We so often meet clients whose primary objective is to ‘reduce my Inheritance Tax liability’. Now this is a noble enough objective – the UK Inheritance Tax regime is one of the harshest death duty regimes in the world (certainly compared with some of our peers on the world stage, Australia and the USA, who have either zero death duties or allowances so high it really is only the 0.1% who need worry about them) and it stands to reason that we would want to try to pass on more of our hard-earned wealth to our loved ones.
Inheritance Tax is also a very emotive tax – we see far more people coming to us to try and mitigate their 40% Inheritance Tax bill than we do their income tax liability for example (despite the fact that income tax is also often at 40% or even 45%). It got me wondering why this might be?
Well… I think there are 2 primary reasons – one practical and one emotional:
1. Inheritance Tax is paid on assets or income which have, in most people’s view, been harshly taxed already. “I have already paid 40% income tax when I earned the income, I have paid my VAT as I spent the income, I have paid my council taxes and National Insurance…. and now, you want another 40%.”
2. Inheritance Tax doesn’t impact on us per-se, it impacts on our wives and husbands and children and grandchildren – the people we love the most. I think this is the one that really gets people. “I understand if you want to tax my income, my assets, but don’t you dare touch the income or assets of my children.”
I think it’s this second one that is the tricky one to get to grips with. To deal effectively with Inheritance Tax, we first have to imagine a world without us in it. We have to imagine our spouses and children coping without us, financially and otherwise. This is perhaps the reason why Inheritance Tax has emotions running so high.
All of this can leave us a little blinkered however, focusing on IHT as the one and only issue that we need to deal with in our Estate Planning.
However, there are several other, lesser spoken about threats which can have just as significant an impact on family wealth and the impact can be even more severe in some cases.
The first of these is the re-marriage of a surviving spouse or the divorce of a beneficiary (the children and grandchildren for example).
Now, the first of those issues is very uncomfortable for people to talk about. The idea of a spouse going on to have another relationship when we are gone is clearly not a pleasant thought for most people. However, the stats tell us that this is a very real issue. It depends which study you look at, but some peg the rate of re-marriage for people who have lost a spouse north of 50%.
The issue here is as follows. Let’s take an imaginary married couple, Jack and Jill. Jack sadly passes away, leaving Jill. Jill goes on to remarry Bob 5 years later. If Jill now dies first in this new marriage, there is a very real possibility that Bob will inherit some or all of Jill’s estate (which in turn would have received Jack’s assets most likely).
Bob is now the sole owner of these assets and can, in theory, do whatever he wishes with them. Now of course we would all love to think that Bob is a stand up gentleman and he will follow Jill’s wishes (which one assumes would be for the money to pass to her children), however not everyone will behave like this and Bob would be within his legal right to make a new Will leaving everything to his 2 children from his previous marriage, cutting Jack and Jill’s children right out of the picture.
This scenario happens more in reality more often that people realise and we frequently see cases like this popping up in the courts.
The next issue is the divorce or separation of a beneficiary (usually the children). If a child inherits funds from their parents directly and then goes onto get divorced, there is a good chance that the inherited assets will form a part of the divorce proceedings.
This is a similarly painful issue for some people to think about, however the stats are once again quite stark. Most of us are familiar with the fact that the divorce rate in the UK tends to hover around 50%. This means if you have 2 married children, there is a reasonable chance that one of them will go through divorce. If you have 3 or 4 children, then there is an even greater possibility of this issue having an impact on your family.
These are just two examples of issues that we collectively call ‘social impacts’ and this generally relates to anything non-tax related that can have a damaging impact on family wealth.
There are several other issues that fall into this category as well – care fees and spendthrift beneficiaries to name a few, but those can be the topic of another blog.
From experience, these ‘social impact’ issues have at least as much of an impact on family wealth overall – in some cases taking much more away from families. In a typical divorce for example, an outgoing spouse might be awarded 50% of the whole estate, whereas, with IHT, a 40% charge is generally levied on only a part of the estate.
When you take this into account, it is puzzling to think why IHT seems to get all of the airtime and attention – perhaps we need to give a little more focus to these other issues as well!
All of the above issues (and more besides) can be effectively dealt with by implementing a well drafted will and trust framework.
If you require any assistance with your own estate planning, please don’t hesitate to contact a member of the Buckingham Gate team.
