Many people are keen to ensure they reduce their Estate’s future liability to Inheritance Tax planning by engaging in tax planning to reduce or mitigate their tax bill. The tax planning is a very important aspect, but it is just that – an aspect.
In reality, it is important to think about Estate planning first (the horse) with tax planning second (the cart). The two are symbiotic, but should be led by Estate planning.
How does Estate planning differ from Inheritance Tax planning, and how can you go about making sure you find the best solution for your situation?
Estate planning is about taking steps to protect your Estate for future generations, not just about reducing tax. For example, many people want to ensure their wealth and assets are protected for their bloodline. They want to protect against their children inheriting part of their wealth and then in the future being subjected to a divorce or bankruptcy meaning that the wealth could disappear to the benefits of the Ex-Spouse. In case of bankruptcy, this will be for the benefit of creditors.
Making plans today to ensure wealth and assets remain in the bloodline, and future inheritors are themselves protected, is an example of Estate planning. Any Inheritance Tax planning becomes part of the wider Estate planning exercise. For many, this requires a delicate balance between the needs of the individual couple today, and the future wellbeing of their beneficiaries.
Making large one-off gifts can be challenging for a number of reasons
Leaving a legacy which is not unnecessarily reduced by future taxation, is a desire many people have, but they don’t want to leave themselves short in their own lifetime. Outright and large gifts can be complicated by this contradictory position and major gifts also often require the donor living seven years. There may be reservations about when an individual is comfortable for their offspring or beneficiaries to receive the gift. We also have to factor in that future governments might introduce more stringent rules and tax rates.
It’s a complex position, but the good news is there are ways to plan for Inheritance Tax which can deal with most, possibly all, of these factors. You just need the right solution and suitable advice.
Inheritance Tax allowances
There are Inheritance Tax exemptions and allowances you should be aware of. Making sure these are properly used is a simple but highly effective step. There are gifts, which can be made on a regular basis, in a drip feed fashion. For example, every individual can make a gift of £3,000 per year, which is immediately outside of the tax loop.
There are investment schemes such as the Enterprise Investment Scheme (EIS) where the value of the invested sum is outside of an Estate for Inheritance Tax purposes, after just two years.
Which of these, or other possible tax saving options, work best for you will be dependent on your circumstances and wider Estate planning. How you use these will be subject to a skilled appraisal of your situation, aligned to your wishes.
The key is to make sure the Estate planning and Inheritance Tax planning are coordinated into a plan, which meets all your requirements, both short and long term.
Like all matters related to Estate Planning and Inheritance Tax, experienced advice is essential.
Call us if you require any help.