Home Finance Inheritance tax: How to manage & reduce bills as £293bn is 'earmarked'...

Inheritance tax: How to manage & reduce bills as £293bn is 'earmarked' for grandchildren

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Inheritance tax is levied on the estate of someone who has died and is passing on their assets. As it stands, IHT is charged at 40 percent but only on the parts of an estate that are valued above the £325,000 minimum threshold.

Mike Morrow, the Chief Commercial Officer at The Openwork Partnership, commented on the results: “The sheer size of the amount that parents and grandparents plan to give as early inheritances shows how important intergenerational wealth transfers are in the economy.

“Average gifts per child or grandchild of nearly £9,500 are significant and £293billion makes a major contribution to the wealth of younger generations.

“The size of the gifts underlines the need for trusted advice on how best to use the money whether it is to pay for house deposits or pay off debt or to invest for the future. Parents and grandparents as well as children and grandchildren would benefit from an ongoing relationship with a financial adviser.”

In light of these findings, Anna Murdock, the Head of Wealth Planning at JM Finn, warned many families may find themselves hit with unexpected IHT bills as their financial assets continue to grow: “Weighing in at 40 percent, Inheritance Tax (IHT) will afflict more and more people with the nationwide rise in property prices – especially in London, and the stagnant tax free nil rate band of £325,000.

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“The usual advice to avoid or at least manage your estate’s liability is to gift away capital you will not need, as this is the simplest way to reduce your estate. Also, make use of the Government allowances such as the annual gift exemption of £3,000 and gifting of surplus income.

“You could also consider topping up your pension pot to pass on your retirement savings to a loved one on your death. Beneficiaries pay no income tax on death before 75, or just their normal income tax rate on death aged 75 or over.”

The impact of rising property prices should not be understated as Daniel Wood, a Financial Planner at 7IM, explained: “Rising house prices have pushed more people than ever before into the dreaded inheritance tax net. Current HMRC stats show that £5.2billion was paid to the Treasury in inheritance tax in the 2019/2020 tax year.

“Most do not wish to leave their loved ones with a large bill. With careful planning and some financial advice, you can reduce the impact or mitigate completely, any tax liability. Giving assets away at least seven years before you die is the simplest way to mitigate any liability but is not always appropriate. There are also numerous types of trusts that could be established for future generations.

“It’s also important to think about your Will. Whilst clearly not the cheeriest of subjects, making sure your Will is written by a qualified adviser or solicitor, and is up to date will assist in ensuring your estate is settled efficiently after you’ve gone.

“Estate and tax planning can be complicated. Tax treatments will depend on individual circumstances and rules are subject to change, so it is well worth engaging with a financial planner.”

As Daniel highlighted, IHT and estate planning can be incredibly complicated and difficult to manage but as is the case with many elements of life, taking action early could make things much easier.

Alexandra Milton, a partner in the private client team at Moore Barlow, detailed: “Inheritance tax is notoriously difficult to understand and often people leave it too late to begin thinking about passing on their hard-earned money to future generations. It’s so important to be organised and make sure you make full use of the allowances that are available.

“While individuals are able to pass on assets of up to £325,000 tax-free, married couples and registered civil partners can combine their thresholds – transferring any unused element of their allowance to the surviving spouse. Subject to the satisfaction of certain restrictions, an individual may also have an additional allowance of up to £175,000, called the ‘Residence Nil Rate Band’, if a property passes to direct descendants.

“The first port of call should be a well-constructed Will, which outlines who you would like to benefit from your estate and what you would like them to have. While DIY Wills exist, it’s paramount that you seek advice to ensure you are maximising the reliefs that are on offer and to ensure your Will isn’t written in a way to create unnecessary tax implications. Sound estate planning will also consider life insurance policies which, if not written correctly, can pass into your estate and attract avoidable inheritance tax.

“With billions of pounds expected to be inherited in the years ahead, inheritance tax planning has become more crucial than ever, and it pays to start planning as early as possible.”

In providing detailed guidance, Mark Collins, the Head of Tax at Handelsbanken Wealth & Asset Management, broke down all the elements involved in how IHT can be managed and even reduced.

How IHT can best be managed

Mark began: “Before looking to reduce your estate by making gifts it is important to establish what funds or capital you will require to fund your lifestyle during retirement. Once you have established this, you can start to plan on how you might reduce your exposure to inheritance tax. This can be done by looking to gift assets away or/and by making investments in assets or products that attract relief from inheritance tax. For example, each individual can gift up to £3,000 per annum and bring forward and use the previous year’s exemption if this was unused. Additionally, outright gifts of capital to individuals do not attract an inheritance tax charge if the donor survives seven years from the date of the gift. Now is a good time to consider gifts of non-cash assets as capital gains tax rates are relatively low and are tipped to increase at some point in the near future.

Before making gifts you should also identify any other family or personal factors that are important to you, such as charitable donations. If you leave at least 10 percent of your estate to charity this should enable the rate of inheritance tax that you pay on your remaining estate to reduce to a rate of 36 percent (from 40 percent.) Additionally, you may wish to retain control over assets gifted away – perhaps because your children are not yet mature enough to receive significant amounts of wealth, or maybe you are concerned about who they may marry and the loss of wealth to persons outside of your immediate family. How much and when are also important questions you should consider, as being fair does not necessarily mean treating family members equally.

“As with any financial planning, careful thought, regular review of your plans, and planning early gives you the best possible chance of managing your inheritance tax position. You should ensure you have a will in place and that it is regularly updated to reflect changes in legislation and ensure your estate is distributed in accordance with your intentions. Involving family members in your discussions can be helpful sometimes as you might think you are being fair in leaving a property to your children equally but this can cause family tension after your death where one party wants to sell and the other does not, or all parties wish to occupy the property. Broader family issues should be considered as a priority when estate planning.”

How IHT can best be paid

Mark concluded by examining the options available to those with larger estates: “Ordinarily, inheritance tax must be paid by the end of the sixth month after the date of death. However, provisions exist to enable the inheritance tax payable on certain assets to be paid by instalments over 10 years. Where the relevant conditions are met, the IHT payable on property, certain shares and securities, and the share of a business may be paid over 10 annual instalments, although HMRC will charge interest on these instalment payments.

“For persons with illiquid estates, such as those with large property portfolios, it might be worth looking to take out a whole of life insurance policy that will pay out on death. Whilst regular premiums will need to be paid during your lifetime, the insurance pay-out on death can be used by your beneficiaries to pay some or all of the inheritance tax arising on your death, which may mitigate the need for assets to be sold to pay the inheritance tax arising.”

Do you have a money dilemma which you’d like a financial expert’s opinion on? If you would like to ask one of our finance experts a question, please email your query to [email protected]com. 



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