Inheritance Tax Seminar– 5 Key Takeaways

As independent financial advisers, it’s important that our clients are kept informed of any changes that may impact their pensions, mortgages or overall financial plan. To that end, directors Andrew Hannay, Jeff Lewis and Lisa Doig recently attended an Inheritance Tax seminar run by Octopus Investments in Edinburgh at the end of January.

Here are 6 key takeaways from that session.

1. Because the value of most properties has increased significantly over the last few years, more and more people are finding that their assets are now worth more than the current exempt £325,000 threshold. Any assets that are beyond this nil-rate band are subject to 40% inheritance tax which can come as a surprise if not planned for.Lisa Doig said “The last thing that people want to discover, especially if it’s a result of the loss of a family member, is that there is an unexpected tax bill to cover. It’s important therefore to understand the value of the taxable estate in advance and plan accordingly”.
2. If married or in a civil partnership, the assets that you leave your spouse are transferred without any inheritance tax to pay. Subsequently when the surviving spouse dies, they can potentially have a nil-rate band of £650,000 before inheritance tax is due as their estate is able to make use of their own nil rate band and any unused nil rate band from their spouse.If, however, you are part of an unmarried couple, then each person is treated as single and therefore each has a separate nil-rate band of £325,000. Any assets passing between them on first death aren’t exempt as they would be with a married couple – and can be subject to inheritance tax on first death if above the nil rate band. Any nil rate band unused on first death can’t be used by the second to die.
3. There is a relatively new residence nil-rate band which was announced in 2015 but effective from 2017 claiming to raise the nil-rate band to £1 million. The following criteria however have to be met to qualify:
   – At least one spouse must pass away after 5 April 2020
   – The surviving partner must own a home used at some time as
   their main residence (or have owned one since 8 July 2015) worth at
   least £350,000 when they die
   – They must leave that home to their children or grandchildren or
   other lineal descendants (or their spouses)
   – Their total estate must be worth no more than £2 million; likewise
   for their deceased spouse.

   Andrew Hannay said “While the headline of increasing the inheritance tax threshold to £1 million is very attractive, there are a lot of criteria that need to be met in order to qualify. That said, if our clients understand this, then we can help them plan to make the most of this threshold”.

4. Apart from the State Pension, the changes made to pensions in 2015 do have implications for inheritance tax, but it depends on whether you have a Defined Benefit or Defined Contribution pension scheme. In addition the age at which you die has an implication on whether beneficiaries have to pay any income tax.
5. There are a number of solutions available to deal with an IHT problem from insuring the liability through a Life assurance policy, gifting capital to beneficiaries or creating a Trust. However the most common route now is to invest in a Business Relief qualifying plan offered by a number of product providers such as Octopus. The plans are investment related but quite often they are structured to reduce as much risk as possible and provide a steady 3 or 4% pa return. If the plan is retained for over 2 years it will be exempt from IHT. It is not gifted to the beneficiaries therefore the investor can still have access to the capital from the plan on an ongoing basis.
   Jeff Lewis states “These types of plans can also be taken out on a Power of Attorney basis allowing the family to protect the capital that perhaps has been held in bank deposits thereby reducing the chargeable estate for IHT thereby allowing more wealth to pass to the next generation”.

The Financial Conduct Authority does not regulate estate planning or tax advice.