Prime Minister Starmer has warned us that the autumn Budget “is going to be painful”. We can speculate what this might mean, but it feels unlikely that Inheritance Tax (IHT) will be treated favourably.
We’ve previously written, in isolation, about many of the different ways you can address an IHT liability, but we thought it timely to bring this together into a series of steps you can use.
Undeniably, the younger you are when you start planning, the easier it may be to lessen your liability. Furthermore, a combination of options e.g. Gifting, Trusts, Life Assurance etc. are often the preferred solution rather than relying on just one solution.
Navigate the ‘painful’ Autumn Budget with these 7 essential steps to protect your estate
Step 1 – Plan
Having a documented plan that includes how you will finance your future lifestyle, including any unexpected or unforeseen future costs, how and when you wish to transfer funds to your beneficiaries, alongside a well-structured Will and Lasting Power of Attorney is essential.
Step 2 – Use Exemptions
Use your obvious gifting exemptions e.g. if appropriate, use your annual £3,000 exemption and the £250 per person exemption each tax year.
The “normal expenditure out of income” exemption provides the opportunity to make gifts of regular excess income (earnings, pensions or investments) which will be immediately exempt from IHT.
Step 3 – Gifting
If your overall plan has identified the option to make gifts now, consider making these gifts which will start a seven-year clock, after which they will fall out of the IHT calculation.
Documenting any gifts is essential so other plans you put in place are not impacted by such gifts. We recommend using this editable and official form.
If you are not comfortable making gifts now (loss of control, concerns about the use of gifted funds, divorce, bankruptcy etc..) or you subscribe to the “Give them enough to do something but not enough to do nothing” school of thought, then we move on to Step 4.
Step 4 – Trust Planning
Having identified what you might need now, and, in the future, it will be easier to find the optimal Trust solution.
There are a wide range of Trust solutions available, generally, and where possible, we prefer solutions that provide you with the “safety net” of future access, if required.
Two such examples are:
- Loan Trusts. Under a Loan Trust, you have full access to your capital. However, all growth is outside of your estate from day one. The payment to set up the trust is not a gift but a loan, so there is no seven-year clock unless the loan is waived at a future date.
- Flexible reversionary Trusts and see also this short (4 min) explanatory video.
Commonly, a gift into trust will start your seven-year clock, after which the gift is no longer in your estate for IHT purposes.
Trusts can be an excellent solution if you are worried about how a large gift may change the recipient’s behaviour, or if you have concerns about the recipients marriage/relationship and/or bankruptcy/business failure.
However, what else can be done if you don’t wish to make gifts or set up Trusts?
You may have a portfolio of buy-to-lets and not the liquid assets to set up a Trust. In which case, you may consider setting up a simple life assurance plan to cover part or all of your IHT liability.
Step 5 – Life Cover
A whole of life plan can be written on a joint life last death basis for married couples/couples in a civil partnership or on a single basis for individuals. The life plan is written under trust in order that the sum paid out on death does not form part of your estate.
These plans can offer a solution to you assuming you can afford to pay the premiums throughout your lifetime.
If you are uninsurable, the premiums are prohibitive, or you don’t want to pay for life cover, look at Step 6 options.
Step 6 – Tax-Advantaged Solutions
Where appropriate, investing in Business Relief schemes can be very useful and effective for IHT purposes.
A Business Relief scheme investment that has been held for two years, under current tax rules, falls outside of your estate, for IHT purposes, on death.
See also 5 Business Relief Myths Busted.
Consideration can also be given to maintaining existing ISA portfolios and reinvesting in qualifying AIM shares, which share the same tax advantages detailed above.
Step 7 – Family Investment companies (FIC)
A FIC is a bespoke private company, often used as an alternative to family trusts. They are flexible, allowing family members to benefit through varying rights attached to shares (or the number of shares in issue), see Family Investment Company Pros and Cons.
Next Steps…
Your views and approach to IHT will be unique and the overall solution may be a combination of the above steps to provide you with the desired control and access to funds.
If you can reduce your joint estate to below £2 million, that will also immediately re-instate your residence nil rate band giving you £1 million in allowances before you have to start paying IHT.
If you have any questions relating to this article, please get in touch on 01825 76 33 66 or via the form below.
This blog is for information purposes and does not constitute financial advice, which should be based on your individual circumstances. The Financial Conduct Authority (FCA) does not regulate Inheritance Tax Planning or Trust Advice. Benefits of insurance products will be put at risk or cease altogether if premium payments are not maintained. The Financial Conduct Authority does not regulate some aspects of Trust, Tax and Estate Planning Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.
