You have more control over the Inheritance Tax your family pays than you might think, but each option to mitigate the levy has to be carefully weighed in the balance.
When the value of your assets dip, this may be a good time to take advantage of the lifetime gifting rules to reduce potential Inheritance Tax liabilities on your estate. There might also be big changes to the tax system on the horizon that you need to prepare for too.
Markets have bounced back recently, but there is likely to be continued volatility ahead. As we recently highlighted, it is important not to torment yourself by seeing “paper losses” as real ones. There may even be a significant upside to market dips from an Inheritance Tax (IHT) perspective.
Depressed values can signal a good time to gift assets to family members, taking advantage of lifetime gifting rules
Depressed values can signal a good time to gift assets to family members, taking advantage of lifetime gifting rules (these mean that any bequests given are free of IHT as long as you live for seven years afterwards; if that turns out not to be the case, the tax charge will be applied on a pro rata basis). If you choose to gift assets when values have fallen, then the Capital Gains Tax charge applicable could be at a deep discount because assets are worth less. Then, if IHT does become payable on those assets, the amount is set by their value at the time of gifting – not the likely very much higher amount they will have risen to.
Utilising the lifetime gifting rules to transfer significant wealth to the next generation is certainly not to be taken lightly, and you should always bear in mind that you may need the funds for yourself later down the line. That depressed markets could be an excellent opportunity to pass money onto your family and minimise the tax charges that could accrue. The fact that IHT stands at 40% once tax-free allowances are exceeded means that mitigating death duties should be central to all families’ wealth management plans.
With that in mind, people with significant wealth should also be aware that IHT could be set to rise massively as a result of the economic shockwaves stemming from the COVID-19 crisis. Like the rest of the world, the UK is going to face a public debt mountain in the years to come and it is to be expected that the wealthy are going to have to take a lot of the strain in replenishing government coffers. The Treasury is already reported to have raised £2.2bn less in tax for March 2020 compared to 2019.
Like the rest of the world, the UK is going to face a public debt mountain in the years to come and it is to be expected that the wealthy are going to have to take a lot of the strain in replenishing government coffers
Experts are drawing comparisons with the period after World War II, when IHT hit a punishing 80% before ratcheting up even further to 85% in the 1960s. There is potential for taxes to rise across the board, and allowances to be slashed, as they have been before. It is unlikely (we hope) that income tax will rise to astronomical levels seen during following WWII and the decades after, but it seems that painful increases are inevitable.
Inheritance Tax is one of the most tricky — and emotionally charged – elements of the wealth management picture. A lot can be done to reduce liabilities, yet often people don’t want to think about such things or have the honest conversations with family this subject calls for. A professional can be invaluable in helping you tackle this thorny issue. Death and taxes might be the two certainties of life, but finding the right wealth manager will give you a degree of control over the latter.
People tend to focus on the investing side of the wealth management equation, but it is vital to remember that mitigating your tax liabilities is just as important. This is true at the best of times, but will be even more so going forward as the public finances face their reckoning.
People tend to focus on the investing side of the wealth management equation, but it is vital to remember that mitigating your tax liabilities is just as important
There are many perfectly legitimate ways through which you can seek to reduce your tax bill, but this is definitely an area where professional advice is called for. Not only does the UK have one of the most complex tax codes in the world, it is vital that your tax strategy is pulling in the same direction of that of your spouse (and wider family), and that the totality of your wealth and objectives are taken into account. Holistic financial planning will make all the difference to achieving your goals.
Now more than ever you need an expert adviser fighting your corner, not only to position your investment portfolio for growth, but to ensure the tax liabilities on the wealth you have accrued are minimised. Don’t neglect this vitally important element of sound financial management and make sure as much of your money remains for the use of you and your family as possible (and out of the taxman’s clutches).
Also remember that most strategies need significant lead time to deliver the best effect. Take advice without delay – and before any big tax shocks come into play.
If you need tax or wider financial planning advice, simply indicate this when using our smart matching system. Many of the wealth managers on our panel act as a true “one-stop shop” for every element of your needs. Whatever your situation, you can discover your best wealth manager matches in just a few minutes, and completely free of charge.