Inheritance Tax and estate planning

5th May 2022 | News

In the Spring Budget 2021, Chancellor Rishi Sunak announced that Inheritance Tax rates will be frozen until 2026.

Amidst the cost-of-living crisis, inflation, rising energy bills and the National Insurance increase, the government is under pressure to address economic issues. Some commenters have complained that the freeze on Inheritance Tax rates is impacting bereaved families who may already be struggling financially.

Government cracking down

The Inheritance Tax crackdown has impacted almost 2,000 families who were attempting to sidestep the divisive 40 percent levy. Families who thought they had legally avoided the duty by making tax-free gifts were ordered to repay thousands of pounds after being found to be in breach of “gift with reservation of benefit” laws.

Gifts survived for seven years are usually exempt from Inheritance Tax, but if the person who gave the gift is later discovered to have benefited from the asset in any way, HMRC can demand payment that could total hundreds of thousands of pounds.

Danielle Boxall of the TaxPayers’ Alliance lobby group commented:

‘Not only does the frozen Inheritance Tax threshold hit families’ savings, which have already been taxed once, but the reams of reliefs add a great deal of unnecessary complexity to the tax code. Never mind raising the Inheritance Tax threshold, the Government should abolish the tax entirely and show a more compassionate attitude towards the bereaved.’

Is Inheritance Tax unfair?

The after-effects of the COVID-19 Pandemic were always going to lead to economic issues. Many have expressed the opinion that the fairest way to deal with these issues is to tax the wealthiest with tougher levies on Inheritance Tax and Capital Gains Tax.

However, Inheritance Tax is always controversial with critics of the levy believing it to be fundamentally unfair because tax is applied twice — once when people earn their money and again when they die.

Ways to mitigate your liability

If you are worried about the Inheritance Tax your estate may be liable to pay, there are some measures to be taken to reduce your liability:

  1. Spend some of your assets – An obvious way to decrease your Inheritance Tax bill would be to spend some of your savings so that your estate is smaller. However, naturally this will also impact the amount your loved ones will inherit.
  2. Give loved ones gifts – Giving gifts can reduce your Inheritance Tax liability and means family and friends can benefit from your generosity while you’re still here. However, if you pass away within seven years of giving the gift, it may still be considered part of your estate, as the 2,000 families discussed above discovered.
  3. Hold assets in a trust – Placing some of your assets in a trust can mean they are no longer considered part of your estate when it comes to Inheritance Tax. However, setting up a trust can be complicated and there are lots of different types. Seeking financial and legal advice is a must.
  4. Take out a life insurance policy – A life insurance policy will pay out a lump sum when you pass away. This provides your beneficiaries with a means to pay the Inheritance Tax bill without having to dip into your remaining assets. You will need to pay regular premiums for a life insurance policy and if it is intended to pay the Inheritance Tax bill then it must be placed in a trust. If not, it could have the opposite intended effect by increasing the value of your estate and therefore, the amount of tax due.
  5. Donate to charity – Charitable donations while you’re still here can offset Inheritance Tax liability by reducing the overall value of your estate and possibly bringing it under the thresholds altogether. Also, if you leave 10% of your estate to a charitable cause, the tax rate will fall from 40% to 36%. This could be the difference between leaving behind more or less for your family.

The above measures are not exhaustive but are a good start when it comes to considering what nobody particularly wants to think about – what happens to your estate after your death. It is important to seek expert advice when considering tax and estate planning.

As always, if you would like any further information regarding the above, please feel free to contact our offices by email info@williamsoncroft.co.uk

Williamson & Croft is a market leading accountancy, advisory and tax firm with particular specialisms in property, construction, retail, digital and creative, technology and professional services.

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