
Rebecca Williams, client director 0207 606 9833
Our Wealth Planning service can involve investing your capital which places it at risk. Investment risk means the value of your investments or any income can fluctuate and you may not get back some or all of the amount invested. We recommend our clients seek professional tax advice to understand their personal liability for investment income and/or gains. This will depend on personal circumstances and the prevailing tax rules, which are subject to change.