Will the taxman be the main beneficiary of your estate?

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

The average inheritance tax (IHT) bill is now over £200,000, so finding out how you can reduce this for the good of people in your will is a step worth taking.

Clive Barwell, a Registered Trust & Estate Practitioner 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 IHT. Effective IHT planning can be undertaken without being contentious – as you do have statutory allowances and exemptions which you can exploit each year (and with some if you don’t use them, then you’ll lose them.)

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

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 impact the planning which has already been undertaken:

Personal changes

• Are you managing or struggling on your income? What will the situation be following the first death? This can affect how you view the savings and other 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?  Does it take into account the current and likely future family dynamic?
• Are you concerned about the impact future care costs may have of on your family’s inheritance?

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 (NRB) has removed many estates from the IHT trap, but not all. Have you reviewed your Will and considered if your estate will benefit? Without proper planning, there is the potential for many who could benefit from this allowance to miss out.
• Pension freedoms have enabled many more people to review how they use their personal pension funds in retirement. They also have a role to play in IHT planning, as deferring the withdrawal of income and using other assets for income generation can be extremely effective from an IHT perspective.

Some IHT planning involves the use of Discretionary Trusts. Any that are about to reach a 10-year anniversary should be reviewed. Periodic IHT charges (a charge on the value of the trust that exceeds the available NRB) will apply at an effective rate of 6%. Whilst there is no tax to pay if the Trust assets are valued at less than the available NRB on any 10-year anniversary, a report to HMRC still needs to be made if the value exceeds 80% of that available NRB.

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 extended periods of growth from global equity markets. This is against a background of a frozen NRB, which has remained at the same level since 2009.

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

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.

Source: https://www.gov.uk/

All figures correct a time of publication. The levels, bases and reliefs from taxation may be subject to future change and their value depends on individual circumstances. Tax rates referred to are current for tax year 2024/25.

The Financial Conduct Authority does not regulate tax advice, estate planning, trusts or 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.