EFFECTIVE INHERITANCE TAX PLANNING IS A CAREFUL BALANCING ACT

Once a concern only for the very affluent, Inheritance Tax (IHT) is now an issue for many ordinary families, who may find themselves handing over an unprecedented portion of their estates to the taxman. This shift results from years of house price growth, inflation and stagnant tax thresholds. The Office for Budget Responsibility anticipates that IHT will bring in £7.2 billion in the fiscal year 2023/24[1].

Effective IHT planning is a careful balancing act. It’s about ensuring you can live comfortably and meet your care needs while also considering how to pass on your wealth in the most tax efficient way. Navigating these complexities can be challenging, but it’s entirely manageable with open communication and careful planning.

Typically, IHT applies at a rate of 40% on the value of an estate above the ‘nil rate’ allowance of £325,000 (which has been frozen until April 2028). This figure escalates to £500,000 if a primary residence is bequeathed to a direct descendant. Assets passed to a spouse or registered civil partner are exempt from this tax.

VALUABLE RELIEFS AND THE SEVEN-YEAR RULE

A variety of reliefs exist that enable families to protect more of their estate from IHT. The most significant of these is arguably the seven-year rule. This provision allows certain gifts to be tax- free, provided the giver survives for seven years after making the gift. However, this seemingly straightforward rule is fraught with potential pitfalls that could result in an unexpected bill from His Majesty’s Revenue & Customs (HMRC).

Estate planning is a complex endeavour. Prudent giving requires sufficient funds to support a long life and cover care costs. Here, we explore the main tax traps that could cost you thousands and provide guidance on avoiding them.

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Source data:

[1] https://obr.uk/forecasts-in-depth/tax-by- tax-spend-by-spend/inheritance-tax/

THIS ARTICLE DOES NOT CONSTITUTE TAX OR LEGAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.

THE FINANCIAL CONDUCT AUTHORITY DOESN’T REGULATE TRUST PLANNING AND MOST FORMS OF INHERITANCE TAX (IHT) PLANNING. SOME IHT PLANNING SOLUTIONS PUT YOUR MONEY AT RISK, AND YOU MAY GET BACK LESS THAN YOU INVESTED. IHT THRESHOLDS DEPEND ON INDIVIDUAL CIRCUMSTANCES AND THE LAW. TAX AND IHT RULES MAY CHANGE IN THE FUTURE.