Inheritance tax – 10 essential financial planning steps

One of the questions we hear all the time as part of our financial planning discussions is “How do I reduce the Inheritance Tax that will be due when I die?”

It’s really valuable for us to unpick that question to understand exactly what our client’s motivation for asking that question might be. Most commonly, what it boils down to, plain and simple is something like this:

“I don’t mind paying a bit of tax, but every pound of tax due on my death is a pound taken away from my children (or wider family). And that’s not something that sits comfortably with me.” 

“I feel like I’ve worked really hard for the wealth I’ve built up. I’ve saved money when it was prudent to save, I’ve made sacrifices to earn more through my career or business. I don’t spend lavishly. I don’t want to be penalised for being careful with my money”. 

The good news is that there are lots of things that can be done to minimise inheritance tax. The bad news is that most of them take time and are often irreversible. So that means you’ve got to be absolutely certain about what you’re hoping to achieve, your priorities and how they may change over time.

Ten steps to reducing inheritance tax

Here are just some of the areas we explore and consider to help form our financial planning advice:

  • We always start with a full holistic review, understanding your life’s goals and priorities. Yes we really do look at your LIFE’s goals, because financial planning, particularly when it comes to planning around leaving a legacy and reducing inheritance tax, is about having a plan for the rest of your life.
  • We look at your whole financial situation: your home, pensions, investments, jewellery and so on.
  • We look into the life insurance policies you have, because these can also be counted as part of your estate if not well-structured.
  • We consider how much of your estate is protected from inheritance tax already, looking at allowances, reliefs and structure.
  • We look at the wishes you may have set down in writing for your pensions, and what the directions are in your wills. We might look at any trusts you have in place too.
  • We put together a lifetime wealth forecast, taking into account your income and spending over the whole of your lives. This helps project how much inheritance tax might be due if you were unfortunate enough to pass away at any time.
  • We consider your current state of health and how much longer you expect to be with us. Not an easy subject to discuss, but it’s very relevant to the planning.
  • We consider gifts that you’ve made to your family already and the potential to make more in the future, using the wealth forecasting projections to model different scenarios where you make different levels of gift. The purpose of doing this is to get an idea of what’s affordable. We also consider how capable your children might be of receiving any gifts. Many people do not want to make gifts to children still in their 20’s and want to have some control over the money to make sure it’s used wisely.
  • We also consider planning options such as trusts, and different types of investments that can be protected from IHT.
  • We consider short-term solutions such as taking out insurance for the tax liability, alongside the long-term solutions.

Having a holistic approach is absolutely vital, because there are so many moving parts and nuances to this area of planning. Your relationship with money, with your children, your feelings about tax, insurance and retaining control over your money. These are all key to creating a financial plan that will work, and that you are comfortable with.

If you are thinking about inheritance tax and leaving a legacy, please contact one of our expert holistic financial planners. We are always happy to help, and offer a free meeting or discussion (in person or by Skype) with a written proposal afterwards so you can see exactly what we might suggest for you and how much it would cost. We charge fixed fees, which makes our planning advice clear and simple.