2 April 2019
Estate planning is an area of increasing complexity, and one where the financial burden for those affected is increasing. The government’s Inheritance Tax (IHT) receipts reached record levels in 2017/18 and the IHT net is set to catch an increasing number of families. Despite reports of a slow-down in the housing market, according to HMRC, IHT receipts were a record £5.2 billion in 2017/18.
So estate planning remains relevant to our clients and we can add real value particularly where it interacts with many other planning areas such as pensions, family trusts, paying for long-term care and advising business owners.
The initial step is to make a Will. If you die without a Will, then the Government will decide who inherits your estate in accordance with the Laws of Intestacy. These were drawn up in the 1920s, and are now somewhat out of date. These laws state that your spouse may end up sharing your estate with your children or parents. Or if you are an unmarried couple, then your partner may not get anything.
Some key elements to consider in an IHT mitigation arrangement include:
The financial security of the client (in terms of both income and capital) should be protected for the rest of their life. Some degree of illiquidity is a common feature of IHT mitigation strategies, so some scenario based cash-flow planning may be required to ensure clients have sufficient liquid funds available to meet their foreseeable needs.
Anti-tax avoidance provisions should be respected, including ‘pre-owned assets’, ‘gift with reservation of benefit’, and the ‘General Anti-Abuse Rule’. Elements in an estate planning arrangement which are provocative to HMRC or have an uncertain eventual outcome are best avoided.
IHT mitigation options include:
Asset reduction: trust-based gifting, which generally provides some degree of liquidity, can accommodate a relatively low-risk profile and generally achieve maximum IHT efficiency after seven years.
Asset conversion: investment in assets which attract Agricultural Relief (AR) or Business Relief (BR), which generally increase investment risk and/or illiquidity but achieve maximum IHT efficiency after two years.
Insuring the liability: life insurance intended to pay an amount on death sufficient to cover the IHT liability. In this case, factors such as gender, age, state of health and lifestyle are all important factors in determining the cost-effectiveness of a life policy.
Please note that not all estate planning is regulated by the Financial Conduct Authority.
An experienced, accredited later life planner will understand all the options for estate planning and how these interact together and with any other prior arrangements. If you wish to discuss your own situation please get in touch and we shall be happy to assist.