Understanding IHT

Inheritance Tax (“IHT”) is widely considered as being an “unfair” tax. Most people work hard to build a nest egg for their loved ones, only then to see 40% above any allowances being taken away from their family after they have passed away. It is therefore understandable why, at one time or another, everybody asks the question; “What can be done about IHT?” Unfortunately most people start trying to mitigate their IHT liability far too late to make a significant difference to the amount that they will have to pay. Their trusted advisors would do well to ensure that any available methods of reducing this liability are brought to the forefront of the clients mind, sooner rather than later.

But what about those clients that simply leave it too late?

It is widely known that we all have a “tax free allowance” when we pass away. This “Nil Rate Band” can be offset against the value of your estate to reduce how much Inheritance Tax might be paid. It is worth noting that this allowance has been fixed since 6th April 2009 and is unlikely to change any time soon. Considering the dramatic and continued increase of house prices since 2009, it is fair to say that this “allowance” is becoming less and less valuable year on year. In an unprecedented move, the Government recently introduced a new allowance, the “Residential Nil Rate Band”. This article will not discuss the intricacies of this allowance (our previous Webinars provide useful examples) except to say that, if the correct “hoops” are jumped through, a client will become entitled to receive an additional amount of tax free allowance at the date of their death.

But what about those clients whose estate are larger than the combined allowances?

Our recent webinar, explored the available options open to wealthy clients. The simplest (and most commonly used) method of reducing a client IHT liability is to “give away” assets during their lifetime, this is because IHT is only taxed on those assets that a client owns when they die. A client might already be aware that they can make gifts of ￡3000 a year (or ￡6000 if they haven’t used their previous year’s allowance), therefore with sufficient foresight, a client can slowly but surely reduce the value of their taxable estate. For clients with very large estates, or very little time to spread out their gifting, larger gifts might be more appropriate. When a client gifts funds over and above their annual allowance the value of that gift will remain in their estate for seven years, after this point and as long as they do not continue to benefit from the gift, they will not be taxed on the gift when they die. A Gift Trust should be considered by the client to ensure that they can retain total control over who should benefit from the gift after they have made it. Our recent webinars also delved into the commonly overlooked “normal expenditure out of income” rule which allows a person to make unlimited gifts out of their income as long as such gifts do not damage their standard of living.

Commonly only considered by those clients with significant excess cash, a client may wish to seek financial advice regarding the use of Investments that will qualify for Business Property Relief. The use of such products can make a significant “dent” in a client’s IHT liability.

Regardless of the options available to a client, we must always consider a client’s future needs. We must always ensure that “tail doesn’t wag the dog”. A client might be “able” to give away significant assets and this might result in significant IHT savings however the client might need to rely on these assets in the future should their circumstances change. We must always remind our clients that an asset given away, even into a Gift Trust, is very difficult (if not impossible) to get back. 

Our series of Masterclass webinars focusing on topics of IHT continues next month

Register now to ensure you don’t miss the next session:

All of our Webinars are held at 10am until 11am.

Please click the links below to register. Once registered, you will receive joining instructions to your email address. CPD points will be awardable for all who attend the Webinar.