

The recent Budget has brought Inheritance Tax (IHT) planning into sharp focus for many. At Life Matters we understand the importance of balancing the sense of security that wealth brings, along with the peace of mind that comes from effective planning. Here are five key considerations before embarking on any serious IHT planning:
1. Start with the End in Mind
Before diving into the specifics of IHT planning, it’s important to have taken a moment to reflect on the broader question: “What’s the greatest good that can come from your wealth?”
This perspective helps align the financial choices you make with your core values and long-term objectives. Whether it’s ensuring financial security for your family, supporting charitable causes, or leaving a legacy for the future; having a clear vision will guide your planning process.
2. Clarify Your Own Requirements
It’s essential to understand your own financial needs and lifestyle aspirations. Effective IHT planning should not compromise your ability to live a fulfilled and enjoyable life. Start by establishing what you need to feel secure and happy. Remember, spending your wealth is also a strategy for saving IHT – think of it as spending with a 40% discount. Ensuring you have enough to maintain your desired lifestyle and to feel secure in all conceivable eventualities, is paramount.
3. Impact of Lifetime Gifting
Gifting during your lifetime can significantly reduce the value of your estate and, consequently, your IHT liability. However, it’s important to consider the impact on your beneficiaries.
Reflect on whether your beneficiaries will be financially responsible if they receive significant wealth sooner rather than later. Will it reduce their motivation to make their own way in life, or could it enable them to make positive, life-changing decisions? If the latter is the case, will you enjoy being able to bear witness to this during your lifetime?
The expression “giving with a warm hand, not a cold one” captures the essence of this strategy.
4. Be Consistent with your Intentions
The changes in the October 2024 Budget could be used as a prompt to reassess your wealth and the potential impact you can have with it. However, a word of caution. Don’t throw the baby out with the bathwater, with the sole intention of saving tax. This could result in you compromising your values, or even more importantly, your happiness.
Ideally, the Budget may serve as a catalyst to expedite plans you’d already loosely considered or even formulated. Drastically altering your future, doing things you don’t truly want to do, solely to save tax, is not a strategy for enjoying life. Ensure that your financial decisions align with your long-term goals and values, rather than being driven solely by tax considerations.
5. Funding the IHT Bill
Finally, consider how any IHT bill will be funded. Will there be the financial resources available to pay the bill, as it’s necessary for it to be settled for Probate to be granted. If the lion’s share of the value of an estate is property, this can cause cash flow issues as the sale can’t be completed until Probate has been granted.
Although the Government have mooted that it will be possible to use any remaining balance of pensions to pay IHT following the rule changes in 2027, we are awaiting further clarification in relation to this.
Life insurance policies written in trust can be an effective way to cover your IHT liability, ensuring that your beneficiaries receive the full value of your estate without having to sell assets to pay the tax. But of course, this has to be balanced with the cost of a policy.
Conclusion
Effective Inheritance Tax planning requires careful consideration of various factors that reach far beyond understanding the tax rules and how best to make use of the available exemptions and reliefs.
By taking a proactive approach and seeking professional advice that considers both your life and your wealth, you can make the best choices for yourself and future generations. The main goal is to align your financial decisions with your values and long-term objectives, ensuring that both you and your beneficiaries can enjoy the greatest good from your wealth.
Please note that the information provided is not advice and your options should be considered carefully on an individual basis.