Once clients have valued their estate, written up a will and made as much use of gifts and trusts as they wish to, there are other ways to help clients mitigate inheritance tax liability.
According to Robert Clough, investment manager for Thesis Asset Management, the most effective way of reducing the IHT bill is to spend the money.
“Many people worked hard to build up their estates and consequently want to enjoy their retirement – be this flying business class, travelling the world or simply just drinking well,” he notes.
However, if clients do want to leave something for their loved ones, there are other ways to help mitigate IHT.
Good retirement planning can help minimise IHT on any pots that can be passed onto a named beneficiary.
Will Hale, chief executive of Key, says: “For example, if clients choose not to touch a small pension pot and leave this to your beneficiary, they may only pay income tax rather than IHT on it and, depending on which band they are in, this may be lower than the 40 per cent IHT charge.”
Martin Pickles, technical adviser for the SimplyBiz Group, believes the most IHT effective arrangement is a pension written under a discretionary trust.
This is because it puts the fund outside of the scheme member’s IHT-able estate, while giving them full access to the money, with no gift-with-reservation issues. “Add into this scenario the fact the investment fund is growing tax-free”, he comments.
Downsizing and equity release
Downsizing into a smaller home that is well below the £325,000 threshold is one way to help reduce the value of the property asset.
Equity release might also help when it comes to the family home, according to Mr Hale.
He explains: “It may also pay to use equity release to reduce the value of your property to bring it within the IHT threshold.”
Charity starts at home
Charitable giving is often a contentious area, especially if surviving relatives want to contest a significant donation made after death to a cats’ home, but it is also worth discussing with clients.
This is because if anything above the £325,000 threshold is left to a recognised charitable organisation, there will be no IHT charge.
Moreover, if you leave at least 10 per cent of your estate to charity, it will reduce how much IHT is paid on the rest, so the rate at which IHT is calculated will be 36 per cent.
Regardless of whether the bequest is to a charity or to another dependent, Alison Beech, partner at Percy Hughes & Roberts Solicitors, strongly recommends safeguarding the bequest through a trust, especially if the money is being left to a child, or to someone who has a disability or is in mental ill-health.