In recent years, inheritance tax (IHT) collections have seen an unprecedented rise, leaving many individuals and families concerned about the financial implications of passing on their wealth to the next generation.
Data reveals a sharp increase in the number of estates subject to IHT, as well as the total amount collected by HM Revenue and Customs (HMRC). Between April and June 2023, HMRC collected £2 billion in IHT receipts, an increase of £200 million compared to the same period the previous year. According to the figures, June saw £795 million in inheritance tax collections, making it the highest monthly total ever recorded.
Given the current landscape of rising IHT collections, it is crucial for individuals to engage in proactive financial planning to mitigate the impact on their estates. Seeking guidance from a knowledgeable financial adviser can provide invaluable support in navigating the complexities of inheritance tax.
IHT is a tax at 40%, which applies to UK domiciled individuals when assets in excess of the inheritance tax threshold (or nil rate band) are transferred from one individual’s estate on death. The current inheritance tax nil rate band is £325,000 per individual. Those with direct decedents (children, grandchildren) are also allowed an additional nil rate band on their main residential property of up to £175,000 per individual.
Married couples (including registered civil partners) are allowed to pass assets to each other during their lifetime or when they die without paying inheritance tax. Any unused part of the nil rate band can be passed to a surviving spouse, potentially meaning married couples/civil partners could have £1 million in IHT-free allowances to offset against their estate.
There are many methods to consider when it comes to mitigating inheritance tax, such as gifting and the use of trusts, which we have touched on before in previous blogs. However, in this article, we would like to highlight two simple estate planning tools.
Completing an Expression of Wish is a simple, yet very important tool to remember when it comes to legacy planning. Whilst an Expression of Wish does not legally bind the trustees, it serves as a guideline when distributing the benefits to the estate. By expressing their wishes in a clear and concise manner, individuals can provide valuable guidance to the trustees, to help ensure their assets are distributed as intended whilst potentially minimising an inheritance tax liability.
Another effective way to manage inheritance tax that is often overlooked is the use of a Deed of Variation which allows beneficiaries to redirect a gift or inheritance to another person(s) or entity. This can be particularly useful when the original distribution of assets does not align with the beneficiaries’ needs or desires; for example, an adult child receives an inheritance from their parents, however they are now wealthy in their own right and in accepting the inheritance it would mean a potential IHT liability. Instead of increasing their estate value, they could vary the beneficiary from themselves to their children. By utilising a Deed of Variation, it is possible to rearrange the distribution of assets in a tax-efficient manner, thereby skipping a generation and reducing or negating the overall inheritance tax liability.
Understanding inheritance tax is crucial for individuals who wish to protect their wealth and ensure a smooth transfer of assets to their loved ones. Via careful planning and consideration, alongside utilising tools such as Expressions of Wish and Deeds of Variation, it is possible to manage inheritance tax effectively and minimise the tax liability. However, it is essential to seek professional advice to ensure that these tools are implemented compliantly with legal requirements.
Our Chartered Financial Planners work closely with legal intermediaries and are able to guide you through the intricacies of inheritance tax planning. For further advice or to arrange a conversation with one of our financial advisers, please get in touch.