Death:
Inheritance tax planning

In its broadest sense inheritance tax planning can cover much more than just inheritance tax. It can encompass lifetime asset management, the management and distribution of your estate, and the likely impact of all taxes.

In its narrowest sense this type of planning may be restricted to the mitigation of a potential inheritance tax liability on a single, significant asset, such as the family home.

Inheritance tax planning involves the following:

Identifying and valuing the assets which make up your estate and how they are held (for example, jointly, sole name, in trust)

Identifying who you ultimately want to have those assets

Identifying your lifetime needs, the assets needed to meet those needs and which assets are 'surplus' to your requirements

Considering the most tax efficient disposal of any surplus assets (now or at death)

Considering the most tax efficient distribution of your remaining assets on death (and their management during your lifetime)
Considering any alternative or more tax effective investments during your lifetime

Ensuring your will fully takes account of your assets and your wishes

Carrying out regular reviews of your planning, and update it as necessary, say every five years or on the occurrence of a major life event (see Jargon buster)
Considering whether your provision for life insurance is sufficient, or further insurance to meet inheritance tax is appropriate

Jargon buster: Major life events

Major life events include:

Marriage

Separation & divorce

Birth of child or grandchild

Death of child or grandchild

Death of spouse

Death of parent

Retirement

Redundancy

Change in employment status

Diagnosis of serious illness

Involvement in a serious accident.

Inheritance tax planning should not be considered in isolation from other taxes. Effective inheritance tax planning should also seek to prevent other unfortunate tax charges. The taxes to consider are:

Income tax - arising on your actual income and earnings but also charged on some transactions where legislation deems the profit or gain to be taxed as income

Capital gains tax - only arises on the disposal (whether by sale or gift) of an asset but not all disposals of assets will give rise to a capital gain.

Inheritance tax - a tax on your estate both on death and on certain lifetime gifts (subject to reliefs and exemptions)

Stamp duty land tax - payable on the acquisition of land and property, including houses. Although it is generally not payable by the recipient of a gift of property there are some circumstances, such as the property being subject to a mortgage, where a liability can arise on a gift.

VAT - may be relevant if you have or have had a VAT registered business.

Although you should ensure your affairs are arranged in the most tax efficient manner possible, it is also important to ensure that you first decide on the right distribution of assets for your family circumstances and then look at how best to achieve that distribution with minimum tax cost.

Tax planning is all about meeting your needs, and your family's needs, in a tax efficient manner. Tax saving is of little use to you in itself unless you achieve what you want to achieve.

Trusts can be a useful part of inheritance tax planning. Many people assume that they are too complex or expensive for their needs but you do not need to be millionaire to benefit from setting up a trust.

The interaction of your needs and the various tax regimes can be complex, as illustrated in the case study on "Integrated Tax Planning" - see below.