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Six tips to reduce IHT bills

Christine Thornley, head of wills, trusts and probate at Gorvins Solicitors, gives her best tips to reduce your clients’ inheritance tax liability.

Many clients are leaving it later in life to seek advice both in relation to their investments and inheritance tax (IHT) planning. With the additional IHT allowance in relation to residential property starting in April 2017, advisers might think IHT planning is less important than it has been in the past. This could not be further from the truth. Here are some key ways advisers can assist clients to minimise their IHT liability:

Many clients are leaving it later in life to seek advice both in relation to their investments and inheritance tax (IHT) planning. With the additional IHT allowance in relation to residential property starting in April 2017, advisers might think IHT planning is less important than it has been in the past. This could not be further from the truth. Here are some key ways advisers can assist clients to minimise their IHT liability:

Don’t leave it too late

Lifetime planning is an excellent way to reduce the size of an estate or invest in IHT-friendly investments, but all too often we are seeing people only thinking about this in their eighties. Younger people with an IHT bill are not advised early on enough on their available options. It is of course easy to reduce any possible IHT bill by making lifetime gifts, either outright or into trust, but as a general rule you have to survive for seven years unless investing in assets that qualify for business property relief.

There are other exemptions and reliefs, such as making gifts of up to £3,000 per year and making regular gifts out of excess income. The latter is not as commonly used but can be very valuable. However, if clients are going to proceed down this route, it is always worthwhile involving professionals as ultimately their executors will need to prove to HM Revenue & Customs (HMRC) that the gifts have been out of excess income. Planning for this now and retaining any paperwork will make it a lot easier for executors to claim this relief upon death.

Ensure all nominations are in place

It is often possible to nominate on pensions and ensure any payment received is paid out of the estate and therefore exempt from IHT. For various reasons, this paperwork is not always completed and quite often the funds are paid into the estate, causing an unnecessary IHT charge.

As advisers, it is always worthwhile chasing clients to make these nominations, as the inheritance tax savings of doing so can be significant.

Make a will

Over 60% of adults in the UK do not have a will, and it is frightening the number of people in the UK who pass away having given no consideration to where their assets will go. By encouraging your clients to make a will, they will not only direct who deals with their estate and who receives the benefit, but they will also be able to structure their wills so as to minimise and potentially eliminate IHT, and take advantage of any relievable property or any exempt beneficiaries.

Use trusts

The use of trusts, both during a person’s lifetime and in a will, can be incredibly beneficial, not only to protect assets for future generations but also to either direct money out of an estate or to maximise the use of business property relief. Advisers should also explore writing any life insurance policies into trust to ensure that the lump sum falls outside of the estate.

Make use of business property relief

If you have a client who owns a business that will qualify for business property relief, it is important that the will is structured so as to ensure that not only can the business continue to run effectively on their death but also that they do not lose any of the relief.

Make use of the new residence nil rate band

In April 2017 there will be the introduction of a phased additional IHT allowance to enable people to leave their main residence to the next generation. The legislation published is complex and not everybody will benefit from this. It is essential that clients seek the correct advice to enable them to maximise this relief because it can give a couple a further £350,000 of inheritance tax free gifting.

If your clients do not currently fall within the inheritance tax threshold, it is still important for them to plan for the future by way of at least will planning. This will ensure they are aware of any potential issues that may come forward in the future in relation to inheritance tax. It will give them peace of mind that they have provided for their families and done everything that they can to protect potentially vulnerable beneficiaries.

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