Inheritance Tax. Variously called the “voluntary tax” and much derided by many. I often hear ordinary people say, “I’ve paid tax all my life, why should I pay it again?”

For many people, preparing to mitigate against Inheritance Tax (legally of course) it can be a major challenge, as most of us need to retain use of our assets during our lives, to provide us with an income. But what can be done if illness besets us suddenly and there is still a desire to reduce the amount of tax paid?

One answer to last minute Inheritance Tax planning

If there is a Lasting power of attorney is in place many people think that there is nothing that can be done to plan for inheritance tax. This is because making gifts can be very limited without approval from the Court of Protection.

The Court of Protection’s view is that giving away assets during the your lifetime would not be considered as being in your best interest. This can make it difficult to plan for passing on your wealth tax-efficiently.

So, what can be done?

So, let’s imagine that you have total assets £1,500,000 and you have recently been widowed.

Because you were previously married, you have a total nil-rate band of £650,000, but that still leaves you with an inheritance tax bill of £340,000 (£1,000,000 – £650,000 @40% = £340 ,000)

You have put a lasting power of attorney in place, should anything go wrong. But you don’t want to gift assets away as you feel you need to retain full use of your assets. Imagine the worst happens and you lose capacity and you are no longer able to control your affairs. The circumstances in which gifts can be made from your estate without Court of Protection approval are likely to be very limited. In fact, any gifts made will take seven years to fully fall outside of your estate for inheritance tax purposes, by which time it may be too late.

Your Attorneys decide that they must take action

Your Attorneys need to ensure that any investment decisions are made in your best interests and will not disadvantage you, for example, by making your money inaccessible.

One possible solution

Your Attorneys decide upon the advice of your financial adviser to invest £350,000 on your behalf into business property relief investments. The investments are made in your name, meaning you retain full ownership of the investments.

Once the investments have been held for a minimum of two years and owned at the point of your death, the investment should fall outside of your estate, saving your beneficiaries an inheritance tax bill of £140,000 upon your death. It does not entirely eliminate the tax liability, but it is still an improvement.

By using this type of strategy, there is no life insurance requiring medical underwriting and no requirement to survive for seven years after making any gifts. In addition, if necessary, withdrawals can be made at any time, without jeopardising the plans to mitigate against inheritance tax.

Furthermore, some of the business property relief investments now available to investors are towards the lower end of the risk spectrum and only not targeting high investment returns. They are looking to return relatively modest returns and capital preservation is important.

Inheritance tax is a complicated area of financial planning and it is strongly advised that you seek specific financial advice from an independent financial adviser before making any decisions to invest or plan for inheritance tax.

This simple example does not take into consideration the new Residential Nil Rate Band, that is due to be introduced with effect from April 2017. You may also benefit from this new allowance once this is introduced.

Action call

If you or your family are considering your options regarding inheritance tax, why not contact us for a no obligation conversation about your options.

You can contact us by going to our website and contact us via our “Get in touch” form on our home page or Contact Martin Dodd on 01902 742221.

If you or your family would like to talk us about your financial plans for future, please get in touch for a no-obligation meeting.

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It is advisable to take advice from a professional financial adviser when making major financial decisions.

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The contents of this article should not be regarded as specific advice. No responsibility can be accepted by Martin Dodd or Midlands Investment Agency Ltd., for any loss that may occur by a person acting or refraining from acting on the basis of this article.