With it potentially being one of the largest tax bills your family will ever pay, you definitely need a plan for Inheritance Tax. Inheritance Tax is paid on your death if the value of your estate is more than the various allowances you are entitled to. Your family could lose nearly half of everything you own in taxes!
It’s been widely reported that comedian Sir Ken Dodd, who died in 2018, did the ultimate last minute plan for Inheritance Tax. Six weeks before his death, Ken had been hospitalised with a chest infection. Ken had been with his partner Anne Jones for 40 years but they had never married. Two days before his death Ken and Anne tied the knot. This ensured that his £28 million estate was passed to Anne without any Inheritance Tax paid. This one act saved over £10 million in Inheritance Tax.
Luckily you don’t need to leave it this late or go to these extremes to save Inheritance Tax. There’s plenty you can do to plan ahead.
Making a plan for Inheritance Tax vs other financial priorities
Making a plan for Inheritance Tax can be difficult because you always need to balance the plan with your other financial priorities.
For example:
- Being secure in your home. Purchasing your first, second ….. and forever home. In your early life you will likely want to prioritise saving for your home and ensuring you can afford your lifestyle.
- Protection. Paying for relevant insurance products that ensure your family are looked after if you were to fall ill or die unexpectedly.
- Retirement. Ensuring you can afford the lifestyle you desire once you have stopped working.
Whilst Inheritance Tax could impact you at any age if your estate is valued high enough, there is no point giving away money or tying it up now if you need it for other priorities.
If you want to make a plan for Inheritance Tax you need to know your other priorities are covered.
When you are ready, there are multiple ways to plan for Inheritance Tax including:
1. Spending. Anything you spend is gone from your estate and therefore can’t be taxed.
2. Gifting. Gifting money or assets to others can eventually lead to them not being included in any Inheritance Tax calculations. But be careful. Gifting large amounts of value in one go can lead to an immediate tax charge.
3. Leaving to charity. Anything you leave to charity will not be subject to Inheritance Tax.
4. Insurance. There are various insurance products that can help pay the Inheritance Tax bill on your death.
5. Investment. There are also various investment solutions that are also exempt from Inheritance Tax.
When to plan for Inheritance Tax
There is no exact right time when you should be making a plan for Inheritance Tax. It will depend on how big your tax problem is and how much you value saving Inheritance Tax over other financial priorities.
There are however some things we would advise you to do right now if you haven’t already:
- Will. By having a valid Will that is up to date will ensure your estate is passed to who you intend it to go to.
- Lasting Powers of Attorney. If you were taken ill or in an accident, a Lasting Power of Attorney can ensure your financial affairs are handled by someone you trust.
There can also be some crossover that means you can save Inheritance Tax through planning for other priorities.
Pensions for example are not only a great way to save for retirement, they are also outside of your estate for Inheritance Tax calculations.
Insurance you take out to support your family if something was to happen to you can also be left to a trust you set up, and potentially fund any future Inheritance Tax bill due.
To understand when is the right time to plan for Inheritance Tax, consider these points:
1. Can you afford to gift? What would be the implications of gifting money out of your estate? Could you still afford to live comfortably? Would this impact your retirement lifestyle?
2. Do you trust your beneficiaries? If deciding to make gifts will the beneficiary be responsible with the money. If gifting to children, what would happen if they later divorced and lost half the gift?
3. How much control do you want? Are you comfortable giving up money and assets to save Inheritance Tax. Or would you prefer to be in charge of money and assets you ring fence for Inheritance Tax planning?
4. What is your net tax position? Whilst Inheritance Tax is charged at 40% would you be worse off now by changing investments that have a higher rate of tax? For example would you pay 45% Income Tax on an investment withdrawal to gift?
5. What is your attitude to investment risk? Are you prepared to invest money at a higher level of risk to ensure you reduce your Inheritance Tax bill?
Ultimately you need an overall plan no matter what stage of life you are at. A good solid financial plan will ensure you are ticking off your financial priorities at the right time that fits with your overall objectives.
The sooner you plan the better, even if the plan is to take no action right now in regards to Inheritance Tax.
You don’t need to be like Sir Ken Dodd and take drastic action on your death bed. You might not be lucky enough to have enough time left.
If you would like to understand your current Inheritance Tax position and when you should be making a plan for Inheritance Tax please secure a free 15-minute video call with us. You can speak to a Chartered Financial Planner who will listen to your situation, give you an outline of what you need to consider and guide you in the right direction. We have helped our clients save hundreds of thousands of pounds in Inheritance Tax.
Question: What do you think the right age is to plan for Inheritance Tax? Please share your answer on LinkedIn.
Risk warning:
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.
