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What do people tend to do about Inheritance Tax?

17th May 2024
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What do people tend to do about Inheritance Tax?

Inheritance tax (IHT) can cast a shadow over the legacy we leave behind, prompting individuals to explore various strategies to mitigate its impact. While some proactively address the issue, others find themselves in the trap of recognising the problem but not acting. Let's delve into common approaches people adopt and why some may hesitate to act.

Calculator with wooden house and coins stack and pen on wood table

Spotting the problem but not doing anything

Many are aware of the looming IHT burden but procrastinate in implementing solutions. The reasons can range from inertia to not understanding the complexities of financial planning. It's easy to push such matters aside, especially when confronted with the discomfort of contemplating one's mortality. However, putting it off could lead to substantial tax liabilities for beneficiaries.

What are the popular solutions?

  1. Lifetime gifting – Individuals can opt to gift assets during their lifetime to reduce the value of their estate subject to IHT. This strategy can be effective, provided it's done with careful consideration of limits and the seven-year rule.
  2. Gifts from income – Making regular gifts from surplus income is another way to reduce your taxable estate. However, stringent criteria apply to this exemption, so it’s important to seek professional advice.
  3. Pensions – parents could consider making contributions to their children's pensions as a tax-efficient means of passing on wealth. Pension funds typically fall outside the estate for IHT purposes, offering a compelling strategy for intergenerational wealth transfer.
  4. Discounted Gift Trusts – these trusts allow individuals to gift assets while retaining a right to receive a regular income stream. By discounting the value of the gift, the potential IHT liability is reduced. You can read our previous article on DGTs.
  5. Whole of Life policy – with a lump sum payout on death, this type of policy can help cover IHT liabilities without waiting for probate. It's a valuable tool for ensuring beneficiaries have immediate access to funds to settle any tax obligations.
  6. Business Relief – for owners of assets or businesses, this relief reduces the value for Inheritance Tax purposes. You can only get relief if the deceased owned the business or asset for at least two years before they died.

Despite these viable options, many individuals hesitate to take action due to various reasons, including complexity, lack of awareness, or fear of losing control over assets. However, with careful planning and professional guidance, it's possible to navigate the complexities of IHT and safeguard your legacy for future generations.

At Davenport Thomas we have a wealth of experience in doing just this. So, for a discussion about how we can help you and your clients, you can book directly into Richard’s diary here, email us or call us.

[email protected]

Contact number – 0208 6182077

https://calendly.com/richard-dtapp

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A pension is a long-term investment not normally accessible until 55 (57 from April 2028).The Financial Conduct Authority (FCA) does not regulate Will writing, tax and trust advice and certain forms of estate planning.