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20/02/2019 … Author:

Inheritance Tax (IHT) can decimate an individual’s estate, yet there are IHT savings strategies that everyone with a reasonable size estate should consider. 

First a recap; Inheritance Tax is charged on your worldwide assets, valued at the date of death.  There are certain allowances that can be deducted, such as the first £325,000 of estate value and while other exemptions have been introduced, these have as much served to lull people into a false sense of security, as reduce the amount of tax levied. 

Despite what you may have been led to believe, the Inheritance Tax take is on the increase.  The Office for Budget Responsibility estimates that total receipts in 2018/19 will be £5.5 billion, raised from over 22,600 households. 

Let’s look at a simple case study of how much IHT might be due and what can be done about it:

Jim has been living with Trudy for over twenty years and they are both independently wealthy. Their house is owned jointly and valued at £390,000 and in addition, Jim has other savings, investments and assets worth £300,000. 

Unfortunately, Jim has just had the worst possible news from the doctor and the couple have contacted Lowes Financial Management with a view to putting his affairs in order.  Despite Trudy having her own savings and investments, as they have no children, Jim expects to leave everything to her.

Taking into account half the value of their property, Jim’s estate is valued at £495,000 which after deduction of the Inheritance Tax Nil Rate Band of £325,000 leaves a taxable estate of £170,000 meaning a potential tax bill of £68,000.  Whilst this still means that Trudy will end up with the whole of the house and £232,000 of Jim’s assets let’s see what a little bit of last minute planning can do.

First of all, if Jim gifts Trudy £6,000 now, utilising this year’s and last year’s annual gifting exemption he will reduce his estate by the same amount and thereby immediately save £2,400 of tax.

Trudy wants Jim’s legacy to be more than the increased wealth that she neither really needs or wants and so they agree to support a charity that is close to their hearts.  As a result, they decide to give the charity £16,500 that will be used to build an orphanage that will bear Jim’s name.

As the £16,500 is more than 10% of Jim’s net inheritance taxable estate a special exemption applies to the extent that the IHT due on the balance of the estate is reduced from 40% to 36%.

The net result is that following Jim’s death, rather than Trudy inheriting Jim’s share of the house and £232,000, she now inherits his share of the house and £230,400.  So as a result of just a little bit of appropriate action, Jim’s Orphanage that cost £16,500 to build, ultimately came at a cost to Trudy’s inheritance of just £1,600 -  that’s around £1.03 cost to her, for every £10 the charity benefited.

Now whilst this all may seem perfect, I should add that even if Jim had tragically died without any warning, much of the above could still have been achieved after his death, solely at Trudy’s behest and even without having to choose the ultimate charity beneficiary until a later date. 

Furthermore, in the example as it stands, with just one more step, that a good financial planner will have already spotted, we could have created an outcome where Trudy could receive a net inheritance of £2,000 more than she would have originally received, and the charity could build not one, but four orphanages in Jim’s name!

The sooner Inheritance Tax planning is started, the more effective it can prove to be but as demonstrated above, it’s never too late to consider it and it can even be concluded up to two years after the date of death, potentially saving families fortunes and also supporting worthy causes.

There is nothing that upsets us more than hearing people say that they see no value in financial advice.  Such comments invariably come from those that don’t know what they don’t know and ultimately cost them and their families dearly.

Lowes Financial Management have been helping people build, protect and pass on their wealth for generations.  Why not arrange a free consultant with a Lowes Consultant to see how we can help you and yours?

The Financial Conduct Authority does not regulate on estate planning and tax planning.

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