Funnily enough, raising taxes never seems to go down too well with the electorate and so freezing tax thresholds has emerged as the preferred method for successive chancellors to achieve the same gain. This stealth tactic is no more evident than with the Nil Rate Band (NRB), the amount of money that can be passed on tax-free from an estate without an Inheritance Tax (IHT) liability, frozen at £325,000 since 2009, moreover, the Chancellor under our former Conservative government announced this will remain the case until at least 2028, representing nearly 20 years without an increase. Conversely, since the turn of the millennium UK house prices will have trebled, and the inflationary environment in which we now find ourselves means we can fully expect wider asset values to increase also.

With this in mind, and property representing the main asset base across the UK, it’s not surprising that whilst once reserved for the rich and famous, the subject of Inheritance Tax has now tip-toed into conversation at many a family dinner table. IHT receipts for HMRC hit a record £7.1 bn in the 2022/2023 tax year, £1bn more than the year previous, and the trend looks to continue.

Whilst a single property in the right part of town will make short work of the NRB, when combined with a successful career or perhaps a business sale, second property, inheritance, or some other form of capital fortune, one can quite quickly find themselves with an inheritance tax problem. Interestingly, it’s not uncommon for the children to be the one’s raising the question, as inertia, or even worse, apathy, creeps in and parents seemingly sleepwalk towards a growing problem, the generation below become increasingly aware that it is in fact they who will be picking up the pieces of what can turn out to be a both a costly and incredibly challenging situation.

For those awake to this dilemma, the realisation of having spent a working life paying income tax, possibly at the highest rates, and now faced with the prospect of that same hard-earned wealth being taxed again at the IHT rate of 40%, can be a bitter pill to swallow.

The good news is that with the appropriate planning and foresight there are tools at our disposal to help mitigate any potential IHT liability, and without necessarily condemning yourself to abject poverty. Whilst maintaining an appropriate level of both income and capital, to support the fulfilled and active retirement you undoubtedly desire, the IHT puzzle can be solved, as well as tackling the more difficult ‘what if’ questions such as funding your own potential long term care requirements.

With a robust financial plan in place, and effective cash flow modelling to help demonstrate this, estate planning then becomes much more a conversation about softer facts, such as how and when is the right time to gift, and indeed how much. Giving with ‘warm hands’ may afford you the opportunity to witness your loved ones enjoying their early inheritance, but ‘too much too soon’ may serve to be a demotivating factor for someone in the infancy of their career. Through marriages, births and death, life events mean some family trees are less straight forward than others which may shape decisions, and sometimes, bypassing generations entirely may be more appropriate. With so many variables to consider, putting in place a successful IHT strategy can be a complex task and so the support of a trusted financial adviser equipped to help guide you along that journey will be vital.

A firm understanding of how the Resident NRB and transferable NRB applies to your situation will be important and not to forget the basic building block of an up-to-date will! The IHT exempt status newer style pensions⁽¹⁾ enjoy means your accumulated fund may in fact turn out to be your most effective long term IHT planning vehicle.  Lifetime gifts start a 7-year clock which you will need to survive in order for the full value of a gift to fall outside of your estate for IHT purposes, and for larger estates this may involve a succession of gifting exercises so facing this challenge early on will be key if you are to have the necessary planning time to deliver your longer-term objectives. Alongside this, sensible trust planning may help you retain some degree of control as to how and when funds are distributed to your intended beneficiaries, and indeed, for what means.

Discounted Gift trusts may deliver a significant IHT saving overnight whilst simultaneously providing a lifetime income for the settlor, often a popular segway into more direct gifting that may follow. Beyond that, investing in assets that qualify for Business Relief will allow you to retain access to the capital, but may qualify for up to 100% relief from IHT if certain criteria is met, which subject to the relevant risk considerations may become appropriate in later life.

And if the idea of gifting capital away all seems a little too premature, life assurance can be an effective way of providing some breathing space whilst you consider these all-important decisions, providing cover for an IHT liability that exists today so that you can take time to explore more permanent mitigation strategies.

The list and combinations are endless, and when making financial decisions that will potentially span generations, it’s about getting a solution that’s right for you, and that’s where the expertise of a qualified and experienced adviser will prove to be invaluable.

⁽¹⁾ older style pension type policies such as retirement annuity contracts were not automatically written in trust and if they haven’t physically been placed in trust since inception will form part of the estate for IHT purposes.

Contact us on 0330 320 9280, email info@cravenstreeetwealth.com or complete our online enquiry form for professional financial advice regarding estate planning.

The content of this article is for information only and does not constitute formal financial advice. This material is for general information only and does not constitute investment, tax, legal or other forms of advice.

You should not rely on this information to make, or refrain from making any decisions. Always obtain independent, professional advice for your own particular situation.

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