The first step to effective Inheritance Tax (IHT) mitigation is to know how much money you need for your own lifetime. Once you have identified this, you will have more confidence to act and take action.
Howard Goodship, Chartered Financial Planner in Lonsdale Wealth Management's Ringwood office explains that having the confidence to act can mitigage inheritance tax.
I have met many people over the years who know they need to do something to reduce the value of their estate as they don’t want to pay a high IHT bill, but they fail to act in good time. It wasn’t because they weren’t aware of IHT (often they had been thinking about what to do for years), but they simply failed to have the confidence to act!)
I help clients by following a simple process, at the end of which they understand whether their own retirement and lifetime needs are secure and if so, are able to put in place a plan of how to mitigate future IHT on their estate. I will share this with you.
1. What do you need?
We run cash-flow projections (including inflation assumptions), based on your regular expenditure, predicted ad-hoc expenditure and later life planning needs such as care fees.
2. Identify surplus capital or income
The cash-flow projections help identify whether you have more capital or income than you are likely to need. We quantify what is surplus and consider the most effective way to pass this down to your families, to reduce your future IHT liability.
3. Ensure Wills are up to date and tax efficient
This is done by referral to a solicitor to ensure the Will allows the estate to benefit from all relevant IHT exemptions, including the Residential Nil Rate Band (RNRB), where available.
4. Utilise annual gift exemptions
Usually, you need to live for a further 7 years from the date of any gifts but there are currently several exemptions which result in immediate removal from the estate.
5. Solutions to mitigate your estate’s IHT liability
Potentially Exempt Transfers (PET), Chargeable Lifetime Transfers (CLT), Trusts, packaged solutions such as Loan Trusts and Discounted Gift Trusts. There are a number of solutions available and the most appropriate will be dependent on your personal situation.
6. Insuring any remaining liability
Whole of Life cover can pay a future IHT liability and if written in trust, is paid out immediately without the need for probate. It can provide liquidity to the beneficiaries to pay any IHT liability.
Howard Goodship, independent financial adviser and member of the Ringwood financial planning team said:
'Sometimes, making simple changes to your current investments and planning is sufficient. For example, pensions are currently outside the estate so it may be better to stop drawing income from your pension and spend surplus savings. All my Lonsdale Wealth Management colleagues in St Albans, Barnet, Ware, Harpenden, Stafford and Leeds / Bradford are available for an initial, no obligation chat to discuss your personal requirements. We are able to do this in a variety of ways, taking account of any current COVID restrictions. If you would like to understand more about Inheritance Tax Planning please read our Lonsdale Services Inheritance Tax - An Introductory Guide.'
The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested. The contents of this article are for information purposes only and do not constitute individual advice. The Financial Conduct Authority does not regulate Cash Flow Plans or Cash Flow Modelling. The Financial Conduct Authority does not regulate will-writing.
Howard Goodship has written several articles for his Understanding Investments series. Read more below.