Inheritance Tax Planning

Let’s Look At Inheritance Tax Planning

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The future can’t be predicted, but it can be protected

Inheritance tax planning is one of the key components of protecting your estate from the tax man. In this post we are going to look at some of the key points to look out for when planning one of these. A step by step guide if you will.

When you die, you undoubtedly want your loved ones to inherit as much of your wealth as possible. There’s more to estate planning than just taxes. It’s about ensuring that your loved ones are financially supported, that your assets are safeguarded, and that the tax your estate pays is reasonable. The Coronavirus (COVID-19) pandemic has acted as a stark reminder of the need of foresight.

You want to protect your wealth after you’ve worked hard and invested wisely to build it. That is why it is critical to plan for the preservation of your money as well as the future transfer of that wealth. Have you explored the following question: ‘What happens to my estate after I die?’ For many families today, asset preservation and transfer are becoming increasingly crucial issues.

Individuals with any amount of assets should obtain competent financial guidance to determine what steps should be made before it’s too late. The truth is that, regardless of any tax or legal implications, most of us should plan for the ultimate transfer of our possessions. Many of us naturally desire to leave our riches to those who are most important to us. Let’s look at how that can be done.

With inheritance tax receipts at £5.32 billion in 2020/2021 there is scope for advice

An inheritance tax is a tax imposed on a deceased person’s estate (their property, money, and possessions). Inheritance Tax receipts in the United Kingdom totaled over £5.32 billion in 2020/21, compared to £5.36 billion the previous financial year, which was a high point for this time period. Cashing out any savings accounts held by the deceased and possibly selling any of the estate’s assets may be necessary to satisfy an Inheritance Tax liability. There is no easy way to put it: thinking about one’s mortality is a difficult subject to broach. However, it is frequently worthwhile to push through the discomfort in order to explore the potential benefits of good wealth transfer planning.

There are three places your assets can go at your death: to your family and friends, to charity or to the government in the form of taxes.

Planning your way to lower inheritance tax

Inheritance Tax can cost thousands of pounds to a family, but there are several legal ways to avoid paying it. Your loved ones could face a tax levy of 40% on the value of everything you own above a specific threshold if you don’t make proper provisions. You’ll want to make sure that as little of your wealth as possible ends up in the hands of the taxman and that it may be enjoyed by you, your family, and your intended beneficiaries, whether you earned it, inherited it, or made wise investments.

If you die without making provisions to preserve and protect your assets, your family may end up spending a significant amount of time and money fighting over your possessions. It’s possible that the procedure of separating your assets will get problematic. You have power over what happens to your possessions after you die if you plan ahead. It is an essential component of financial planning, regardless of how much money you have amassed.

An estate plan not only helps to guarantee that those who are important to you are cared for when you pass away, but it may also help to ensure that assets are passed in a timely manner and that Inheritance Tax penalties are minimised. The procedure is creating a detailed plan that specifies how you want all of your wealth and property divided after your death. It entails putting in place papers to ensure that your assets are transferred according to your intentions.

Strategic plans to mitigate Inheritance Tax

Inheritance tax planning has many different facets, let’s look at a few more specifics below.

Writing a will & lasting power of attorney

A Will is one of the most critical elements of an estate strategy. A Will, first and foremost, gives you control. You get to decide who gets to benefit from your estate and how much they get. You also get to choose who will take care of your affairs when you pass away. If you don’t prepare a Will, the intestacy regulations will determine who receives your estate, which can have unfavourable consequences. The law also establishes a hierarchy of who is capable of handling your financial affairs after you die, which might present issues if the individual is ineligible due to age, health, geographic location, or any other reason.

Property and financial affairs, as well as health and welfare, can all be covered by a Lasting Power of Attorney (LPA). These documents can be set up at any moment, and it is vital to think about doing so regardless of your age. An LPA specifies who should assist you with your property and financial concerns, as well as your health and welfare. You have complete control over who handles with these issues, as well as any constraints and guidelines.

Once the Will and the LPA are sorted, the next step is to think about Inheritance Tax planning.

Gifting assets & gift allowances

The government determines the amount, which is presently £325,000 and is slated to remain frozen until 2026. Furthermore, from April 6, 2017, the value of your estate before tax has increased if you leave your home to straight lineal descendants, thanks to the addition of the Residence Nil-Rate Band (RNRB). The Residence Nil-Rate Band for the 2021/22 tax year is £175,000. When creating an estate plan, keep in mind that the process isn’t simply about transferring your possessions when you pass away. It’s also about looking at your finances right now to see how you can make the most of your assets while you’re still living.

A Potentially Exempt Transfer (PET) for Inheritance Tax is a donation from one person to another. There is no Inheritance Tax on the PET if you live for seven years after the date of the gift.
You can give away £3,000 in tax-free presents each tax year (your ‘annual exemption’). You can also give away up to £1,000 per person in wedding or registered civil partnership gifts (£2,500 for a grandchild and £5,000 for a child). You can also gift your children regular quantities of money from your earnings. You can also donate up to £250 in presents to as many people as you wish, but not to anyone who has already received a gift of your entire £3,000 annual exemption.

Investing into IHT exempt assets & keeping wealth within a pension

Another option to potentially reduce Inheritance Tax payments for experienced eligible investors is to invest in Inheritance Tax exempt assets. These schemes have a greater level of risk and are hence not suited for all investors; any investment decisions should always be made with the assistance of competent financial counsel.

The Enterprise Investment Scheme is an example of this (EIS). Because the qualifying trades for EIS and BR are so similar, the vast majority of EIS-qualifying investments qualify for 100 percent Inheritance Tax reduction via Business Relief (BR). A two-year minimum holding period is required for BR qualification. (from the later of the share issue date and trade commencement).

Unlike many other investments, a defined contribution pension is usually free of Inheritance Tax. It isn’t included in your taxable assets. Keeping your pension capital in your pension fund and handing it down to future generations might be a tax-advantaged estate planning strategy. Your pension will be passed on tax-free if you die before the age of 75. If you die after the age of 75, however, your beneficiaries will be taxed at their highest income tax rate on the proceeds. Because your pension is not covered by your Will, you must make sure that your pension provider is aware of your specified beneficiaries.

The key is to get the right advice for your unique situation

Whilst there are a few tips in this article about in, how do you know what suits you best? It’s often tough to decide when there are so many options. Having impartial financial advice from our experienced, expert estate planner can help. Our financial advisor has arranged many of these plans to save clients on tax in the future. The best idea is to contact us directly so we can assess your individual situation and provide a tailored plan that suits your needs.

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Tony Hollom
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