Inheritance Tax 

What do clients need to know about inheritance tax planning?

This article is part of
Guide to end of life planning

What do clients need to know about inheritance tax planning?

Having spent their working lives paying tax, many people want to avoid giving the taxman too much when it comes to passing on their wealth to their family.

Inheritance tax (IHT) can catch clients out if they have not planned for what happens to their assets after they have died.

Research published in April by Time Investments found that of the 500 people aged over 55 with assets above the IHT threshold surveyed, 36 per cent who use a financial adviser had not yet considered inheritance tax planning.

Henny Dovland, business development manager at Time Investments, believes it’s an area of end of life planning where clients value support and professional advice because of its complexity.

“Clients want to get it right and sometimes having that advice gives them confidence. That’s what advisers can help clients with, it’s giving them confidence to put appropriate planning in place,” she says.

Firstly, it helps to know the facts about IHT and how it works.

Femi Folorunso, a consultant at Mattioli Woods, explains: “The current inheritance tax threshold is £325,000 per person. 

“This increases to £650,000 for a married couple, as long as the first person to die leaves their entire estate to their partner. Anything over this limit could be subject to 40 per cent tax.”

He continues: “There is also the recently introduced Residence Nil Rate Band (RNRB), frequently referred to as the ‘main home allowance’. This is on top of the standard IHT threshold. 

“To be eligible, you must pass your home – or a share of it – to linear descendants (i.e. your children or grandchildren). The home allowance is currently £125,000, but will rise incrementally to reach £175,000 in 2020-21 and, thereafter, in line with the Consumer Price Index."

He emphasises the need for clients to be aware of how their circumstances fit into the prevailing IHT regime and to explain this to beneficiaries so there are no nasty surprises.

“For heirs, an understanding that they may not inherit 100 per cent of the asset left to them, and may need to pay 40 per cent on a small or significant part of it, is important to manage expectations,” notes Mr Folorunso.

“It can come as a shock to a beneficiary to learn they may have to sell a property that has been in the family for generations because of lack of IHT planning.”

Estate planning

Property is probably the biggest asset most people have, so understanding how this is affected by IHT is vital.

“Property is almost always a major asset for investors”, observes Joe Roxborough, chartered financial planner at Ascot Lloyd, “and the government has grabbed headlines by increasing the nil rate band to £1m for those with property assets with the RNRB”.