Inheritance tax is a levy many people will be keen to mitigate, with some describing it as a “death tax” or restrictive of income. It is set at 40 percent of an individual’s estate above a certain threshold when they pass away. But according to one expert, many people, despite wanting to avoid Inheritance Tax legally, are still not taking any action on the matter, which could leave their families with a sizeable bill once they have gone. Express.co.uk spoke exclusively to Neil Rushton, Chartered Financial Planner at Old Mill. He provided further insight into problems which could potentially ensue for families when it comes to Inheritance Tax, and how, with action, these may be avoided.
Mr Rushton praised the idea of gift giving for those who are able, as it is an action which could help individuals to reduce the value of their estate, while allowing others to benefit. However, this does not mean there are not important points to consider in this regard.
He said: “While gift giving can be a beneficial action, challenges can come with actually recording those gifts so the executors can demonstrate this – namely, if it is surplus income. HMRC will be coming to evaluate the estate when a person passes away, so it is important to get this in order.
“That one, the focus really there is on the record-keeping, which ends up being one of the most important, if not the most important, part of Inheritance Tax strategies and planning ahead.
“It will be important to make sure that there is a clear layout of a person’s estate for their executors to easily be able to lay hands on later down the line and provide this information if and when they are required to do so.”
But record-keeping is not the only effort Britons will have to go to when it comes to planning their estate. While this is a formal aspect of getting one’s affairs in order, some can take action on other aspects of their wealth ahead of time.
Mr Rushton continued: “Linked in to this, we also have a lot of clients with portfolios they are not actually touching. The capital is really just sat there, and while it is doing well, the individual knows they are secure enough that they do not really need it. Surplus income gifts could really help there too.
“Rather than that money being reinvested within the portfolio, what you can do is each year you have a ‘consolidated tax certificate’ showing you how much that income has been. If it is a couple of percent, that might be a sizeable sum.
“This is rolling up over time, and could actually end up increasing the Inheritance Tax bill at the end of the day. What clients could decide instead is to give this as surplus income. And it will be really easy to demonstrate to HMRC that this is the case. This is something which is often overlooked when it comes to Inheritance Tax. If you don’t do anything at all, then the problem really is going to grow in some cases, but you could gift to help this problem not grow.”
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But when it comes to managing wealth, no matter what form it comes in, Mr Rushton was keen to circle back to the notion of record-keeping, an idea clearly illustrated as one of the utmost importance for those with the desire to plan ahead in this manner.
He added: “You’ve really got to buy into the record-keeping element of things when you’re looking at estate planning in this way. Many people will tell you you could really get into a long-running battle with HMRC without taking this kind of action.
“It is really important to make sure there is an accurate record, because the family or friends you put in charge of your estate aren’t always going to know about the gifts that you’ve given or the decisions you have made throughout your lifetime.
“If you do this every year, it can keep a note of who you are paying, how much, what the date was, and any other points you feel might be relevant or helpful for people to know. Seven years worth of bank statements, for example, may feel over the top, but it isn’t difficult to file your bank statement once a year.”
The formality of the record-keeping process may be burdensome, but could prove particularly worthwhile. But Mr Rushton also said that combining this with another action could help the process to become more cohesive.
He said: “Record-keeping also leads on to communicating with the people who you wish to be in charge of your estate – the executors, that is. And that can also come with its challenges, with different ends of the spectrum when it comes to openness about these kind of matters within the family.
“Open families are the ones where least mistakes are made, because you are advising the generations, but you are also taking more of a holistic view of the family and the family’s wealth and position. In terms of mistakes being made, these can occur when assumptions are made by family members – something which could easily crop up.
“For example, it might be that the mum and dad pass on their wealth to their son and daughter, but the children might have an Inheritance Tax liability in their own right. Would it have been better, in this kind of instance, to cascade the wealth down and skip a generation in order to avoid this? If you involve your family early on in the tax mitigation strategy, you could really help with planning and avoiding any unnecessary financial stress.”
Many people will have the ultimate aim not only of passing down wealth to family and friends, but also to shield them from complicated financial matters. This could be particularly important at a time of grief and sadness, which can create its own challenges for those left behind.
However, Mr Rushton concluded by urging Britons who currently hold a trust to check their circumstances. This is because, he explained, this could be another area where things could quickly spiral out of control, creating “chaos” for families who aren’t expecting to have to deal with these financial responsibilities.
He said: “For the general public, there is also a warning flag if there is a trust held within the estate, as many people do choose. While lots will think this can be outside of the value of the estate, there is the potential for complications to arise later down the line, when a person is least expecting them.
“I would say in these cases it would be definitely important to seek advice to find out what these trusts mean, how they work, and as the trustee, what your responsibilities are. An accountant or solicitor could undertake a trust review to ensure this is fit for purpose.”