Why IHT planning needs to start sooner rather than later

After working hard for decades, in their chosen careers or building up a business, the aspiration for many people is to be able to provide for the future by handing on some wealth to their family.

However, without effective financial planning that can be a very difficult aim to achieve as inheritance tax (IHT) can eat into the estate people hope to leave behind for their loved ones.

Ross Leckridge, Chartered Financial Planner with Aberdein Considine’s wealth management operation in Edinburgh, says: “IHT can no longer be seen as something that just impacts the ‘wealthy’. Rising house prices and frozen tax bands mean more and more families are finding themselves unexpectedly liable for IHT. For example, in Edinburgh the average house price is now £335,401 [according to Rightmove], while the IHT threshold is £325,000. And residential property just forms one part of an estate, alongside the likes of savings and other possessions. This means that more people than ever are liable to pay IHT.”

The amount being paid each year in IHT is steadily increasing. Figures released in January showed IHT receipts collected by the Treasury for April to December last year reached £5.7 billion. This was £400 million higher than the same period in the previous year. This puts the Treasury on track to take record receipts in the 2023-24 tax year, beating last year’s high of £7.1bn.

Leckridge adds: “With a UK general election set to be held this year, there is uncertainty about the future of IHT and what changes could be made in the coming months. This can make it difficult to plan ahead, but the worst thing to do would be to ignore IHT.

“There are several steps that can be taken to reduce your IHT bill. While this can be a complex area, the best way to start the process is to speak to your family and to do that sooner rather than later. While it can be a notoriously difficult subject to discuss with loved ones, the rising level IHT receipt figures clearly show why there needs to be more awareness among families.”

There are several steps that people could take when it comes to IHT planning, explains Leckridge. And it is important to get the basics in place, for example by writing a will or ensuring it is up to date if you already have one. At this point legal advice is helpful.

James MacKinnon, Head of Aberdein Considine’s Edinburgh Private Client team, says: “IHT can be a technical area with lots of things that can trip people up. Engaging legal expertise can help individuals and their families prepare for the future and mitigate their IHT bill. Certain groups, such as unmarried couples, will especially benefit from advice. The rules around IHT are different, with married couples, or those in civil partnerships, being better protected than unmarried couples.”

Leckridge sets out some options that could help reduce IHT bills:

- Gift allowances: these can be popular with families looking to support younger generations during the current cost of living crisis. They can also be a nice way for parents to see their family enjoy the money while they are still alive.

- Setting up a trust: the main benefit compared to gifts is that this allows people to maintain control over the assets.

- Residence Nil Rate Band: where the family home has been left to direct descendants, meaning up to £500,000per person is protected from IHT.

- Don’t leave it too late: the "seven year rule” around IHT and gifts means it’s beneficial to start estate planning early. The rule means that in some circumstances no tax is due on any gifts if you live for seven years after giving them.

Leckridge concludes: “One of the simplest and quickest ways to address an IHT problem is to transfer the liability to someone else by insuring it. Taking out life assurance equivalent to the anticipated IHT bill could provide your family with the means of paying the bill without having to wait for the estate to be settled, or having to make any other changes to current circumstances.

“You could potentially help solve an IHT problem by spending money - yes, you heard that right. A financial planner can use technology called cashflow modelling to help determine an increased level of expenditure that’s right for you while also calculating the impact on any residual IHT.

“For people who don't want to give their money away or move it into a trust, certain types of investments which qualify for relief from IHT could be an alternative choice.

“If you think your family may be impacted by IHT, the good news is that there are many potential options out there that could help minimise it. But it's also important to remember that not all of these options will be suitable for everyone and in many cases it will be necessary to speak to a financial planner.”

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