Inheritance tax – don’t think of this as double whammy of death and taxes at the same time

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An adviser can help you negotiate the knowns and unknowns of estate planning to maximise the value of your assets for passing on to family, friends and good causes.

Some wits say, fatalistically, that Inheritance Tax (IHT) is both death and taxes at the same time. In my experience, client views on estate planning fall broadly into two camps. Some simply accept that IHT will take a large bite out of their estate and are either unconcerned or grudgingly reconciled. Others are combative, declaring that they don’t want a penny of IHT to be paid on their estate.

As is so often the case, the best approach is a middle way. Estate planning is both an art and science with knowns and unknowns to negotiate. It’s a journey an adviser can help guide you through.

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Let’s start with the key questions you should ask when considering estate planning. They are reasons to be cheerful – they are questions about life rather than death.How much do you need for the rest of your life? Even if you want to give money and assets away to help family, friends or good causes you should take care of yourself first. As airline safety briefings say, help yourself before helping others. A good adviser will model your cashflow, taking into account things you choose to plan for – your lifestyle – and things you can’t guarantee –such as your health. Only after this can you move onto creating plans for others.But who, when, and how much? Different family members may need help at different times and for different purposes. Sometimes inter-generational wealth planning isn’t just about bequeathing money but about helping people when they need it – if you can.

Helping with education costs, getting on the property ladder, or investing in a business can help family. Gifting and trusts are means of passing on wealth while you’re still around and able to appreciate how it might help your loved ones or a philanthropic cause.

A key consideration, however, is that giving away money or assets means that you no longer control that wealth. Are you happy to give it away and accept whatever happens next? It is essential that you are.

But somewhere you can and must retain control is by keeping your Will and Power of Attorney up to date. It is the vital first step in making sure that your wishes are not only respected but actionable too.

Only once this has been taken care of do we get to the nuts and bolts of using the allowances and exemptions that may allow you to shelter assets from IHT and maximise what your beneficiaries receive.

The art and science of estate planning is to arrange and distribute these so that you can continue to live comfortably whatever your wants and needs. The changes made in Rachel Reeves’ 2024 Budget mean that more of what you leave behind is likely to be subject to tax, which is bad news for the “not a penny” cohort.

Here’s an example of what planning can do. A couple’s estate is valued at£2 million on both their deaths. It consists of the family home, valued at £700,000; savings and investments, valued at £900,000; and a private pension of £400,000.Without estate planning, IHT will be levied at 40 per cent on the net value of the estate for tax purposes.

After a sad loss, the surviving spouse has inherited their partner’s nil-rate band of £325,000 which doubles with their own to £650,000. Likewise, the family home is left to their children, which means that the residential nil-rate band of £175,000 is also available for each, making a further deduction of £350,000.

Under present legislation, the £400,000 private pension is outwith tax scope, so the net value of the estate is £1m, and £400,000 of tax is payable, leaving £1.6m for the beneficiaries.

After April 2027, the personal pension comes into the scope of IHT, resulting in tax payable of £560,000 and £1.44m due to beneficiaries.

However, advice taken on the same estate seven years before death could result in the pension being fully crystallised and further funds being taken by drawdown to support living costs and reduce this element of the estate.

The existing savings and investments could be placed into trust, providing an income and securing a legacy for its beneficiaries.

At the date of death, the value of the estate outside of trust might comprise £700,000 in the family home, £50,000 in cash and £250,000 remaining in the pension. With all the nil-rate bands still in place and the assets in trust out of scope, in this precise scenario no IHT would be due.

No-one can promise a zero tax liability but, put together, modelling and planning can help you shape your legacy and enjoy your life while you’re at it.

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