Will the taxman be the main beneficiary of your estate?

News headlines of tax avoidances schemes can be unsettling, especially if you worked to protect the assets you have a built up over many years to go to your chosen beneficiaries rather the tax man.

In fact, according to data from the Office for Budget Responsibility, inheritance tax receipts increased by 16.4% during the first half of the 2017/18 financial year, compared to the same period in 2016/17.

David Everest, an inheritance tax expert at Wren Sterling, says that for most clients who have taken proper financial advice, there shouldn’t be any major concerns, but you shouldn’t take arrangements for granted. Here, he runs through some key considerations for inheritance tax.

Inheritance tax (IHT) planning can be undertaken effectively without being contentious – as you do have allowances and exemptions which you can use each year (and if you don’t, then you’ll lose them.)

What does this mean for people with arrangements made several years ago?

For many people (especially those with more modest estates) who have arranged mainstream planning having taken professional advice, are unlikely to be affected by the rulings from these contentious schemes.

That said, there are several factors that can have impact on the planning which has already been undertaken:

Personal changes

Are you using more or less of your income than you thought? This can affect how you use the assets you have built up.
Who do you wish to benefit from your estate, how and when? Has this changed?
Does your Will reflect your current situation and wishes?
Have you arranged Lasting Powers of Attorney so that you can delegate key financial matters?

IHT legislation

Are you making full use of the current IHT exemptions, which is an excellent way of passing on wealth free from IHT?
Not all exemptions are automatic. The introduction of the Residence Nil Rate Band will remove many estates from the IHT trap but it will not go to everyone. Have you reviewed your Will and considered if your estate will benefit? Is there potential for many who could be entitled to this allowance to miss out?
Pension freedoms have enabled many more people to review how they use their pension funds in retirement. This also applies to inheritance tax planning, as deferring the withdrawal of income, withdrawing tax free cash from a personal pension and using other assets can be extremely effective from an IHT perspective

Those who have arranged discretionary trusts that are about the reach their 10th anniversary should be reviewed. Periodic charges (a charge on the value of the trust that exceeds the nil rate band which is £325k for the 2017/18 tax year) will apply at a rate of 6%. It’s important that provision is made to pay the tax when required by HMRC.

Economic factors

The value of your estate may have increased, especially as in recent years we have seen a resurgence in property prices as well as an extended period of growth and strong investment returns from global equity markets.

What about those without any IHT plans?

As planning takes time to be effective (particularly for larger estates) we would recommend speaking with a financial adviser as soon as possible. Legitimate allowances from government are there to be used, as well as suitable investment options. If you do not make plans for your IHT, this may result in the taxman being one of the largest beneficiaries of your estate.

Arrange an appointment

To find out more about your IHT exemptions and how you can organise your estate for your beneficiaries, book an appointment with one of our independent financial advisers.

https://www.gov.uk/government/publications/inheritance-tax-main-residence-nil-rate-band-and-the-existing-nil-rate-band/inheritance-tax-main-residence-nil-rate-band-and-the-existing-nil-rate-band

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/664501/Nov2017EFOwebversion-2.pdf, p120.

All figures correct a time of publication. The levels, bases and reliefs from taxation may be subject to future chance and their value depends on individual circumstances. Tax rates referred to are current for tax year 2017/18.

The Financial Conduct Authority does not regulate taxation and trust advice and also will writing.

The value of your investments may go down as well as up and you may not get back the full amount invested.

Accessing pension benefits early may impact on levels of retirement income and is not suitable for everyone. You should seek advice to understand your options.