Simon Lewis, CEO at Partridge Muir & Warren, provides an overview on a tax that to many is becoming one they would prefer to nullify as much as possible.
One thing I have noticed over recent years is that a lot more people are becoming concerned about the impact of inheritance tax (IHT) on family wealth. It is not surprising because it is becoming an increasing problem for many families, particularly those in the South East.
People often have a vision of their wealth cascading down through future generations to make members of those generations more financially secure; but the reality is that if you take a big slice out of that money on death to pay tax, it has a permanent long term impact on the amount of family wealth that can be accrued.
Recent statistics show just how much the tax is starting to bite. In the 2009/2010 tax year there were 15,000 estates that paid IHT and by 2016/2017, just over seven years later, that number had doubled to 30,000. The tax currently contributes around £5 billion each year to the Exchequer and this is forecast to increase to £7 billion over the next five years.
The big picture is that the government is struggling to raise the revenue it needs to maintain the welfare state and there are no easy solutions. Demands on the State, based on current levels of provision, are only going to increase as the population ages and it is getting harder to raise the tax necessary to sustain this. It is arguably more effective to tax estates than it is to tax individuals who are in work, because if you tax individuals too much then you take away the incentive to work and that is bad for the economy and in turn, tax receipts.
There are so many reasons, not just those that are politically motivated, for the government to make inheritance tax carry more of the tax burden. With this in mind, it makes sense to plan now to minimise the chunk that HMRC might bite out of your estate.
The standard IHT exemption (nil rate band) has been frozen at £325,000 since 2008/2009 and is not set to increase until 2021/2022. This creates a lot of what we call ‘fiscal lag’; when the government increases exemptions at a slower rate than the rate of growth in assets, or indeed income, leading to a proportionate increase in tax. If we think about how much residential property has risen in value since 2008, particularly in the South East, it has had a big impact on the amount of IHT that is going to become payable.
Increasingly, we see that the largest single beneficiary of an estate is HMRC. The more the estate grows, the bigger the share that HMRC will receive. So it is really important to take advantage of the various exemptions and allowances that can help you legitimately reduce the tax that is taken from your family wealth.
In March we ran a series of seminars specifically for those wishing to find out more about how to protect their estate from IHT. We presented to around 200 people who are not currently clients and told them about the sorts of things that we are doing for our existing clients to help protect and preserve their wealth. So what strategies do we use?
The key thing from a planning perspective is that if you gift wealth prior to death and survive for seven years the gift is IHT-free (regardless of the amount). If you do nothing and simply leave everything to your beneficiaries on death, then the nil rate band is currently only £325,000 per person. Whilst there is now a residence nil rate band that has been phased in to augment that, this often does not apply because it is tapered away once your estate exceeds £2 million. However, the priority should always be to retain sufficient wealth to ensure that your own needs can be adequately financed, whatever they might be.
Pension funds can currently be transferred to beneficiaries free from IHT on death. Therefore, for some people it makes sense to consume non pension assets first and leave as much of their pension fund as possible to pass down to subsequent generations. That can be a very tax efficient way to plan your estate, although it does depend on what sort of pension you have; it isn’t something you can do with defined benefit or final salary pensions in payment, for example.
Many people also do not realise that it is possible, during their lifetime, to contribute to pension arrangements for their beneficiaries, even minors. By using surplus income to top up a child’s or grandchild’s pension pot you can immediately reduce the value of your estate subject to IHT, generate income tax relief for the recipient and also have the peace of mind that those funds cannot be accessed until the recipient reaches retirement age.
We set up many trusts for clients that will allow wealth to pass to their beneficiaries on death, but also enable them to retain control over the money in the meantime and in some cases allow them to still benefit from the money should it ever be needed.
If you look at how trust planning has been used in the past, some of the wealthiest families in the UK are just that because they have managed to protect family wealth from taxation by sheltering it in trusts.
A good example of this is the Duke of Westminster. That family estate is worth over £10 billion and has been preserved by a series of trusts. They do not avoid paying tax altogether, they are just paying tax in a different way. The family wealth has been sheltered, which means it has been allowed to accumulate. That level of wealth would not have accrued over the years had there been a £4 billion tax bill on the death of the last duke.
Trust planning isn’t just for the super-rich. It can be worthwhile using trust arrangements for anything upwards from say £100,000, from the context of the cost of doing so in relation to the benefits derived. Equally, it is possible to use property assets as part of your trust planning.
We would normally be cautious about advising people to use their main residence as a trust planning asset, but it is quite common these days to have a number of properties. Whether it be a holiday home or property investments, there are opportunities to shelter the value of those properties from IHT by transferring them to trust. Often people hold property assets for a long time and they become effectively illiquid because of the capital gains tax liabilities that would be crystallised in the event of their sale; so people hold on to them meaning that they become a sitting duck for IHT. There are strategies that can be employed where assets like these are transferred into trust without an immediate capital gains tax liability.
We have been setting up trusts for the last 50 years as part of the service we provide, but we have noticed a significant increase in the interest that our clients have in setting up these sorts of arrangements. To recognise that, a few years ago we set up a trust company, PMW Trust, specifically to provide estate planning services. Our specialist solicitor and chartered tax adviser provide advice and assistance on setting up trusts, as well as drafting wills and all other aspects of estate planning.
One thing I always point out to clients is that there is usually no one ‘off the shelf’ solution to estate planning. Usually it is a matter of combining a whole series of individual actions to form a suitable strategy for a specific family.
If you would like to find out more about how you could prevent IHT from taking an unnecessary bite out of your family wealth, please get in touch. Alternatively, visit www.pmw.co.uk/seminars to find out more about our complimentary seminars in October and to register your attendance.
Simon Lewis is writing on behalf of Partridge Muir & Warren Ltd (PMW), Chartered Financial Planners, based in Esher. The Company has specialised in providing wealth management solutions to private clients for 50 years and was recently voted Wealth Manager of the Year: Southern England at the City of London Wealth Management Awards 2019. Simon is an independent financial adviser, chartered financial planner and chartered fellow of the Chartered Institute for Securities and Investment. The opinions outlined in this article are those of the writer and should not be construed as individual advice. To find out more about financial advice and investment options please contact Simon at Partridge Muir & Warren Ltd. Partridge Muir & Warren Ltd is authorised and regulated by the Financial Conduct Authority.Telephone:
01372 471 550Email: firstname.lastname@example.org
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