Inheritance Tax Planning

Trying to pass on as much as your wealth as possible to your children is getting harder and harder, due to the freezing of the IHT (Inheritance Tax) thresholds since 2009.

If this wasn't bad enough, the current Government is planning to pull in the value of your personal pension into the equation, thus squeezing more of your hard-earned wealth.

So what can we do?

There isn't a one-size-fits-all solution and most problems are removed or reduced by using several strategies together.

There are some allowances which help but won't make a big difference.

You can give away lump sums and hope to live 7 years. However many people need the money themselves for their ongoing-income. You could invest via a lifestyle trust, which allows you to set up variable withdrawals but ring-fence an amount of the capital which would be out of your estate after 7 years.

If you want to gift capital, do not need access to it but don't want your kids to have the money yet, you can invest into trust.

Some trusts allow you access to capital, some to income, some to a combination.

You can gift out of normal expenditure which means you regularly gift money to someone from your income and not your capital. These gifts are immediately exempt from IHT, you do NOT need to survive 7 years.

If you do not think you will survive 7 years, you can invest in a Business Relief scheme, whereby you only have to survive 2 years. The investment returns aren't as good as our model portfolios but don't forget the main goal is to avoid a 40% tax bill!

If you are a couple in good health, you can take out a guaranteed premium, whole of life policy which will pay out the IHT due on second death. Please note married couples only pay IHT on second death, everyone else pays IHT on first death.

High value houses can be a problem. Since 2006, you cannot gift your house to someone else or a trust, continue to live in it and expect it to be out of your estate for IHT. One option, if you do not want to downsize is look at equity release. Your first instinct might be "I have heard of them, there will be nothing left for my kids and I don't want one". Well, bear with me.

If you took an equity release mortgage of £500,000 at 6% interest, you would pay £2500 a month in interest. If you paid this every month, the debt would not increase. If you let it roll up, then the debt would increase by £30,000 in year one, and you would pay 6% interest on £530,000 in year 2 and so on, in other words you would experience the negative effects of compound interest.

You then have £500,000 to invest to mitigate IHT. If you achieved a net return of 6% (the same as the cost of the mortgage) and lived seven years, you would save 40% IHT on the £500,000, a saving of £200,000. If the mortgage debt was allowed to accumulate, you would reduce the equity in the house and therefore the IHT bill. Any growth in the investment would be exempt from IHT from day one, whereas if it had remained in the house it would have been liable to IHT.

We would hope to achieve better returns than 6% a year by investing in global-equity-heavy portfolios.

High value estates over £2,000,000 also start to lose the RNRB IHT allowance. Once the estate is over £2,700,000, a couple loses £350,000 of IHT allowance, so pay an extra £140,000 in IHT. Equity release and/or a well-written Will can re-gain this allowance.

In April 2027, many people who thought IHT did not apply to them might be in for a nasty shock when they realise their personal pensions are included.

As you can see, there are different solutions for different circumstances and we are very happy to go through the options with you, you only have to ask.

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