Beginners guide to IHT

[Lovingthelighterevenings]

Through luck, education and work we find ourselves in a good place financially, such that for the first time ever I'm starting to think I need to.understand how IHT works and how it can be decreased, so I can make informed decisions.

We own the house, have a good sized pension pot, one well paying job, 10+ years before state pension kicks in, and two DC, one at uni, one at school. I'd like to be to get the kids a helping hand to some level.

Where should I be looking for information? We have a IFA but I'd like to have some understanding before we talk to him (and googling takes me to IFA and talk of trust funds...)

Start by looking at the IHT allowances - which if you are married and passing your home onto your children/grandchildren should take your joint IHT allowance up to £1 million https://www.moneysavingexpert.com/family/inheritance-tax-planning-iht/#:~:text=In%20the%20current%20tax%20year,to%20their%20'direct%20descendants'.

Then you can think about how much you can give away during your life times to reduce IHT.

If you want to give your children a helping hand the best and easiest thing to do is give them money well before you die. As long as it is 7 years before you die then no IHT is payable. It also helps them more to get money when they are in their 20s/30s, as opposed to waiting until you die and they are likely to be in their 50s/60s.

You can set up trusts if you wish but that costs money and are a pain to manage (annual accounts, etc)

Not to be crass but what figures are we talking about here? It is important to understand as the options and rules differ depending on amount. Over £2.35m? If so then no nil rate band available. £5m? A family investment company or discretionary trust may be appropriate. Is retaining control important to you? Could you wait a few years and just give each a chunk for a house deposit? How much difference would that make to the value of your estate?

@AdeptPeachSquid not crass, it's numbers.
House worth £650k but we have to live somewhere, and downsizing won't liberate money we could give away. £400k ISAs, £1M pension between us (mostly mine, but DH has a decade of final salary). Pension gets £60-80k / year. Both mid 50s. DH is having a break from work (burnout) so we may have to adjust a bit to live one salary if we want to continue maxing out savings and pension. There may be inheritances in the next 10-20 years as well (guessing £100-200k maybe) unless nursing home fees consumes it all.

I'm guessing we should start to give the kids a share of the savings (ironically one refuses money, the other has no interest in money which is why I thought trusts might be the way).

So not enormous sums, but enough to think about IHT?

Definitely enough to worry about IHT. Also a good time to start thinking about it, even if you are, say, ten years off having to do anything about it. I assume you are married so IHT only really kicks in on second death. Might not be a concern for another 40 years plus!

At that level I’d be thinking about passing the inheritance straight to them. Not through you, but straight to them. Check the wills or get them changed after the deaths.

don’t want to downsize, no problem.
£1m pension pot will provide a level of income you’re happy with I assume?

the only thing left then is the ISAs savings. Again, if it were me I’d be thinking about giving them a chunk of that for a house deposit, say £100k each which should get you under the £2m when the in, rate band tapers away.

if giving a gift like that then you have to live for seven years for maximum benefit. Could look at making gifts out of income. Also could make use of the £3k annual exemption that you both could give each year. Do that for 20 years you’ll get rid of £120k though they will likely just spend it and it likely won’t reduce the isa pot.

just initial thoughts. Rules change, keep an eye on them.

You could consider a whole of life insurance policy that pays out on second death, with a sum assured to pay the estimated IHT bill.

This allows you to hold off giving your assets away until you are sure you can afford to, and means there is cash available to settle the IHT bill on time without having to sell things. Your IFA can give you more info.

@AdeptPeachSquid and @Sunseed thank you.

What confuses me is that if I understand correctly we can give away large chunks (any limit?) of our savings pot without any implications (assuming we live for another 7 years) - do we have to be able to demonstrate that these gifts come from our income (rather than savings as that could be seen as an attempt to reduce our total worth)

So how does the £3k/year gift limit fit with this (maybe that can come from savings and we don't have to survive another 7 years - maybe that's the reason as this really could be a route to reduce your estate).

I have heard of whole life policies (my workplace offers a once a year pension review and the advisor was quite keen to set up another call to set one of these up - it was the first time I'd been introduced to them as it's not something our IFA has discussed, yet he sees our entire portfolio).

As regards the kids, we could max out the eldest's yearly ISA payments, and setup a junior stocks and shares ISA for the younger and do the same?

Personally I’d visit a financial planner rather than an IFA. Ideally one from a law firm who could set up any trusts and similar if they are needed, especially now pensions are fair game for IHT.

We did this a few years ago and got some very good advice, and will go back for a quick check once the pension / IHT reforms kick in.

@jaundicedoutlook interesting idea! I had to look up the difference between a IFA and a financial planner. I'm still not positive I understand as I would have described our advisor as a planner (we have been with him for 20+ years, he's sorted mortgages, savings, my work pension, private pension, husband's lack of pension (doesn't pay UK tax), etc etc). But I can see that while he knows where all our assets are, how they are performing etc he may not be thinking ahead for us. Having checked out his company, they list inheritance planning so I'll check in with him regardless, but will look for a well reviewed local planner too. Thank you