Updated 03 September 2020
Daniel Elkington explains some simple steps to minimise the tax your loved ones pay on your estate and make their lives a little easier at an already difficult time.
I do not like inheritance tax. But it exists and you can get in serious trouble with it. Even if you do not care about your beneficiaries paying tax on your estate, you could make their lives a little easier with a small amount of planning.
The two solutions
1. Spend it
2. Give it away
Now there is a little more to this article and there are many permutations on the two themes, but all inheritance tax (IHT) advice and strategies essentially boil down to these two concepts.
“A good independent financial advisor should be able to keep this register for you as part of their servicing package.”
Write a will. If you get married (and did not consider this in the will) or divorced your will is void. You should probably review it every 4-5 years to ensure it is still relevant to your current needs and to ensure your chosen executors are still alive and competent.
Work out the value of your estate and work out whether IHT applies to you. There is a guide on the HMRC website, which is easy to read.
Keep a gift register. Gifts up to seven years and in some cases even longer count for IHT. You should keep a tally of all the gifts that you make.
A good independent financial advisor should be able to keep this register for you as part of their servicing package.
Put any life insurance policies under trust. The life company often has a default form; you should give them a call, or your financial advisor, to arrange this. It is very simple from a professional point of view.
Consider a discounted gift trust. These used to be carve-out trusts.
If you have a large amount of liquid assets, these can be placed into a trust that will pay you an income. The investment within this should be a bond – however professional advice should be sought.
These products are a bit win-win as you get an income from them and after the seven-year period, the funds fall outside your estate – and still pay you an income.
Let your beneficiaries know.
Often the beneficiaries are kept in the dark until the last minute. You should get your financial advisor to tell them the bill they will have to pay and invite them to take out whole of life insurance on your life so they can pay this.
If they cannot afford the insurance (and it is expensive) then they will have to pay the bill, but you should give them the option.
Stay on top of it.
If you have a good IFA or wealth manager then you probably will not need to. If you are self- managing then you need to watch the autumn statement and the budget for any changes to the law.
Important – never leave yourself struggling for money to save on inheritance tax, it is someone else’s problem at the end of the day!
Speak to a financial advisor to make sure your family receive the maximum benefit from your assets.
Also, why not use our tax waste calculator to check if you’re losing out on money unnecessarily?
Please note: some forms of inheritance tax planning are not regulated by the Financial Conduct Authority.