Howard Goodship, IFA Ringwood - Mitigating inheritance tax at the right time

Wednesday 12 October, 2022

The first step to effective Inheritance Tax (IHT) mitigation is to know how much money you need for your own lifetime. Once you have identified this, you will understand what is surplus to your own needs and have more confidence to act and take action.

In addition, the time when family members need the most financial help often isn’t in their 60’s (assuming their parents live to their average life expectancy of mid-80s) but is earlier when they are raising families of their own, paying a mortgage or saving for their own retirement.

I have met many people over the years who know they need to do something to reduce the value of their estate as they don’t want to pay a high IHT bill, but they fail to act in good time. It wasn’t because they weren’t aware of IHT (often they had been thinking about what to do for years), but they simply failed to have the confidence to act!

We are also in the midst of a challenging period in which the cost of living is increasing for everyone, which is especially challenging for those with young families and mortgages. Whilst high inflation will be tackled and brought down at some point, it appears clear that the central banks will achieve their goal of “normalising” interest rates. The days of interest rates of under 1% are most likely gone for a generation. So how can a family unit (grandparents, parents and children) make best use of their inter-generational wealth?

How to mitigate inheritance tax - what to do now?

1. What do you need? 

We run cash-flow projections (including inflation assumptions), based on your regular expenditure, predicted ad-hoc expenditure and later life planning needs such as care fees. 

2. Identify surplus capital or income

The cash-flow projections help identify whether you have more capital or income that you are likely to need. We quantify what is surplus and consider the most effective way to pass this down to your family and reduce your future IHT liability. 

3. Utilise annual gift exemptions

Usually you need to live for a further 7 years from the date of any gifts but there are currently several exemptions which result in immediate removal from the estate. Each donor can gift £3,000 per annum which is immediately exempt from IHT. If there is surplus income, this is also exempt if gifted regularly. 

4. Potentially Exempt Transfers (PET)

You are able to gift capital to other individuals without any immediate tax implications. Assuming you survive 7 years that capital is deemed to be outside of your estate for IHT purposes.

Howard Goodship, chartered financial planner, Ringwood said:

'We're often asked by clients, 'How can all of this fit together for a family unit?' Clearly every client and family is different so a bespoke solution is needed which may include Trusts. But to give a simplistic example; if it’s identified that a grandparent has liquid capital of £250,000 that is both surplus to their own needs and would be liable to IHT on their demise, then the capital sum received by their beneficiaries would be reduced by 40% (£100,000). In addition if that money was held in cash during the grandparent’s lifetime, they may earn anything between 0.1% and 3% depending on how active they are in searching out the best available interest rate. Perhaps their adult children have a mortgage on which they are paying a higher level of interest? By gifting the capital, the money can work harder during their lifetime for the family by reducing mortgage interest and potentially save a significant level of future inheritance tax. Clearly this is overly simplistic, but in our experience there are many opportunities for families to make better use of their combined wealth. My colleagues in St Albans, Ware, Barnet, Leeds/Bradford, Chippenham, Stafford, Wimbledon and Harpenden are available for a free initial, no obligation chat to discuss your personal requirements.'

Please note: The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested. The contents of this article are for information purposes only and do not constitute individual advice. The Financial Conduct Authority do not regulate cash flow planning, tax planning, or estate planning.

 

Latest News Next Article Previous Article