Today’s tax receipt data shows that estate planning is more important than ever, according to national financial advice firm Continuum.
The latest HMRC inheritance tax receipts published today have revealed that £6.8bn was collected in the 11 months from April 2023 to February 2024.
This is £400m than the same period a year before.
It means IHT looks likely to raise yet another annual record in IHT receipts for the Treasury, with estimates putting this year’s total at £7.8bn, which would top last year’s £7.1bn total.
If your estate is worth more than £325,000 when you pass away, IHT could be charged at 40% on everything over the threshold, leaving your family with a massive bill before they can access your estate.
The main residence nil rate band, currently £175,000 was introduced as an additional nil-rate band when a residence is passed on death to a direct descendant.
Inheritance tax was conceived as a tax on the wealthy classes, but decades of inflation have spread the burden from landed gentry to ordinary people.
Ben Alcock, Chartered Financial Planner at Continuum, said: “With inheritance tax receipts to HMRC continuing to rise with no sign of slowing down, now more than ever families need to be planning for their future accordingly.
“Proper estate planning can make sure that your money goes to your loved ones, without a sizeable deduction from the taxman.
“There are many tax-efficient vehicles that can be used as estate planning tools. A good independent financial adviser can help you navigate through the ins and outs of inheritance tax planning without the jargon, so you can find the right combination for your situation.”
Those making gifts to family during their lifetime also need to be looking out for IHT bills.
The amount of inheritance tax paid on gifts has climbed more than 153% since 2011 to £256m in the 2020-21 tax year, according to an HM Revenue & Customs response to an Freedom of Information (FOI) request from Continuum in January.
The number of estates that paid IHT on gifts has more than doubled since 2011, with 1,300 paying the tax in 2020-21.
IHT is currently charged on gifts that are made within the seven years before death.
Under the small gifts allowance, people can give away a total of £3,000 of gifts each tax year. For parents, on the occasion of their son or daughter’s marriage or civil partnership, parents can gift them £5,000 and grandparent can gift £2,500.
At Continuum we are looking at five practical strategies to make the most of your assets.
1. Get talking.
The first step towards a successful inheritance plan for all families is communication. Talk to your spouse, children, and stepchildren. Understand their concerns, expectations, and spot the potential conflicts.
Some items may have emotional as well as purely monetary significance to some family members. That ring that has been passed down on one side of the family for years, the old picture that was part of a first home.
You need to find out what items are significant to each family member, and you may need to find some compromises. They can’t all have your watch or your diamond ring.
If you have children who no longer have much contact with you, you may still need to discuss your plans with them, even if it takes a special effort.
One solution may be to allot each beneficiary the most appropriate sentimental item and divide up wealth equally.
2. Take stock
The next step in your inheritance planning journey is creating an inventory of your financial assets. Your home and any other property, investments, savings, and any valuable possessions. If you have a surviving partner, they might be your first priority, but you need to look at what happens when they are gone.
Your home may be the biggest challenge. It can be difficult to balance its value against other assets and giving it to one beneficiary may lead to resentment. Stipulating that it should be sold and the proceeds shared is one answer. A shared bequest that allows one beneficiary to buy out the shares of the others is an alternative.
You also need to look at the liabilities or debts that eat into your estate. You want to leave financial security and happy memories, not debts.
Knowing what you have now can be the basis for devising a fair inheritance plan that takes into consideration the needs of everyone who survives you.
Look at your life insurance as part of this review. It can help ensure equal inheritance for all parties. The payout from a life insurance policy can be divided among the beneficiaries, helping to balance any disparities in the value of your other assets.
3. Watch out for the taxman
Inheritance tax could take a large proportion of your wealth – 40% or everything above £325,000 -and stop your family members enjoying the results of your hard work. Avoiding or reducing inheritance tax is possible, if you have expert advice, and plan accordingly.
4. Write that Will
A well-crafted will is the linchpin of any inheritance plan, and for all families, it is crucial. Work with an experienced solicitor to draft a will that clearly outlines your wishes and specify the exact percentage or value that each heir, whether biological or stepchild, will inherit. This ensures that your intentions are legally binding and minimises potential disputes later on.
Review and update beneficiary designations on retirement plans, investment accounts, and insurance policies. Beneficiary designations override instructions in your will. Failing to update can lead to unintended consequences – money intended to go to a current partner still being earmarked for a previous spouse is not uncommon.
5. Get professional help
Seeking the guidance of a qualified financial adviser is vital for any family.
A good independent financial adviser can provide tailored advice based on your unique situation and help you make informed decisions that prioritise fairness for all concerned.
We can also help you regularly review and update your inheritance plan to reflect any changes in your family structure, financial situation, or personal preferences. This proactive approach can help you avoid conflicts down the line and ensure that your estate distribution remains fair and up to date.
Perhaps most important of all, we can help you reduce the impact of inheritance tax – and ensure that all those you leave behind receive all the bequests you want them to have.
