Carl Lamb of Smith & Pinching Responds
Managing Inheritance Tax (IHT) on a large estate may require a careful balance of a number of different measures. Firstly, I think it is important to accept that it may not be feasible for you to reduce your estate down to below the IHT thresholds: it’s more of a case of mitigating the level of tax payable where it is suitable and practical to do so.
The IHT payable on your estate will depend on what exemptions you can claim. With an estate of £5 million, you are unlikely to be able, for example, to claim the Residence Nil Rate Band, which is a slice of IHT exemption that applies when you leave the value of your home to your direct descendants (children, grandchildren, step-children, adopted and fostered children). This exemption is subject to a tapered reduction for anyone with an estate of over £2 million and is effectively cancelled out for estates worth over £2.7 million for a couple combining their IHT exemptions (so leaving the entire estate from one to another on the death of the first spouse/civil partner).
Gifting is certainly one of the first steps that we discuss with clients facing large IHT liabilities on their death. There is a range of gift allowances that you can use where the gift is immediately considered outside your estate. Gifts over and above the allowances are considered completely outside your estate after seven years (known as Potentially Exempt Transfers – PETs).
Trusts are a possible solution for you to manage at least a part of your IHT liabilities. Money put into a trust is considered a gift and so subject to the seven-year PET rules but trusts do give you the opportunity to move money or assets out of your estate. It’s critical to get financial and legal advice in respect of trusts to ensure you understand the implications.
There are also financial products such as Discounted Gift Trusts that remove money from your estate immediately but provide you with an income. Any money left in the Trust when you die is considered outside your estate for IHT purposes.
I strongly recommend that you take independent financial advice as early as possible to enable you to mitigate your future IHT liabilities as far as you are able.
Any opinions expressed in this article do not constitute advice. They assume the 2021/22 tax year and may be subject to change.