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All good plans start by having a conversation

5 min read
David Little, Senior Financial Planning Director08 Nov 2022

That includes financial plans.

Throughout life we are taught to be secretive when it comes to our wealth, even with our closest family. Yet, this secrecy can be the defining reason why financial plans often fail at the last hurdle – on death.

We have all heard the famous saying “in this world nothing can be said to be certain, except death and taxes”. However, when combined, is this also true of “Death Taxes”? Or could Inheritance Tax be seen as a voluntary tax?

In generations past, Inheritance Tax was often viewed as a “tax on the wealthy”, therefore an easy target for the Treasury with limited wider political consequences. However, with rising property values and stagnant allowance thresholds, more and more families are finding their hard-earned family wealth decimated by the highly punitive 40% tax on death.

So, could this be avoided? Possibly.

It is clear that early planning will be the key driver to avoiding, or at least reducing, an Inheritance Tax liability. However, like all good plans, the earlier you start, the better the outcome.

The first step is to have a clear understanding of what is actually in your estate. What assets do you have? How are they held? What would the tax liability be on your death today? Could the assets be shielded from tax? Often it is not the assets that are the issue, it is how they are held or structured in your estate that defines the taxation.

The next step is to look to the future, ideally with a professional cash flow model. What are your expectations for income and expenditure in retirement? Do you have any one-off purchases planned? Any “bucket list adventures” to tick off? Could your different assets be used collaboratively for an income instead of opening your pensions? Could you afford to gift assets now to avoid Inheritance Tax in the future? Do you have a charity in mind? If giving up control of the asset is a worry, then would a Trust work? Are Care Home costs a worry? Do you plan to downsize?

So many questions! Yet all are essential to consider when constructing a comprehensive plan. This can often seem daunting, especially at the beginning.

The following are seven key points to consider when planning for the future:

  1. Have an open and honest conversation with your family and loved ones. It is important that they understand where you hold your wealth and what your wishes would be post-death. Remember though, these should be your wishes and you should not be pressured into decisions. Educating the next generation on managing wealth is key to planning, along with providing you with the reassurance that your hard-earned wealth will not be “frittered away” by the next generation.
  2. Keep your will up to date along with any nomination forms. This will ensure your wealth is distributed according to your wishes, instead of via strict intestacy legislation. Let your family or solicitor have a sealed copy of your will if possible. Furthermore, a Power of Attorney should be registered and kept on file to ensure your finances and wellbeing can be dealt with in line with your wishes should you lose mental or physical capacity.
  3. Pension funds often fall outside of your estate for Inheritance Tax calculations. Therefore, could your income requirements be met using your other savings or investments? Preserving your pension pot is a simple yet effective way of passing down wealth. Spending other investments or savings should be considered to lower your taxable estate on death.
  4. It is possible to gift assets prior to death to avoid Inheritance Tax. In simple terms, if you survive more than seven years from the date of the gift, it does not form part of your estate on death. Do you need to hold all of your savings or investments? Are some surplus to requirements? A professional cash flow model will provide you with reassurance before gifting assets, ensuring your chosen lifestyle remains affordable post-gifting.
  5. Make sure you are aware of, and use, your tax allowances. This includes annual gifting exemptions, Nil Rate Bands and Residential Nil Rate Bands. These allowances can play a key part in your financial plan and regular early gifting, even smaller amounts, can have a positive impact on the taxable value of your estate.
  6. If the maturity or financial awareness of your beneficiaries is a worry, consider using a Trust to allow control of the wealth to be maintained. You can control the Trust, as a Trustee, whilst commencing the “7 Year Clock” for Inheritance Tax purposes. Furthermore, by using a Discretionary Trust, you can control and alter who benefits from your wealth in the future, thereby ensuring flexibility and removing the need for a final decision to be made now.
  7. Spouses often leave all their assets to the surviving spouse on death, commonly referred to as “Mirror Wills”. However, have you considered passing growth assets, such as investments, down a generation on first death? This could be hugely beneficial for Inheritance Tax in the future.

The key point to remember is that early planning, including involving your family, is a tried and proven method of ensuring your wealth becomes truly inter-generational, without suffering unnecessary taxation along the way.

Please note that this article is intended for educational purposes only and should not be taken as investment advice. The value of investments can go down as well as up and you could get back less than you invested. Investment in funds will not be suitable for everybody and you should make yourself aware of the risks before investing and if you are unsure, you should seek professional advice.

Tax rules are subject to change and taxation will vary depending on individual circumstances.
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