Your Estate and Inheritance Tax – why bother to plan?

20th November 2015

I know some people get quite het up about Inheritance Tax (which from here I will call IHT), it perhaps seems unfair that having paid tax all your life you get taxed again when you die – at 40% of all your assets over £325,000.

My general approach has always been “why worry, you will be dead” and, whilst you may not want your beneficiaries to pay tax, the ability to plan when rules change on a regular basis is pretty hard. There are times and circumstances, however, when a focus on Estate and IHT Planning could be time well spent.

My client Marie lost her husband at 82. Once we had spent time with her to understand her needs our financial planning process established that she could comfortably manage to do all the things she wanted with only a portion of the capital her husband had left, including being able to stay in the home she loves.

With what could therefore be called ‘surplus’ capital she had a number of choices and the family lawyers were consulted to try to decide what was the best plan:

  • She could make gifts of the money to her children
  • She could make arrangements by use of a Deed of Variation to amend her late husband’s Will

We generally prefer simple solutions. Whilst making gifts to the children appears, on first sight, to satisfy this criterion it does present some complexities.

Marie feared that the money might not be used ‘wisely’ by her children; she wanted to be able to control their use of the funds. This is a common problem with gifts, particularly where the children are younger. Unless you are prepared for the disappointment that the children don’t do what you would do then keeping control may be more appropriate (this includes them losing it to a divorcing spouse!)

If Marie made a gift personally this would be a Potentially Exempt Transfer (PET) which means the money would remain in her estate for IHT purposes for another 7 years, possibly an issue when you are 82!

The alternative of a Deed of Variation effectively amends the Will of the deceased meaning that a number of things can be achieved; in this case:

  • The surplus capital was put in a Trust.
  • Marie was therefore able to keep control of what happens to the money.
  • Marie retained access to the money should she be wrong about the capital being surplus.
  • She can pass control to someone else (for example a lawyer) who can control the fund meaning that the children could not put pressure on her to change her mind.
  • Investment choices become clearer and any investment return falls outside of her estate.151120 Piggy bank in hands - 000045856720
  • The capital would not be assessable against long term care funding.
  • The house remains in her estate to benefit from the new additional IHT allowance for residential property.

The Deed of Variation did not reduce the IHT liability in respect of the estate because any of her late husband’s unused nil rate band automatically passes to Marie. Importantly, however, it is a mechanism which gives Marie confidence and comfort as she has maintained control over the capital.