Unless you are fabulously wealthy, there is no reason you should pay inheritance taxes. You are free to donate as much wealth as you want, completely tax-free, as long as you do so during your lifetime and survive seven more years.
And if you understandably don’t want to hand it all over, there are many reliefs you can use to keep significant sums and still not burden your loved ones with an inheritance tax bill when you die.
I have worked in financial services for 34 years, and the main reason grieving families pay inheritance tax is not because of complicated rules or dealing with large amounts of wealth. No, they are emotional complexes.
I see the same pattern in families over and over again. Very often people are plagued by psychological worries that can have great consequences for their finances.
Roy Jenkins, Labor chancellor in the late 1960s, described the inheritance tax as “a voluntary tax paid by those who distrust their heirs more than they dislike the Exchequer”.
Many fear they will run out of money if they give too much to the family, but inheritance tax is an issue that more and more people cannot afford to ignore.
While there are obvious exceptions to this, Roy was definitely right. I hear the same concerns over and over again.
What if I give my money to my adult daughter, who then gets divorced and it goes to my horrible son-in-law? What happens if my kids waste my hard-earned money on frivolous purchases, like vacations and expensive watches?
Can I really trust my 40 year old son with a large sum of money? After all, this is the same person who at the age of 18 rammed his car into a tree without insurance.
What if I give my money to my children and they put it into their business and then the business fails?
Sometimes people leave their loved ones with an avoidable inheritance bill because they simply didn’t want to think about death or believed they had more time than they did.
A couple I knew refused to write a will because they feared it would tempt fate.
But the inheritance tax is an issue that more and more people cannot afford to ignore.
The growth in asset values, coupled with the fact that the nil rate band, unchanged at £325,000 since 2009, will remain frozen until at least April 2028, means many more relatively modest-sized properties are being swept up to the net inheritance tax each year.
Married couples and people in civil partnerships can combine their allowances to transfer £650,000 together tax-free. They can also transfer wealth to each other tax-free.
Anything above these reliefs is taxed at a flat rate of 40 per cent, although there is an additional relief for transferring a family home worth less than £2 million.
There is also no inheritance tax to pay on gifts made with regular surplus income.
But even when you have lifetime wealth that would exceed your allowances, most tax bills can be avoided or reduced through some careful estate planning steps.
Roy Jenkins, Labor chancellor in the late 1960s, described the inheritance tax as “a voluntary tax paid by those who distrust their heirs more than they dislike the Exchequer”.
One of the most common complexes (and the most difficult to overcome) is the fear of running out of money if you give a large part of it to your family while you are alive.
This is a legitimate concern and we, as financial planners, take our planning very seriously.
But it’s surprising that even ultra-rich people worry about this when, frankly, without any complex calculations you can look at their wealth and see that they will never run out of money, even if they need expensive care.
Spending and enjoying the money you’ve earned could improve your quality of life and reduce your tax bill on what’s left when you die.
There are smart tricks we can use to get money out of your estate and toward your children, but still make sure you have access to it if you ever need it. For example, you can leave an inheritance in a trust, some of which allow you to retain some access to the money you have donated, while minimizing inheritance tax liability.
If you want to use a trust to retain access should you need it, you can only go up to the nil rate band, i.e. £325,000 (or £650,000 for a married or civil partnership couple) in any given period. seven years. If you have a large property or would like to put your home on it, it may make sense to start early in the hope of having several seven-year periods ahead of you.
However, you may not need a trust. In many cases I see that the desire to maintain control that is not necessary leads people to use trusts and therefore slow down the process. There may be some other tax
However, there are consequences to consider, and as a generally complex area, trusts are best organized with estate planners than on your own.
People often worry about giving up control of their wealth. They have worked hard all their lives and seen their net wealth increase, so the idea of passing it on to the next generation may be difficult for them to understand.
Sometimes it’s important to put this aside and really think about when your children will benefit the most from your hard-earned money.
Is it while they’re trying to climb the housing ladder in their 20s, raising their kids, or sending them off to college? Or is it when you die and they are newly retired?
People who are very wealthy sometimes don’t want to transfer wealth to their children all at once while they are young adults, because they fear that it might remove ambition and drive from their lives. It’s true that too much money too soon can cause damage, but sooner or later they will get it.
It’s worth giving kids some money early on to see how they cope and get them used to handling it.
If you buy them a house or give them enough for a deposit, for example, they will still need a job to be able to afford their lifestyle.
Sadly, I see cases of this every week, where people hold on to their money until they become ill and then it may be too late to give away their wealth without the risk of paying inheritance tax.
There is no hard and fast rule, but you should start the process the moment you receive your pension, meaning for most people, around age 60. You don’t have to take big steps, but start thinking about it.
For example, you might start to consider what you spend and what you hold on to.
Pensions do not count towards your estate and therefore do not attract inheritance tax, so they could be a better vehicle for transferring assets than anything else. This means there may be better ways to fund your retirement while preserving your pensions.
There are rumors that the Chancellor could make pensions subject to inheritance tax in the next budget. If that happens, is it really a disaster?
Well, now you have a preserved pension that you can draw on later, so it will be there if you need care. After all, you can only plan on what you know.
Try to put your emotions aside or understand that your psychological complexes could cost you dearly in the future.
As told to Jessica Beard
Ian Dyall specializes in trusts, estate planning and inheritance tax. He works at the wealth manager Evelyn Partners.
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