Who said Inheritance tax is optional?!
It’s been said before that “IHT is a tax on those who trust the government more than they trust their kids”. I don’t know who said this. It is certainly thought provoking. But I’m not sure how much veracity it holds today.
To recap, the basic threshold for IHT is £325,000 per person, which equates to £650,000 for a married couple (two people).
If you have a property you are leaving to children, grandchildren or lineal descendants you can also benefit from the Main Residence Nil Rate Band which is up to an extra £175,000 per person, therefore increasing the individual’s IHT threshold up to £500,000 (or £1m for a married couple).
As such, looking at the example of a married couple leaving assets to each other on first death and to their children on second death, if their assets total over £1m there’ll be IHT for the kids to pay – at up to 40%.
This isn’t news. This has been the case for a number of years now.
The suggestion is that if you have assets over £1m you should directly gift them down the generation or put them in trust for kids, and, if you don’t, its because you trust the government more than you trust your kids.
I acknowledge the statement is supposed to be provocative, but I think for many people it is now simply untrue.
Firstly, it doesn’t hold if your main residence is worth over £1m (which is above average, but not irregular in the Southeast).
Or if your house is worth over £600,000 and if you have over £400,000 in savings.
Again, this isn’t news. This is a result of house prices increasing over the years and the Inheritance tax thresholds standing still and being eroded by inflation.
However, what has compelled me to write this post is the fact that, as you’ve probably heard, from April 2027, most Pensions will be included in one’s estate for IHT calculations.*
Thus, a husband and wife, with a property worth £500,000 and with £200,000 each in pensions; if they have over £100,000 in savings, that excess is subject to IHT.
Conclusion: Since the Autumn budget last year, the government have made it harder for people to pass on their assets without being taxed to the hilt.
But it is still possible.
How?
It’s complicated.
There’s no simple answer and the answer for any individual has to be tailored to their particular needs.
But, in short, it is difficult to undertake IHT planning with either one’s main residence or one’s pension. Therefore, the best first solution is to redouble IHT planning efforts and strategies around savings and investments.
But I can’t just give everything to my beneficiaries – even if I’m confident I’ll live the 7 years required. How would I pay the bills if I’ve given most of my assets away?
There’s a trust for that! The Discounted Gift Plan. This trust allows you to make a lump sum gift of capital into trust and retain a fixed income from those funds. You can no longer access the capital, that now belongs to the trust and appointed trustees, but you can take an income.
Subject to eligibility and HMRC ratification. Exact amount of any discount will only be calculated if death occurs within 7 years.
Please note that if withdrawals exceed the growth on the plan the capital value will be eroded.
But what if I don’t need an income now but I might in the future. What if I do trust my kids, but I don’t trust the government to provide for potential care needs in later life? How could I pay for my care if I’ve given most of my assets away?
Well, there’s no perfect answer because we don’t have a crystal ball, but there is a potential solution for that. It’s called the Later Life Planning Scheme and it enables you to make a gift of capital into an investment bond which is held in trust to reduce the value of your estate for IHT planning, whilst retaining the ability to access a predetermined level of withdrawals to help meet the expenses of care in later life, if required. Please note that if the income taken exceeds the growth on the plan the capital value will be eroded.
These aren’t the only trust options available and they aren’t the only IHT mitigation strategies. For example, there is also the strategy of taking out a whole of life insurance policy to meet the potential IHT bill and, if the asset pushing your estate over the IHT threshold is your pension, this Whole of Life policy could be funded from pension withdrawals.
So, in conclusion, it is now harder than ever to avoid Inheritance Tax and for a lot of people come April 2027, I don’t think it can be classed as a “voluntary” tax because, including pensions in the mix really does mean that the thresholds really are now too low for a significant number of people.
But there are plenty of planning opportunities available and strategies in our tool kit for your financial adviser to be able to help you and your family avoid IHT as much as practically possible.
And, where there is no single silver bullet solution, a multipronged and diversified strategy to tackle the problem for multiple angles is most likely to provide the flexibility and adaptability required in these changing times.
If IHT is something which concerns you and you haven’t discussed this with us recently, you know who to call.
*Pension and IHT changes are still at consultation and not yet confirmed.
Although the content of the article was correct at the time of writing, the accuracy of the information should not be relied upon, as it may have been subject to subsequent tax, legislative or event changes.
The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief is dependent on individual circumstances.
Trusts are not regulated by the Financial Conduct Authority.
Daniel S. Hanbury Ba(Hons) DipPFS
Financial Adviser & Director
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