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Estate and Inheritance Tax Planning

Many of our clients would like to pass on wealth to their loved ones in the most tax-efficient way before and after they are gone. This is where quality estate and inheritance tax planning can come into play.

There are various rules that govern the gifting of assets. Trusts can also play a key role in financial planning for individuals and families.

This is particularly the case when it comes to one of Britain’s most penal taxes – inheritance tax – which is levied at 40%. Our guide on trusts for inheritance tax planning contains further details.

Inheritance Tax Planning 

Inheritance Tax (IHT) is often referred to as ‘the voluntary tax’ because there are ways in which it can be avoided.

Under current legislation, IHT is payable for on an individual estate where total assets exceed the Nil Rate Band of £325,000. For couples, the tax is only payable on the second death, assuming that all assets pass from husband to wife (or vice versa) on the first death.

The tax rate is currently 40% on the excess. So, for example, for a joint estate of £1,000,000, a tax of £140,000 (£350,000 @ 40%) would be payable.

While saving tax is important, it should not be done at the detriment of the client’s own position. Sound, responsible planning in this area looks at options that do not adversely impact the client’s requirements, which we believe should be the number one priority.

No one knows with certainty what lies ahead of them, so an appropriate element of flexibility is also key in this area of planning.

Points to Consider

  • First, you should value all assets to establish the value of your individual and joint estate, and quantify what the current liability would be.
  • Ask yourself whether there are any special factors to consider, for example health or special family circumstances.
  • What is the current and projected annual cost of living and capital costs, for example replacing your car? Consider your target income, do you currently have surplus assets or surplus income?
  • What is the current and projected annual income post-tax, and does this leave you with a surplus or deficit after meeting your costs year-by-year?
  • What capacity exists – if any – to gift assets or surplus regular income that does not jeopardise the financial wellbeing of the donor?
  • Do you have an up-to-date Will and Power of Attorney in place?

With good financial planning, these questions can be addressed in association with a lifetime cash flow model. This is very helpful for IHT considerations because the cash flow modelling adds an extra aspect and provides a clear visual presentation of the ‘what if’ scenarios.

Key Factors for Estate Planning

Prior to making any IHT planning proposals, clients normally have various ‘what if’ scenarios that could cause them concern, especially when looking at making significant gifts. Key factors might refer to:

  • What if we decide to move house or spend significant sums on an existing house?
  • What if there were a significant fall in investment values?
  • What if we need to increase income for care costs?
  • What if the husband predeceases the wife or vice versa, is there adequate planning provision on the first death?
  • What if a family member needs an expensive private operation?
  • What if significant inflation returns?
  • What if the next generation needs capital for whatever reason?

Financial modelling, combined with qualified professional advice, will provide clear answers to these factors. This, in turn, provides clients with peace of mind regarding their financial future.

The main Estate Planning options may include:

  • Gifts direct to family
  • Gifts into trust
  • Loan trust
  • Discounted gift trust
  • Use of annual allowance
  • Gifts out of regular income
  • Life cover
  • Gifts to Charity

Each of these options has its own pros and cons depending on the client’s personal circumstances. This is where an individual consultation with a financial planner to discuss these further is advisable.

Inheritance Tax planning can be a complex area with many moving parts to consider. There are significant amounts of tax that can be saved, but care is required to ensure that the planning considers the various what-if scenarios. Once gifts are made, access and control of the capital is lost.

Significant savings can be made in the right circumstances without adversely affecting the client’s own requirements. This will, in turn, add flexibility and allow clients to achieve their full financial promise.

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