In a world where vaccines are front page news, it is important to not only protect against medical pandemic but also to ensure that there is effective protection against the endemic challenges caused by the UK inheritance Tax regime. With the continued growth of net household wealth, which according to the Office of National Statistics, grew by 8.4% in 2020, action is required now to ensure that estate wealth is not eroded by the growing spectre of IHT.
According to Halifax, the average house price is now a record £272,992 which represents quarterly growth of 3.4%. However, what is more alarming is that the average house prices in not only London (£521k) but now South East (£370k) now exceeds the base IHT allowance of £325k, with East England soon to breach the same milestone. What this means in reality is that estates will experience a diminishing level of relief from tax free allowances which are frozen until 2026, and more estates will face an IHT bill.
The responsibility falls on legacy planning professionals to work with families to ensure that family wealth is protected and that the impact of IHT is minimised when a bereavement event occurs. Options for immunisation against IHT include;
Creating and maintaining a Will
Practitioners must make sure that Clients have a valid Will in place that is periodically reviewed and maintained as necessary, to ensure it remains current and relevant to the Clients’ changing circumstances and wishes.
Awareness of allowances
It is important that practitioners help their Clients understand their available allowances including NRB, RNRB for both the Client and any spouse, as this will determine the strategy for the transfer of intergenerational wealth.
In-life asset transfer
Gifting in-life is the best way to ensure that wealth is transferred in the most tax efficient way. However, it is important that practitioners make their Clients aware of the limits to what can be transferred and when, for instance;
- Wealth transfers between a spouse or civil partner are exempt.
- All in-life gifts to certain charities are exempt, and legacy gifts of over 10% of estate wealth reduces IHT from 40% to 36%.
- Wealth including assets and cash, can be transferred in life but gifts made within the 7 years prior to a bereavement may be subject to IHT. Such gifts are limited to £3000 per tax year.
- Unlimited small gifts of up to £250 subject to other allowances.
- Wedding or civil partnership gifts can be made between £1000-£5000 depending on relationship to the Client.
- Regular payments for normal expenditure out of income, providing the Client can maintain their own standard of living.
Practitioners must therefore advise their clients as to which of these gifting options are best for their specific circumstances and how they can be combined for optimal benefit.
Use of Trusts
Trusts are a good way to transfer wealth and potentially reduce IHT, however these are complex and may still attract tax of between 20-40%. Specialist professional advice is needed to ensure all options, trusts types, and taxation implications are fully understood.
The reality is however that IHT immunity can only go so far to reduce the potential IHT exposure once an estate is being assessed for probate. Once personal allowances have been surpassed by estate value, IHT of up to 40% will need to be paid within 6 months of the bereavement. Some estates however do not have suﬃcient provisions or liquid cash to pay the tax bill and other costs. Unless a beneﬁciary has personal liquidity to support the estate through probate, an alternative solution will be required. Typically, the estate cannot be accessed and distributed until a grant of probate is obtained, which is not possible until IHT has been paid. It is now possible for both private and appointed executors to leverage the value in the estates by obtaining a specialist probate bridging loan. Such a loan is secured against itself so does not require an individual or appointed executor to take on any risk.
This could be invaluable to not only the Clients but also the professional probate advisors, as money advanced can be used to not only discharge IHT, but also to ﬁnance other testamentary costs such as professional and estate maintenance fees. As such payments can be made in advance, so professional advisors can get their payment ahead of the estate being discharged, helping to eliminate any challenges of cash-flow.
Prevention is always the best cure, but comfort can be taken in that a solution is available to support practitioners and their Clients where the estate experiences distress due insuﬃcient funds.
Simon Dawson, Chief Commercial Officer – Legacy Release, a specialist HNW probate bridging loan provider