Preserving FAMILY WEALTH

Lee Wood APFS

Chartered Financial Planner

Let’s face it – none of us like paying Tax, and of all the different ways we contribute to the Exchequer, Inheritance Tax is perhaps the most hated Tax of all. It is not hard to see why Inheritance Tax is so unpopular, and as it is charged at a rate of 40% above the available exemptions, Inheritance Tax is highly punitive.

Government revenue from Inheritance Tax is only likely to increase, due to the freezing of the Nil Rate Band, which is the amount an individual can leave on death without a tax charge applying. This has been set at £325,000 since 2009, and this allowance is frozen until at least April 2028. Of course, over this time, asset values have risen strongly, and the real value of the Nil Rate Band has therefore become lower over time.

As we get older, our financial priorities often begin to shift, and many start to consider preserving the wealth they have accumulated during their lifetime for the next generations. It is only natural that we would want to leave family wealth to those who mean the most to us, and in the most tax efficient way possible. It is easy to forget that accumulations of wealth through salary or earnings have already been taxed on receipt, and with assets above the nil rate band being liable to Inheritance Tax, this can lead to a significant reduction in the value we leave to our loved ones.

We often meet with clients who haven’t given any consideration to Inheritance Tax planning. With house prices rising over time, increasing wealth through investment and surplus income receipts and inheritance they may themselves receive in the future, clients are often surprised at the amount of Inheritance Tax that could be payable on their death.

You will be pleased to learn that there are a range of options available that can be used to mitigate the potential liability to Inheritance Tax on your estate and with careful planning, greater sums of family wealth can be passed on to the next generation.

Timing is important when it comes to Inheritance Tax planning. In mid-life, most will have more significant financial priorities to attend to, such as saving to provide a retirement income, paying off existing debts, or covering the costs of University for their children. It is, however, important not to leave Inheritance Tax planning too late in life, as this can limit the range of options available. As clients get older, conversations about wealth preservation generally become more focused, and this is the time to begin to plan ahead. By starting conversations early, appropriate mitigation can be put in place in time so that hard-earned wealth can be preserved for family members, and not passed to the revenue in the form of Inheritance Tax.

It is important to seek professional advice and guidance on an ongoing basis to make the most of any Inheritance Tax planning and avoid any unforeseen potential pitfalls. After all, circumstances change and any Inheritance Tax planning needs to be balanced against other financial needs, such as providing income in retirement. For example, making gifts of assets to children and grandchildren is a perfectly rational strategy to consider; we, however, have seen cases where clients have decided to make large gifts to family at an early stage in retirement, without considering the longer term implications of their actions. They then find themselves in need of capital that now isn’t available to them, as the capital has been gifted and spent. Likewise, we have come across individuals who have put in place complicated arrangements, which prove very costly, and may not be effective for Inheritance Tax mitigation. Some of these involve the family home, and we would always recommend seeking independent financial planning advice before considering any such scheme.

Another complication of this type of planning is the potential for changes in legislation to impact on Inheritance Tax planning that has already taken place. Of course, any advice can only work within the existing set of tax legislation, and we, like everyone else, cannot guess whether the tax rules will change in years to come. It is, however, a reasonable assumption to note the increasing relevance Inheritance Tax receipts now have as part of the overall Treasury revenue, and any reduction in the amount of Inheritance Tax received would need to be found through alternative taxation. For this reason, we look to plan ahead with clients, and as part of a wider financial planning strategy, can include solutions that aim to provide Inheritance Tax mitigation, but remain as flexible as possible, so that they can adjust in the event that tax rules change. These include investments in assets that qualify for Business Relief, which can provide exemption from Inheritance Tax in just two years.

Preserving family wealth is a key element of many financial plans in later life. By engaging with an adviser at an early stage, you can begin to consider what steps you need to take to minimise the Inheritance Tax burden and preserve more of your hard-earned family wealth.

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