A record £5.2bn in inheritance tax (IHT) was collected last year, with the number of estates within the scope of the tax increasing every year since 2009.
The tax applies at 40 per cent on the whole of an estate at death, so a failure to plan can leave a substantial and unnecessary dent in a client's legacy.
1. Don’t leave it too late
In 2017, more than half of UK adults had no Will. While few of us enjoy talking about our eventual demise, not having a Will can result in assets passing to the wrong person or in a way that gives rise to a larger IHT bill.
For example, remember that by directing wealth to a spouse or civil partner, it is possible to secure a total IHT exemption (different rules apply where a spouse or civil partner is not UK domiciled).
It is equally important to keep any Will up-to-date. Tax rules and rates are always changing and it is crucial to make the most of any new opportunities and to avoid any pitfalls.
A new residence nil rate band applies to deaths since last year but only where the property is left to lineal descendants. For non-doms, it is essential to keep an eye on the duration of UK residence as, also since last April, their worldwide estates are exposed to IHT after 15 years.
Individuals who were born in the UK with UK domicile, who left and subsequently returned will be in a similar position and may find that any trusts they have no longer protect them from IHT.
2. Make the most of available reliefs and exemptions
Although the nil rate band remains frozen at £325,000, there are numerous other ways to reduce the impact of IHT.
Sums left to charity are exempt and they comprise 10 per cent of an estate, a lower IHT rate of 36 per cent may be available. If eligible assets have been owned for two years before death, business property can benefit from up to 100 per cent relief from IHT.
Another valuable exemption applies to normal expenditure out of income.
As long as gifts are made as part of a regular pattern of giving, are made out of income as opposed to capital and leave the client with enough income to maintain their usual standard of living, there is no limit to how much can be transferred IHT free.
3. Make gifts
Lifetime gifts to individuals are potentially exempt from IHT.
This means that they fall outside the client's estate for IHT purposes entirely if they survive seven years after making the gift.
If they die during that period, IHT is due but once the client has survived the gift by more than three years, the applicable rate falls by 20 per cent each year to 0 per cent.
4. Consider placing assets in trust
If structured correctly, assets placed in trust will not be subject to IHT.