How to plan for a low IHT bill

While planning for a retirement income is essential, clients can miss a number of steps when it comes to passing on wealth.

You should review your will at least every three to five years Philip Whitcomb, Moore Blatch

Often, this is because they have not taken advantage of the available reliefs and exemptions.

First and foremost, it should be kept in mind that IHT rules can – and do – change. 

Key points

• People should review their will once every three to four years
• Advisers should look at long-term prosperity for their clients
• Gifting to children and grandchildren should be considered when planning for IHT

Therefore, it is important to have an up-to-date will, says Philip Whitcomb, partner and head of rural private clients at Moore Blatch.

He said: “Ideally, you should review your will at least every three to five years to take into account not only changes in family circumstances but also changes [to tax rules in regards to succession].”

There are other easy ways to plan for the eventual IHT bill on a client’s estate, taking into account the number of reliefs and exemptions that clients can utilise if they plan ahead.

Ben Gilmore, investment manager at Charles Stanley, says: “The middle-aged now have frighteningly large mortgages and small pensions, young people cannot get a foot on the housing ladder without significant help from their family, and the older generation is often extremely rich on paper but can be cash poor as a large proportion of their wealth is tied up in property. 

“With millennials standing to inherit more than £20tn of wealth over the next 20-30 years, our inheritances will come to the rescue, right?”

But he continues: “Data certainly suggests that inherited wealth will not find its way to those who need it most, and they will continue to use their money for the hand-to-mouth requirements and those subscription fixes. 

“This means today, more than ever, planning for your retirement and the management of family wealth matters.”

He says Experian data suggests there are three clear groups who are most likely to receive an inheritance: 

• Moneymakers: people typically in their early 40s who spend much of their income, but also earn significant figures – and their savings and pensions reflect that. They tend to have large mortgages, but they can comfortably service them through strong earnings power and can always fall back on the likely future inheritance.
• Established investors: people approaching retirement, generally with pension pots of more than half a million pounds.
• Career experience: people approaching 50 years old and have already made good provision for when they retire, with pension pots approaching half a million.

Passing on pensions

Advisers should be looking at long-term prosperity for their clients and their families, says Tracy Crookes, financial planner at Quilter Private Client Advisers.

Money has long been a subject no one talks about Tracy Crookes

Ms Crookes says: “An easy way to build that long-term relationship is to suggest meeting family members and/or including them in client conversations. 

“Some clients will not be comfortable to start with – money has long been a subject no one talks about but it’s really important that we knock down these walls.”  

She continues: “We all include family members where a client is elderly or could be considered vulnerable for other reasons such as a bereavement, but I actively encourage bringing family members into any meetings so they can see the plans unfold and feel involved.” 

Indeed, encouraging clients to share some if not all of this information with their family is an important first step.

Laura Suter, personal finance analyst at AJ Bell, says: “Since 2015, pensions are more attractive from an inheritance point of view, meaning it is more tax efficient to pass on your pension wealth to your children or grandchildren. 

“The same changes were not made to Isas so this money still counts towards your estate for [IHT] purposes.”

This means that pensions are one of the most tax-efficient ways to pass on wealth and, if a client dies before the age of 75, the benefits left in a pension can be paid as a lump sum or income to a beneficiary tax free, adds Mr Whitcomb.

Gifting

Clients often overlook the annual gifting limits too, with every individual able to give away up to £3,000 a year before the taper kicks in, according to Ms Suter.

She says: “This can also be backdated if it has not been used in the previous year, meaning a couple who have not used the allowance until now can give away £12,000 in the current tax year.”

Additional gifts for weddings of up to £1,000 per person, £2,500 for a grandchild or great-grandchild and £5,000 for a child, and small gifts of up to £250 per person each year, can be added on top of the other limits.

A less clear-cut allowance concerns the ability to gift money out of income, adds Ms Suter.

She explains: “There is no monetary limit attached to this but, instead, you need to prove that gifting the money won’t affect your standard of living. 

“For wealthy people with substantial income, this can prove very lucrative.”

She continues: “If you leave 10 per cent of your estate to charity in your will, the rate of [IHT] you pay on the rest of your estate is reduced. 

“That gift to charity from your estate is free of [IHT], and the rate on the rest of the estate, after gifts and allowances, is reduced from 40 per cent to 36 per cent.”

She adds: “The nuances of many of these rules show how important it is to have a will and ensure the right people are being left the correct assets to make the estate as IHT- beneficial as possible.”

Indeed, one of the easiest steps is to get clients to start to think about making lifetime gifts. 

“Start with the simple things, such as gifting money to a younger relative to top up their pension or paying into an Isa for a youngster,” says Mr Whitcomb.

“All these things can be transformative for that person’s life. Remember each year to give away £3,000 and that gift will not be subject to IHT.”

He reiterates: “If you are philanthropically minded, gifts to charity are tax free.”

But recently, the Office of Tax Simplification has proposed changes to the seven-year period – in which gifts are taxed before death – cutting it to five years, as part of a body of recommendations to simplify IHT.

In its second and final report on the IHT review, published July 5, it also recommended taper relief should be abolished – where gifts exceeding the total nil-rate band of £325,000 and made three to seven years before death are taxed on a sliding scale.

Property

The residence nil-rate band gives an additional allowance on top of the current £325,000 threshold, but only if the property is left to certain people. 

However, according to Ms Suter, this latest IHT break “has proved very complicated”.

Nevertheless, it means that a couple could, in theory, leave a £1m property free of IHT.

She explains that in the current tax year, clients get an additional £150,000 limit per person, rising to £175,000 from April 2020.

“However, the rules are tricky,” she says.

“You must leave the property to a ‘direct descendant’, so a child or grandchild, or step-child or step-grandchild, meaning that childless couples can’t make use of the allowance,” she explains.

“You also only get the full allowance if your estate is worth less than £2m, as you lose it at a rate of £1 for every £2 you are over the threshold.”

Victoria Ticha is a features writer at Financial Adviser and FTAdviser.com