Personal Financial Planning for the elderly – Part 3

Personal Financial Planning for the elderly – how to keep Inheritance Tax at bay

So far in this series we have discussed the personal financial planning required to help an elderly person manage their finances and suggested some options they can employ to help pay for their care.

Today, we will be looking at things from a tax planning perspective or more specifically at issues around Inheritance Tax.

The Government has announced that it is estimated that Inheritance Tax is forecast to contribute 6.3bn to the government coffers for the tax year 2023-24.

Yes, you read that correctly £6.3 BILLION! The expectation is that this figure is set to reach £10 BILLION by the year 2030.

Whether you agree with this or not, it seems clear that enormous amounts of family wealth are systematically being transferred across to HMRC.

Yet with only a rudimentary understanding of how this tax works, most families could easily look to reduce their Inheritance Tax bill, substantially increasing the wealth that they pass on to their heirs.

Here are the main things you need to look at:-

1. Life Insurance

If your elderly relative still has life insurance policies, are these written into trust?

If they are not, then any monies paid out on death will form part of the deceased’s estate (thereby becoming subject to Inheritance Tax).

When an insurance policy is written into trust, any proceeds will bypass the deceased’s estate and be paid directly to the beneficiaries – dare I suggest, where the policyholder would have intended them to be paid when they took out the policy!

The best thing about this is that policies can be written into trust at any time – even if the life cover is very old. The policy provider will normally have a trust document that can be completed.

So simple, yet so effective.

Best you have a look at this now?

2. Investment Properties

Whilst your elderly relative continues to reside in their main property (or Principal Private Residence) then not much can be done with that as far as reducing Inheritance Tax goes.

But Investment Properties are a different matter.

If your relative doesn’t need to rely on the rental income, then these properties can be gifted to another family member (or multiple members) at any time.

Technically these transfers are not treated as sales and no stamp duty is charged but the other legal costs involved in selling a property such as Conveyancing fees will need to be considered.

After four years the Inheritance Tax liability attached to this gift will begin to reduce and after seven years it will be gone, provided the elderly relative is still alive at the end of the period.

3. Individual Savings Accounts (ISAs)

ISAs are a fantastic tax-free option both for income and capital growth whilst a person is alive.

On a person’s death however, they are counted as part of the estate and therefore subject to Inheritance Tax in the normal way.

One option to consider is switching an ISA into another ISA-based investment that qualifies for Business Property Relief (or BPR).

One of BPR‘s main advantages is that assets will become EXEMPT from Inheritance Tax after only two years, versus the normal seven years for a gift.

Another advantage is that any investment of this nature will still be held in the elderly relative’s personal name (because they are not giving the funds away) and they can always access the funds again if required.

4. Cash and Shares

There are a couple of options we could look at here.

Firstly, we could look at ways to use trusts to hold the assets.

Trusts can be particularly useful as you can structure them so money can be invested how you would like whilst also paying you an income (which is classed as return of capital).

Any money put in to a trust will count as an instant reduction in your asset value meaning that you do not need to wait the full seven years to achieve maximum benefit.

BPR can also be used in a slightly different way, through a potentially more stable investment such as asset-backed loans. This is more complex however and would need to be explored in detail.

In this article I have discussed a few different areas a family could consider when thinking about options around Inheritance Tax but there are many more ways to structure your affairs to mitigate your Inheritance Tax liability.

Personal Financial Planning

When it comes to personal financial planning, every family situation is different, so if you would like any specialist advice in this area, please feel free to give us a call here at THP Chartered Accountants, with offices in Chelmsford, Sutton, Wanstead and Saffron Walden.