Guide: 3 ways to reduce your IHT bill

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Estate Planning

Estate planning is an area of increasing complexity, and one where the financial burden for those affected is increasing. Inheritance tax receipts jumped by £700m to £5.5bn between April 2021 and February 2022 as frozen thresholds brought more estates into scope due to rising property values.

HMRC said this increase is likely in part due to the higher number of wealth transfers that took place during this tax year, itself the result of higher-than-usual deaths due to COVID-19.

So estate planning remains relevant and can add real value particularly where it interacts with other area such as pensions, trusts, long term care and advising business owners.

The initial step is to make a Will. If you die without a Will, then the Government will decide who inherits your estate in accordance with the Laws of Intestacy. These were drawn up in the 1920’s, and are now somewhat out of date. These laws state that your spouse may end up sharing your estate with your children or parents. Or if you are an unmarried couple, then your partner may not get anything.

First principles

Some key elements to consider in an inheritance tax mitigation arrangement include:

  • The financial security of the individual (in terms of both income and capital) should be protected for the rest of their life. A degree of illiquidity is a common feature of IHT mitigation strategies, so some scenario based cash-flow planning may be required to ensure clients have sufficient liquid funds available to meet their foreseeable needs.
  • Anti-tax avoidance provisions should be respected, including “pre-owned assets”, “gift with reservation of benefit”, and the “General Anti-Abuse Rule”. Elements in an estate planning arrangement which are provocative to HMRC or have an uncertain eventual outcome are best avoided.

Main strategies

Inheritance tax mitigation options include:

Asset reduction: trust-based gifting, which generally provides some degree of liquidity, can accommodate a relatively low risk profile and generally achieve maximum IHT efficiency after seven years.

Asset conversion: investment in assets which attract Agricultural Relief (AR) or Business Relief (BR), which generally increase investment risk and/or illiquidity but achieve maximum IHT efficiency after two years.

Insure the liability: life insurance intended to pay an amount on death sufficient to cover the IHT liability. In this case factors such as age, health and lifestyle are all important factors in determining the cost effectiveness of a life policy.

Please note that not all estate planning is regulated by the Financial Conduct Authority.

Next steps

An experienced accredited later life planner will understand all the options for estate planning and how these interact together and with any other prior arrangements.

If you wish to discuss your own situation please get in touch and we shall be happy to assist.

Barra Gorman

Chartered Financial Planner

This blog is for general information only and does not constitute advice.