Inheritance Tax Planning - Top tips

Other IHT planning points which are often overlooked are the use of personal gifting allowances, using clear expression of wish documents or even having a valid will in place.

To ensure you are making the most of your allowances and putting the right plans in place, they must be reviewed regularly with your tax adviser. It is also important to work with a financial adviser, one that you trust and feel has your best interests at heart, to make sure you are using allowances efficiently and that you feel confident about your financial situation.

Below are nine top tips to consider when thinking about IHT planning

1. IHT impacts almost everyone

Many people do not realise that IHT is likely to impact them. IHT applies to your worldwide assets unless they are specifically exempt, like a pension or assets in many trusts. It includes your home, any other properties you own, your savings and investments, including any ISAs, your car and your personal possessions. The list is extensive, and it can quickly add up.

With the allowance frozen until 2028, this could mean more people are subject to IHT as things like the value of property and investments continue to grow.

2. The power of gifting

Gifting is an efficient and effective way of passing wealth to loved ones while at the same time reducing the value of your estate for inheritance tax purposes.

Lifetime gifts are immediately exempt if they fall within the Annual Allowance (£3,000 pa) or Small Gift (£250 pa) exemptions. If you have a larger disposable income you might want to consider whether you might qualify for the normal expenditure out of income exemption which has no limit.

Larger lifetime gifts can also be made but they do come with some rules. You can make a gift of any financial amount but if you pass away within seven years of making that gift, then some or all of that gift could be classed as part of your estate for IHT purposes.

3. Consider Trusts or a Family Investment Company

If you don’t wish to make outright gifts, you can make use of a structure such as a Trust or Family Investment Company. This can have the effect of removing wealth (and future growth) from your estate while still enabling you to have control over the assets, as well as offering an element of asset protection in the event of a failed business or relationship breakdown.

There are several types of Trusts, each comes with its own tax rules so it’s best to consult a specialist to ensure you choose the one that best suits your and your beneficiaries’ future needs.

4. Pensions as IHT tools

Pensions can be a valuable tool when passing down wealth because they typically sit outside your estate for IHT purposes. If you have assets inside and outside of a pension plan, you’ll want to consider when to drawdown from your pension and whether to also consider using non-pension assets to meet the full cost of everyday life.

5. Make a will

A will is one of the most overlooked financial documents and is perhaps the most essential. Without a will, your estate will be distributed under the intestacy rules. This can mean that some of the IHT charges on your estate could have been avoided with sensible will planning.

6. Review your assets to check that they will qualify for relief

This is relevant for those who intend to use Business Relief. This relief is vital for ensuring a business can be passed on to the next generation without a significant IHT liability arising.  Specific trading and ownership criteria need to be met to qualify so it's worth seeking professional advice. 

7. Invest in IHT efficient investments

Beyond traditional businesses, various assets attract relief from IHT.  Investing in certain investments such as AIM shares and farmland can attract 100% relief within a relatively short period. However, as with all investments, they carry their own risks, so advice should be sought before investing.

8. Take out insurance

If you take out an insurance policy, it won’t reduce the amount of IHT due on your estate, but the payout may make it easier for your family to pay the bill. You must make sure the life insurance pay-out goes into a trust - if you don’t, it will only increase the value of your estate and you will have to pay more tax.

9. Seek some help

Inheritance planning is notoriously complex. But there are advantages to starting early. Seek the support of an adviser that you trust and one that you think will have your best interests at heart. While no one wants to think about the need to pass on wealth, it can be of great benefit to your loved ones to get plans in place early.

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If you would like to speak with one of our tax advisers about IHT planning or other tax related queries, please do not hesitate to get in touch.

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