Inheritance Tax  

How to manage inheritance tax liabilities and property

  • Describe how people can mitigate a big IHT bill
  • Describe the importance of financial planning
  • List the ways in which gifting can be a liability

Care must always be taken in drawing conclusions about cause from data, but it is interesting to note that, in the cohort of people passing away in 2015-16, more married men held securities and insurance policies than married women.

A possible explanation is that in the older generations, men were more likely to be the main breadwinner and therefore more likely to be insured and also more likely to have investments.

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Anecdotally, there are plenty of stories of advisers speaking with recently-widowed, elderly female clients who were not aware of the details of their finances, as it was their husband that dealt with them. This is outdated perhaps for today’s working generations, but not necessarily for large parts of the generations covered by these statistics.

So, the data suggests that IHT is being paid on property, but also in many cases on cash, securities and insurance policies.

What are the implications of knowing this? How a person plans for IHT depends on what assets they hold.

Let us consider property first. If a person’s home is valuable enough to be a likely contributor to an IHT liability and they wish to reduce that liability, they may choose to sell the home and downsize.

However, many people wish to stay in their own home and would not want to take such drastic action purely to impact a tax bill.

Clients must be reminded that if they wish to give their home away (perhaps to a son or daughter) but continue to live in it, unless they pay a commercial level of rent, there will be no reduction in their IHT liability, as it would be deemed a gift with reservation of benefit.

In contrast, gifting cash, securities or writing life policies in trust could significantly reduce IHT exposure with no practical impacts on daily living. Cash can be gifted directly through a trust, as could securities – particularly encashing and then gifting Isa holdings where there would be no capital gains tax implications.

It is difficult to envisage a scenario where holding a life policy in trust does not make sense from a tax planning perspective.

Admittedly, it takes a (fairly small amount of) time to set up, and there is a (fairly small amount of) paperwork involved, but holding such a policy in trust means that on death the funds can be released immediately without the need to wait for probate, making the administrative work required seem certainly worthwhile.

In addition, the proceeds will be outside the estate for IHT purposes.

Let us consider an example of a single man or woman (see table two), with half their estate held in property, as shown in column A.