Before Christmas, I wrote about How Inheritance Tax (IHT) is likely to impact more families due to uk economic policy in response to coronavirus. Having identified the rising problem, I now want to focus on the possible solutions.
But, you may well be asking “How much of a problem is this for me?”. No doubt you will have a general idea as to whether or not your estate is going to suffer IHT, but do you know the exact bill today should anything happen to you? Do you know what it might look like in the future if you do nothing?
That’s where Wise comes in. Once we have established the value of your estate, any existing planning you have done, and any future plans you may have, we can provide a comprehensive written report so that you know the facts and can start to make decisions on how to tackle the problem if the value of your estate is above the relevant threshold.
Each individual estate and viewpoint will be different, so there is no ‘one size fits all’ approach. It will be up to you and your Wise adviser to decide the best combination of solutions. Broadly, there are four approaches to IHT planning:
- Spend it. It must be down to personal choice of course, but perhaps the simplest way to reduce the value of your estate and potential IHT bill is to enjoy the money. You’ve worked hard to accumulate your wealth so why not go ‘SKIing’ (Spending Kids Inheritance!). Buying appreciable assets such as property, antiques and collectables obviously just shifts the value and could even make the problem worse. Instead, you could consider spending money on depreciating/wasting assets such as cars or on goods and services which immediately lose their monetary value such as eating out entertainment and holidays. These activities all obviously have value beyond pounds and pence.
- Gift it. Making direct gifts to your chosen beneficiaries can be a satisfying way of reducing any future liability. We generally need to consider the ‘7-year rule’ (gifts made more than 7 years before death are free from IHT and gifts made 3-7 years before death are taxed on a sliding scale), but a much-overlooked rule is gifting from excess income. Gifts from excess income need not be outright but could be into trust. This would mean you can start to take value out of your estate but still have control over when the beneficiaries receive funds. A half-way house is a Loan Trust where the original sum always forms part of your estate and you can call upon it if you need it. However, any growth in the underlying investment is immediately outside of the estate and retained for the beneficiaries.
- Shelter it. Any funds held in Pensions will not form part of your estate. Therefore, these should be preserved and grown where possible. Not only do pensions offer IHT sheltering but of course, if you ever need the money yourself, it is there waiting for you. There are also various investments that you can make which attract Business Relief. Normally these would fall outside of your estate after you have held them for just 2 years. You also retain ownership and control of those assets. The most traditional option is to invest in a portfolio of AIM (Alternative Investment Market) shares, although this would generally be viewed as higher risk. There are other options available where the structures are much more predictable and could appeal to even a cautious investor as part of their wider portfolio. These tend to operate in the field of renewable energy, which brings in returns from government subsidies. Secured property development lending is another popular choice.
- Insure it. You can take out a whole life insurance policy which would pay a lump sum out into trust. The trust fund can then be used to pay the IHT bill. Or your cash and other assets are used to pay the bill and the funds preserved in the trust. Of course, you must consider the cost of the premiums which can be very expensive, particularly as you get older or if you suffer health issues. This is because, with a whole of life policy, the insurance company must account for the fact that they are going to have to pay the sum assured at some point, so long as premiums continue to be paid. If you are unable or unwilling to keep maintain the premiums, the policy ceases and you lose the cover. If you are a couple, taking a joint policy that pays out on the second death reduces the risk to the insurance company of a pay out in the short term and therefore helps to keep the premiums down.
I would caveat all of this with a warning about overplanning. You don’t want to be in a position where you have overspent, given too much away, tied too much up in longer term investments, or committed to expensive insurance premiums which eventually become a burden. Circumstances can change, income streams and investments vary, and unforeseen costs such as care can come to the fore. There is a balance to be maintained between providing for yourselves, providing for your beneficiaries, and minimising tax. That is why it’s important to ensure you take proper advice and that your plan is reviewed regularly to ensure you are not sacrificing your other financial goals in the name of potentially saving inheritance tax.
We would welcome the opportunity to discuss the ways in which we can help you, based on your specific circumstances.
Joseph Cooper FPFS - Chartered Financial Planner
28th May 2021
The information contained in this article is not a personal recommendation and should not be construed as investment advice. If you are unsure about the suitability of a particular investment you should speak to an authorised financial adviser.
Every effort is taken to ensure the accuracy of the information provided but no warranties or given.
HMRC tax rates and allowances are subject to change and tax treatment may depend on individual circumstances.
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