Would more IHT planning be done if we didn’t talk about IHT planning? Les Cameron, Head of Technical at Prudential explores.
Rising IHT receipts
It’s well documented that Inheritance tax (IHT) receipts are on the rise and are projected to continue to do so.
Rising asset values and the frozen nil rate band are ‘to blame’. Rising property prices are often quoted, and whilst a factor there’s a bit more to it than that.
When you dig into the IHT statistics a bit deeper you will find a story of cash, securities and life policies being a not insignificant percentage of the taxable estate. Given these are readily realisable and / or transferrable to others there must be an element of lack of planning.
The thought of IHT tax planning, chargeable lifetime transfers and Potential Exempt Transfers (PETs), exemptions and lifetime gifts may be daunting but also it’s not very interesting is it?
What language might bring it to life?
The case of one widow and her children
Let’s look at Jane, an elderly widow with a nest egg of £100,000, which will be subject to IHT, gathering dust in the bank. Her two children, Jack and Jill will be the beneficiaries.
Let’s assume she’s finally had the good sense to give up the miserable return she is receiving in the bank and kicked up the risk spectrum a little and is expecting a 4% net return.
Given IHT is 40%, anyone with more than one beneficiary will see HMRC being the biggest beneficiary. In this case it’s 30% each to Jack and Jill.
With no IHT planning, is Jane happy that the largest recipient of her nest egg is HMRC?
So something has to be done about making Jack and Jill the biggest beneficiaries of her nest egg.
Simple, Jane needs to give money away.
Once Jack and Jill have the money, after 5 years HMRC will cease to be the main beneficiary and all Jane needs to do is survive 7 years and HMRC will cease to be a beneficiary!
But Jane’s words might be “I can’t give my nest egg away, I worked hard for that and I might need it. And I don’t particularly like Jack and Jill’s spouses either”.
So, all we need is an ability to reduce IHT, have access to your money and keep control over how it gets spent?
Are you happy giving away your growth?
A good solution?
Using a loan trust allows Jane to overcome that psychological hump of giving her nest egg away. She gets to keep her nest egg. After 5 years HMRC will cease to be the main beneficiary. And as time passes and her nest egg grows, HMRC’s share becomes smaller and smaller.
Perhaps we shouldn’t talk about IHT and trust planning. Should we talk about what you’re willing to give up to help your family and who you want to get most of your money – Jack or Jill or “spreadsheet Phil”?
For further information about IHT and intergenerational planning take a look at Prudential’s Life Events hub on PruAdviser.