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The Generation Game – Why Inheritance Tax Planning Is Crucial

During his first few months as Prime Minister, John Major famously expressed a desire to see wealth “cascading” down through the generations. “We do not see each generation starting anew, with the past cut off and the future ignored,” he told his party’s conference.

Fast forward to the present day and the assumption made by a great many Britons is that the wealth they have created or acquired will be passed on to children and grandchildren. Sometimes that wealth is locked up, predominantly in property and savings. In the case of High Net Worth individuals (HNWs), the chances that the inheritance of the next generation will also be dictated by the value of a wide range of investments and business interests. And for many, the hope and intention is that the bulk of what they worked for will indeed be passed on.  

The Wealth Filter

It doesn’t always work out that way. According to research carried out by wealth consultancy,  the Williams Group, around 70% of wealthy families see that wealth lost by the second generation and that figure rises to 90% by the third.  

There are various reasons for this, which include not only poor management by the wealth creators and their advisors but also, too often, less than optimal financial literacy on the part of those who inherit.

But in the United Kingdom, there is another important factor – namely Inheritance Tax.

Over the years, the direction of travel on taxes charged on income or capital gains has been towards reduction, with that trend partly offset by increases in direct (and relatively easy to collect) taxes such as VAT.   

Inheritance Tax, however, is charged at 40% of assets valued above £325,000, including property. Given the trajectory of residential property prices over the last twenty to thirty years, this means that a significant number of families who do not consider themselves wealthy are likely to fall into the Inheritance Tax net, although the sums payable may be relatively small.

High Net Worth families, on the other hand, are likely to suffer – in real terms and proportionate to their net wealth – a much larger hit.  

And coming on top of the 40% charge, there is an additional sting in the tail. Under current rules, Inheritance Tax must be paid relatively quickly – or to be more precise, six months after the death of the relevant person. Often families must find a considerable amount of money to pay to HMRC before there has been time to realise the value of assets.

Tested Strategies

It is, however, possible to reduce the impact of Inheritance Tax through careful planning, and there are a few tried-and-tested strategies that are approved by HMRC.  

One way forward is to pass on the wealth to others during one’s lifetime. This might mean gifting assets to a spouse or civil partner. Alternatively, assets can be gifted – before death occurs – to children, relatives or friends – thus reducing the eventual Inheritance Tax liability.

There are limitations to the sums that can be gifted every year and – crucially – the benefactor must survive for another seven years if the related Inheritance Tax is to be completely avoided, but with careful planning, this represents an effective way to reduce the final bill.

Another common approach is to put selected assets into a trust that essentially removes them from your estate for inheritance purposes.

But there are pitfalls. For instance, it is important to remember when gifting assets that they are effectively and legally passing out of your hands. Thus it is important to remember that any Inheritance Tax planning that you undertake should leave you with sufficient assets to maintain your own lifestyle. There may also be Capital Gains Tax implications for those who receive the gifts, meaning there is a danger of simply swapping one tax for another.  

So it is important to undertake Inheritance Tax planning in a holistic way – looking not only at the degree to which a tax liability might be reduced, but also the implications for you and your family or other beneficiaries. This is a complicated area and it is important to seek expert advice.

The Route – City wealth club offers its Members a comprehensive wealth management and advisory service, which not only provides access to unique investments and advice on investment strategies based on a Member’s life goals, but also tax and estate planning services. With two reviews a year, The Route tailors its advice to the changing needs of each Member. This is particularly important in the case of inheritance tax planning. No two families are the same and any actions should be entirely appropriate to the circumstances and objectives of those involved.

To find out more about Membership, please call: 020 3141 9040 






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