This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice please consult us here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
When you have spent decades saving, building wealth and paying taxes along the way, it is very natural to feel that you have a right to decide what happens to your wealth after you die. This is why inheritance tax is sometimes called the UK’s “most hated tax” – or the “death tax”. The good news is, in 2021-22, there are still many ways to craft a legitimate estate plan which keeps more wealth in the family, without paying needless amounts of inheritance tax (IHT). In this guide, our financial planning team at Elmfield here in Padiham, Burnley, Lancashire offers some ideas on how to mitigate IHT in the present tax year. We hope you find this content useful. If you’d like to speak to an independent financial adviser then you can reach us via:
T: 01282 772938
IHT and wealth projection
Here in the UK, inheritance tax (IHT) in 2021-22 is levied at 40% on the value of your “estate” – i.e. your possessions, property and other assets – over £325,000. This includes your residential property (your home) but, provided you pass this onto your direct descendants when you die – e.g. children or grandchildren – then you can increase this threshold by £175,000. This is called the main residence nil rate band (MRNRL) and is designed to try and stop the IHT system from “punishing” homeowners where property prices are higher (e.g. in the South East).
Depending on your financial situation and goals, therefore, you may not need lots of planning to mitigate IHT on your estate. If, for instance, you do not own a home and all of your assets – e.g. savings – fall under the threshold, then this may be less of a concern. However, those with large complex estates will need a comprehensive strategy. Here, one challenge will be forecasting how much wealth you are likely to accrue over the years ahead, and how this fits into your IHT mitigation plan. A financial planner can assist you in this respect by drawing upon their skills, experience and dedicated software.
Married & civil partnered people
One advantage that you have if you are married or in a civil partnership is that you can pass on any unused IHT allowance to a spouse/partner when you die. A husband and wife, for instance, are each entitled to their own £325,000 IHT-free threshold. If the former dies first and does not use any of this allowance, then it automatically goes to his surviving wife – including any unused MRNRB worth up to £175,000. In theory, therefore, it is possible for a married couple or for civil partners to pass on up to £1m to direct descendants, free from IHT, including the family home. Here, the key document will be a legally-sound will which clearly states each person’s wishes. Otherwise, your estate is dealt with under the UK’s intestacy rules which may not distribute your wealth in accordance with your wishes – or in the most tax-efficient way.
A note on pensions
It is worth noting that, in 2021-22, pension pots can be passed down to beneficiaries free from IHT. This makes pensions not only a great tool for retirement planning but also estate planning! Both you and your spouse/partner can each save up to £1,073,100 into pensions (the Lifetime Allowance). If you die before age 75, your pension savings are passed to your beneficiaries free from any tax. After this age, however, any money they take from these funds may affect their income tax bill – potentially pushing them into a higher bracket. As such, it may be worth working with a financial planner to help coordinate all of this to help ensure no extra, unnecessary tax is eventually paid. Please note that state pensions cannot be passed down to children. Defined benefit (or final salary) pensions are also usually far more limited in their ability to be inherited compared to schemes involving a pension pot (defined contribution schemes).
Gifts, trusts & tax-efficient investments
Aside from these methods, there is a host of other IHT-mitigation strategies available to people. One popular approach is to leverage gifts. In 2021-22, you can make up to £3,000-worth of gifts each tax year without these being regarded as part of your estate by the government (known as your “annual exemption”). Another tool you might consider is a trust. Whilst there is a common misconception that trusts allow you to completely sidestep IHT (they do not), they can be a good way to reduce the bill. For instance, if a trust is in excess of the nil-rate band when it is initially set up, then it commonly pays 20% IHT (rather than 40%). Finally, a client may also wish to look at incorporating tax-efficient investments within their portfolio to reduce a future IHT liability.
Invitation
If you are interested in starting a conversation about your own financial plan or investments, then we’d love to hear from you. Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Reach us via:
T: 01282 772938
