Whilst there has been some relaxation in Inheritance Tax rules in recent years, many families are still unnecessarily caught by this tax. Even those who think they have fairly moderate wealth may still need to consider taking action, particularly if they own property and have savings.
Estate Planning is not just about mitigating inheritance tax, it covers far more than that. It can be defined as:
Leaving your assets to those that matter to you in the most effective way.
Effective planning will take account of a broad range of factors which include:-
- Maintaining suitable access to income and capital
- Tax efficiency
- Protection of the assets from divorce, bankruptcy and other threats
- Protection from irresponsible beneficiaries
- Providing for vulnerable or minor beneficiaries
Estate Planning is therefore important for everyone, and it is essential that you have a clear idea of what you are trying to achieve before you start.
Once you are ready to start looking at solutions it is important to systematically consider all the options that are available. It is highly unlikely that your estate planning objectives can be solved in a single action. The best solutions are likely to involve multiple steps which require a number of different professionals working together to help implement. It may involve reviewing your wills with a solicitor; taking advice on how to pass on your business from an accountant; cash flow forecasting; retirement planning advice and investment advice from your financial adviser.
If mitigating inheritance tax is an objective then the driving principle when planning will be to find the optimum balance between tax-saving on the one hand and access to the capital and income you will need on the other.
Although there are many potential solutions available they can be distilled down into three broad strategies, each of which can be further broken down:-
- Maintain the same sized estate but maximise the amount which is exempt or relievable on death
- Reduce the size of the estate by increased spending or gifting. Gifting can be outright or involve the use of trusts
- Pay the liability. For some people mitigating inheritance tax is not a priority and they are happy to leave their estate to pay any IHT liability and pass the remainder to their beneficiaries. However, often a more efficient way of paying the IHT liability is to pre-fund it using lifecover.
Some of the actions we would consider in advising clients in this area are as follows:
Step 1 - Initial Actions and Legal Work for example putting existing life cover in trust, reviewing wills, using trusts within wills and considering charitable giving.
Step 2 - Reducing the estate through gifting and spending within the context of a financial plan i.e knowing how much you can afford to give away! Again this area may involve gifting into trusts.
Step 3 - Insuring the remaining liability - any remaining liability can be covered using lifecover.
This is a complex area and one in which mistakes can be made. Getting advice from a fee-based financial adviser can make all the difference.
Manager - Advice Policy