When is a pound worth 60p?

Why reducing your clients inheritance tax should be at the top of their New Year resolutions.

If the dawning of a New Year has anything is common with the last, it’s the resolutions that many of us choose to set. Often set with genuine intent, resolutions have a habit of falling by the wayside somewhat. And if we’re honest, it’s completely understandable. We’ve all been there; the New Year resolutions are set, you even outline initial provisions – but somehow, life just gets in the way. This is a common theme, particularly when it comes to Financial Planning and Inheritance Tax considerations.

As your clients trusted advisor, few know your clients financial circumstances better than you. It’s likely your client has, to some extent, looked into how they might be able to reduce their overall IHT liability. In many instances though, the information that is readily available can reinforce false perceptions; that to reduce your IHT liability you need complicated schemes that will be scrutinised by HMRC.

But for many this can’t be further from the truth. There are plenty of options for standard IHT planning before you need to think about complex and aggressive solutions.

We often come across clients in later life with assets over the IHT band and good incomes that they are saving. But for every extra pound they save they only save 60p i.e. their eventual beneficiaries will be giving 40p to HMRC in IHT!

For these clients gifts out of income are an excellent way to minimise IHT – and one that is often overlooked.

But what is classed as ‘income’? And what criteria will HMRC apply when accepting gifts out of income?

• Normal income includes salaries and pensions – plus interest, dividends and investment income (including rental income and annuities).
• The gift must be out of normal income and MUST leave the person fully able to maintain their usual standard of living, including luxuries such as holidays
• The gifts must form part of a regular pattern or provide proof of a commitment (for example, the first payment of a life assurance policy).
• HMRC will generally accept the expenditure as ‘normal’ if it happens three or more times.
• Often mis-understood – the gift doesn’t need to be the same amount to the same person – it just has to be of a similar nature. For example, ‘every year I give 50% of my surplus income to family members.’

Gifts out of income are extremely valuable as there is no maximum amount (as long as they fit within the above criteria). They can provide substantial IHT savings and are simple – but they MUST be done correctly and well documented to ensure they don’t form part of HMRC ‘s IHT calculations.

It’s important that your client is given the right advice before the time comes. Reducing their overall IHT liability will strengthen the relationship not just with your client, but with their extended family too.

Here at Pavilion Row, we are specialists in Wills, Probate and Trusts – and we’re always here to offer advice and support. If you have any queries regarding the above or would like to understand more about how decisions made now affect what happens in probate, please don’t hesitate to get in touch.