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7 ways you can help clients mitigate Inheritance Tax

As clients approach you to put a will in place or other measures to ensure their wishes are carried out when they pass away, Inheritance Tax may be a concern. It affects roughly 5% of estates and can have a significant impact on the wealth clients leave behind for their loved ones.

In the six months to September 2019 alone, £2.4 billion was collected through Inheritance Tax. With a standard tax rate of 40%, Inheritance Tax is likely to be a serious concern for families that find their estate is liable for it. While the saying goes, the only things that are unavoidable are death and taxes, it’s often the case that Inheritance Tax can be mitigated.

Estate planning is one of the aspects we help clients with at Templegate Financial, but legal advice can be incredibly valuable and, in some cases, essential for making sure measures are effectively put in place. If your clients are worried about Inheritance Tax, some steps may be appropriate for them to eliminate or reduce the eventual bill.

1. Gifting during their lifetime

More people are choosing to gift their wealth during their lifetime, allowing them to see the benefits and security their generosity has led to. This comes with several areas of concern.

First, some gifts are considered part of their estate for up to seven years after they were given for Inheritance Tax purposes. However, making full use of gifting allowances, which include up to £3,000 per year and gifts taken from an income, can ensure gifts are immediately excluded from estates.

Second, individuals may want legal advice when gifting. We’ve seen a rise in the number of parents and grandparents using their savings to help the next generation get on the property ladder. While rewarding, some are worried about what would happen to the gift if their loved one split from a partner, for example. Legal guidance can provide peace of mind when supporting loved ones financially.

2. Leaving a charitable legacy in their will

If a client has approached you to write a will and may be liable for Inheritance Tax, a charitable legacy could help. Those that leave 10% or more of their ‘net estate’ to charity, benefit from a lower Inheritance Tax rate, reducing it from 40% to 36%. Depending on the size of the estate, it’s a step that can mean more is left for loved ones, while supporting good causes that are close to their heart too.

3. Making use of nil-rate bands

As clients make a will, another allowance to ensure they’re taking advantage of is the residence nil-rate band.

The nil-rate band, the threshold for when Inheritance Tax is due, is currently £325,000. The residence nil-rate band can add an extra £175,000 to this if the individual is leaving their main home to children or grandchildren. Unused allowance can be passed on to spouses or civil partners, in effect, allowing a couple to potentially pass on £1 million to their family.

In some cases, changing how assets will be distributed may be necessary to make full use of the nil-rate bands.

4. Passing on a pension as an inheritance

Compared to other assets, pensions have favourable taxes when inherited.

If the pension holder is under 75, most lump sums inherited through a pension will not be subject to any tax. This includes Income Tax as well as Inheritance Tax. Where the pension holder is 75 or over, a lump sum is likely to be liable for Income Tax, potentially at a far lower rate than the equivalent Inheritance Tax would be. Beneficiaries may also be able to take smaller amounts of money over an extended period to manage Income Tax liability.

This is important to keep in mind as pensions typically aren’t covered in a will. Instead, clients should be advised to complete an expression of wishes with their pension provider.

5. Using investment bonds

A trust is a common way to pass assets to loved ones and reduce Inheritance Tax liability, but clients also need to consider what assets they’ll place in trust. For high net worths, investment bonds can provide an attractive solution. This can allow clients to retain access to the capital the bonds provide while still putting measures in place to pass on the assets when they die. Depending on the type of trust they choose, they could still retain control and access to their capital even if it’s not included in their estate for Inheritance Tax purposes. This combined with the potential Income Tax benefit of investment bonds means it’s an area where financial and legal advice can create a solution.

6. Applying for Business Property Relief

An executor of a will or administrator of an estate may be able to claim Business Relief where eligible, reducing Inheritance Tax. Any ownership, or share of a business, is included in an estate for Inheritance Tax purposes. However, Business Relief of either 50% or 100%, depending on the asset type, on some of an estate’s business assets can significantly reduce Inheritance Tax in some cases. This can be passed on as part of the will, making it an important consideration for business owners.

7. Taking out life insurance

Finally, if all options have been explored and Inheritance Tax would still be due, taking out a Whole of Life Insurance policy can help clients. This wouldn’t reduce the about of Inheritance Tax due but would pay a lump sum that can then be used to pay it, leaving the estate intact for beneficiaries. Crucially, clients need to have this policy placed in trust otherwise the payout would form part of the estate, increasing the amount of Inheritance Tax due.

Providing financial advice to your clients

As you help clients mitigate their potential Inheritance Tax bill, it’s vital they fully understand their financial position too. This includes net worth, highlighting if Inheritance Tax should be a concern, and how the value of their estate will change during their lifetime. We can help you and your clients in creating a plan that accurately affects their financial circumstances.

Likewise, we understand that there are points when clients of Templegate Financial will benefit from legal advice, from writing their will to setting up a trust. If you’d like to discuss how we can work in partnership, please contact our team on 01264 300 125.

Please note: The Financial Conduct Authority does not regulate Estate Planning.

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