Inheritance Tax Planning – getting started

After much speculation around the scrapping of Inheritance Tax (IHT), the 2023 Autumn statement gave no truth to those whispers, meaning, for now, it’s here to stay with no changes to come…yet. So, it’s worth noting the ways to mitigate your tax liability on your Estate.

We recommend speaking to a tax expert who understands the complex tax legislation, and who will take time to understand your individual situation, in order to work with you to advise on and implement a plan that will aim to keep you on the right side of HMRC, whilst efficiently distributing your wealth as you wish.

We set out below a few things to think about. Please do get in touch if you’d like to discuss these in more detail.

Make a tax-efficient Will

Your Will sets out how the assets in your Estate are distributed, allowing you to decide which of your loved ones should inherit your assets and in what proportion. If you die intestate (i.e. without a Will) your assets will be distributed according to intestacy rules, meaning your assets might not go to who you want them to.

Having a Lasting Power of Attorney (LPA)

At some stage you may no longer have the mental capacity to make financial or welfare decisions. An LPA lets you choose someone to make these decision for you. They’re really important, as they legally appoint someone to make decisions, and maybe even run your business, if you’re unable to.

Gift during your lifetime

Making gifts within your lifetime is a simple yet effective way of reducing the value of your Estate and therefore reduces your exposure to IHT. Unless it is specifically an exempt gift,  you need to survive the gifting date by seven years so that the value is no longer in your Estate for IHT. However, if you survive the gift by three years there is a reduced amount of Inheritance Tax payable.

Make use of exemptions and reliefs

There are a number of exemptions available, the most common ones we advise on are:

• Using your £3,000 annual exemption
• Making regular gifts out of excess income
• Do you own part or all of a business? Evaluate if it meets the conditions for Business Asset Disposal Relief

Review your investments

Reviewing your investments so they are structured to include assets which qualify for Business Relief can see either 50% or 100% relief on some of an Estate’s business assets. Some typical assets that attract relief include forestry, property development and AIM portfolios.

Use a Trust

Setting up a Trust is a common route taken by those looking to gift away their assets, but they still wish to have control.

For most cases you can gift up to £325,000 every seven years into a Trust without any immediate IHT charge. The value of the asset gifted and any further growth will fall outside of your Estate. However, if you gift more than £325,000, Inheritance Tax is payable at 20% on anything above this value.

For married couples and those in civil partnerships, their individual nil rate bands means that, together, a total of £650,000 can be gifted with no immediate IHT charge.

Trusts for grandchildren are often used to pass assets down the family; they can be an efficient way to fund school or university fees.

There are a number of Trust structures available, so depending on your objectives and needs, a different type can be set up. Typical examples are Discretionary Trusts, Discounted Gift Trusts and Gift and Loan Trusts.

Insurance

If gifting away your assets whilst your alive isn’t for you, you may want to invest in life insurance, which can pay out on death to cover your estimated IHT liability. Make sure the policy is written into Trust so that when it is paid, the amount does not form part of your Estate assets. There are many types of life policy available, which should be discussed with a financial advisor.

How Wilson Partners can help

Due to its sensitive nature, not just because it can be a complicated tax, but because these are difficult things to think about and discuss with your loved ones, IHT planning can be a topic that is often ignored and planning opportunities can be missed. However, with a lot of people’s assets increasing in value and the allowance threshold remaining the same, more people are being caught in the Inheritance Tax net. It’s therefore important to understand your assets and your exposure to IHT. Get in touch today.