Mitigating Inheritance Tax and the lost opportunity

During the 2021/22 financial year HMRC received receipts for Inheritance Tax (IHT) totalling £6.1bn, a rise of 14% (£729 million) on the financial year 2020/21*. Clearly this is going to be concerning news for many families who might be exposed to IHT.

With a bit of planning however, many families could reduce their exposure to IHT as well as making the lives of their loved ones more comfortable.

Meet Tom……

It’s 2013, Tom is 45 years old and has two daughters (Sophie and Grace) 5 and 6. Tom’s parents (John and Sally) are both 70 years old. Tom has been reading about the amount of IHT families can pay and he is worried and would like his parents to review their position.

Tom’s parents are wealthy and have a variety of assets:

Their current IHT exposure £380,000.

Tom came to us as he was concerned that his parents have not done any form of planning to aid in mitigating the potential inheritance tax on their combined estate.

In our meeting we discussed that, when advising on IHT, we need to be advising the individuals that wish to plan to mitigate their own IHT position; but we were able to give Tom some general advice on how the IHT system works and what should be considered.

Brief notes of the meeting:

• Inheritance tax is charged at 40%.
• Every person has a Nil Rate Band of £325,000, the first £325,000 of an estate is tax free.
• Every person has a Residence Nil Rate Band of £175,000, providing the family home is passed down to the next generation and the estate does not exceed £2,350,000.

Lifetime planning such as direct gifts or gifts into trust can reduce the estate value.

Other reliefs are available such as making gifts out of excess income, which can keep the estate at its current level, as opposed to increasing its value.

We have recommended that Mum and Dad come in to have a meeting and discuss a potential Inheritance Tax plan.

10 years later…….

Tom has asked to come in, as his parents have now passed away. Unfortunately, they didn’t want to do any planning and Tom is now executor to the will and is required to deal with the estate. The inheritance tax on the estate totals £540,000.

So what could have been done if Mum and Dad had made a plan to mitigate their IHT exposure:

We would have had a comprehensive look at their wills and financial position, which have included reviewing the amount of income they jointly received, to ensure they had enough to live comfortably.

Timings would have allowed for lifetime gifting, by way of either absolute gifting or via a Trust. This could have been up to the value of £650,000, being 2 x the current nil rate band. If successful, this would have allowed for savings on IHT of £260,000.

They could have also made better use of any excess income they had, for example fund schooling for the grandchildren. This would have stopped additional income increasing the estate and therefore the potential for increased IHT.

By working with investment managers, who could have reviewed the parents investment portfolio, there could have been further opportunities to make tax efficient investments potentially IHT free.

Our advice to Tom at the present time becomes very limited at the point of dealing with the estate and although some things can be done to assist in mitigating future inheritance tax for Tom, unfortunately we could not do any planning for Mum and Dad.

*Inheritance Tax statistics: commentary – GOV.UK (www.gov.uk)

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