My wife and I are both 65 and retired. We have three adult children. I recently received a £200,000 inheritance from my late father. Our net worth is around £1.5m including our house. We want to consider inheritance tax planning but are not sure where to start. What advice could you give us?
I am assuming you are both UK resident and domiciled. If either of you are non-UK domiciled, this will have a significant impact on your inheritance tax position. Transfers between UK-domiciled spouses are free of IHT but it is only possible to pass the nil-rate band plus £55,000 – currently a total of £355,000 – to a non-UK domiciled spouse without attracting an IHT liability.
Without any IHT planning at all, your taxable estate on second death would be £1.2m, meaning a current IHT liability of £480,000, assuming that you have not made any gifts within the last seven years. This means that HMRC would inherit more than each of your children. What you need to decide is whether or not this is acceptable to you.
Some aspects of IHT planning are fairly straightforward and inexpensive to organise but others will require a significant financial commitment from you, which will need to be weighed up against your own needs in retirement.
Do not feel obliged to try to mitigate it all. It is your choice.
If you have not written wills, this is something that you should do as a priority. Many married couples write mirror wills, with each leaving his or her assets to the surviving spouse on death. This does not make use of the nil-rate band of the first to die.
The solution is to insert a clause in the will to the effect that, on first death, assets to the value of the deceased’s nil-rate band pass directly to the children or other beneficiaries or are placed in a discretionary trust in which the surviving spouse has a discretionary benefit during their lifetime.
For 2007/08, this represents a potential IHT saving of £120,000. A good start, therefore.
You mention that you have recently inherited £200,000 from your late father. If you do not need or want access to this money, it may be possible to exercise a deed of variation.
This allows beneficiaries of a will to change its contents after the death of the individual concerned. This must be effected within two years of death and needs to be agreed by all parties affected by the change. Assuming a deed of variation were feasible and desirable, this would lower your taxable estate on second death to £700,000. The IHT liability would now be £280,000.
You may decide that the above actions are enough for the time being. My view is that with any form of financial planning, it is important to keep making positive steps. There is often no overnight solution and, even if there appears to be, it may not be desirable.
With IHT planning, I feel that it is also important to be flexible as the rules can quickly change. For example, if the Conservatives win the next general election, they have been talking about raising the IHT bar to £1m.
If you did want to try to cover some of your potential liability, you could look at a joint-life, second-death, whole-of-life insurance policy written in trust. Assuming that you are in good health, every £100,000 of cover could be expected to cost you in the region of £120 a month. This is clearly a lot of money but if you were both to die next year, it would be money very well spent. If you both live to 100, it probably would not be.
This option depends on affordability both now and into the future. If you have a high level of secure pension and want an instant solution, then this could be for you.
Bear in mind, however, that the nil-rate band should increase over time and the level of your assets will fluctuate, thus changing the amount of IHT payable.
I would suggest that before looking at any investment-related schemes such as loan trusts or discounted gift schemes, you should consider whole-of-life insurance.
There are many other ways to mitigate IHT such as using your annual allowances, making regular gifts from income, making bigger gifts, whether through trusts or outright, and investing in unlisted companies, to name but a few.
Jason Witcombe is director of Evolve Financial Planning