On a week’s escape from the office recently, I had the pleasure of residing at a rather swanky Yorkshire hotel for a few days. I was enjoying the novelty of a leisurely read of the paper over breakfast when I found my attention drawn to a conversation ensuing offstage left.
A lady was regaling her companions with tales of a forthcoming cruise. “Of course the kids will be horrified with all this SKI-ing I’m doing.” There was a pause, presumably while her audience tried to visualise skiing and cruising at the same time. “Haven’t you heard of SKI-ing?” the lady continued. “Spending the Kids’ Inheritance.” A lot of merriment ensued. I busied myself with my eggs and soldiers (they are back on the menu at posh hotels, although my mum’s were better) but Inheritance Tax (IHT) had found me again, in deepest, darkest Yorkshire.
For married couples and civil partners, reducing their combined assets to at or below the IHT transferable nil rate band (currently, at most, £650,000) by the time of the survivor’s death is a great way of mitigating all IHT worries. However, getting the timing right can prove tricky! And for some, their main residence, which they can’t easily give away for IHT purposes, prevents them from reducing their wealth below £650,000. Also, old age can be an expensive business (funding social or nursing care maybe) and this does not sit well with the perception that a lot of IHT planning involves denying yourself access to your assets – which, incidentally, is not necessarily the case.
There is nothing wrong with a spot of SKI-ing, if that is the chosen strategy, but a lack of understanding about the dent that IHT can make on the family wealth means that a lot of UK families (who are worst affected by IHT, as their worldwide assets are subject to IHT on death) are effectively SKI-ing without realising it. Except that the person doing the ‘spending’ is the taxman after the surviving spouse’s death – Dad and Mum don’t even get to enjoy themselves.
UK families who want to pass on wealth to the next generation must get serious about their IHT planning. IHT removes a staggering 40% of a family’s wealth on the passing of each generation.
Back in the good old days, of dependably rising asset prices, perhaps UK families could expect their children to have recouped the 40% tax hit by the time of their deaths (ready for the cycle to start all over again!). The wealth managers among you can tell me how likely that is to happen in the future. Personally, I have my doubts. The landscape of wealth acquisition has changed – the monolith that is IHT hasn’t.
And yet there are relatively simple ways in which married couples can use wills, for example, to save IHT – no need to give anything away in their lifetime. With the right will, it is also possible for whatever remains of the grandparents’ wealth after the children’s deaths to pass free of IHT to the grandchildren – in effect, to skip a generation for IHT, without affecting the children’s ability to enjoy their inheritances in their lifetimes. Sometimes matters can be put back on track up to two years after the death of the first spouse, using a deed of variation.
Some of my keenest IHT planners are recently bereaved children who have lost their remaining parent. They do not need me to tell them about the devastating impact of IHT.