Reasons why you need to plan for inheritance tax

  • 20th April 2020

Here are some compelling reasons why you need to review your inheritance tax planning now

The saying that the only certain things in life are death and taxes (alongside toothache and having to pay for a roof over your head) is wheeled out time and time again when experts impress upon investors the need to plan for inheritance tax, or IHT.

The thing is, IHT can – to some extent – be avoided – with some careful planning. Remember you don’t have to be rich to pay inheritance tax, and the good news is that the best time to plan is when asset values are low. The recent falls in the market due to the Coronavirus pandemic mean asset values are around 25% lower than they were, any gifts made now to plan for IHT will be made at these levels and any subsequent market recovery will be outside your estate. The challenge is to bring down your estate’s value to below the £325,000 threshold or £650,000 for couples.

We have launched a new guide, in association with Octopus Investments to untangle the mysteries of IHT. If you would like a free copy of the guide then please email us.

If that doesn’t convince you – here are some compelling reasons why you need to review your inheritance tax planning now.

We are all living longer

The latest ONS figures on life expectancy show a slowdown, but the long-term trend is for us to live longer and even though health improvements are not keeping up with our longer lives, people are working longer and building up more wealth than previous generations. With a trend towards retirees taking part-time jobs, it’s likely that property wealth will continue to increase as people are able to take out longer-term mortgages.

You may already have started your inheritance tax planning without realising

Pension funds are effectively free from IHT in the majority of circumstances. This is because any other funds held over the “nil rate band” – £325,000 for an individual, £650,000 for a couple – are subject to 40% tax on death. So while a fund is held in a pension, its investments are also protected from income and capital gains tax.

It is possible to lose the exemption for pensions from IHT. When it is transferred by a plan holder in poor health and they subsequently die within two years HMRC may then challenge the plan and it could become subject to IHT. Although this stance is itself under challenge in the courts, it is advisable to position your pension correctly when you are fit and healthy. Putting in place your pension nominations as early as possible in accordance with your wider retirement planning is crucial to ensure that tax efficiencies are achieved and family wealth is preserved.

Inheritance tax is not just about property

IHT covers everything. So in addition to your home, if you have family heirlooms worth substantial amounts, you need to include these.

  • Jewellery
  • Savings and investments
  • Works of art
  • Cars
  • Any other properties or land – even if they are overseas

If you are not married but have a partner

You will not qualify for the inter spouse exemption, unmarried partners, no matter how long-standing, have no automatic rights under the IHT rules.

If you don’t use it you lose it

Inheritance tax (IHT) is a voluntary tax which can be reduced by giving away assets. So take independent advice and make use all of your IHT allowances:

  • £3,000 annual gift exemption - Clients with a potential IHT liability can gift £3,000 every tax year free of IHT. If unused, there is a one-year carry forward. Those who made no gifts in the previous tax year, and none so far in the current tax year will have £6,000 available (£12,000 for married couples and civil partners).
  • If you have surplus income each year then this may be gifted under the gifts out of normal expenditure rules. This is a complex area and advice and proper documentation is essential.
  • Other larger gifts are subject to either the Chargeable Lifetime transfer regime or the Potential Exempt transfer rules, again advice is essential but suggest the sooner the seven year clock starts the better.

Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from taxation, are subject to change.

Tax treatment is based on individual circumstances and may be subject to change in the future.

All data and figures referred to in our news section are correct at the date of publishing and should not be relied upon as still current.