Probate documents- last will and testament, inventory of estate, keys

Incapacity and inheritance tax: make a plan for later life

Amid the usual storm of statistics, some recent interesting facts stand out: according to the Office for National Statistics (ONS) the majority of us can now expect to live until the age of eighty (although females still outstrip males in this respect); the number of people dying with dementia has increased from 6.6% of deaths in 2005 to 15.8% in 2014 (Public Health England); and in 2015-16 there was a 22% increase in inheritance tax (IHT) receipts compared to the previous year (ONS).

What do these statistics mean for us personally? Presumably, if we are in good health, we should plan as if we are likely to be among the majority who make it to octogenarian status, but accept that increasing longevity also brings with it a greater chance of incapacity. It follows that we should keep an eye on our assets to ensure that they can support us in our old age, but also with a view to minimizing our IHT liability as much as possible.

Alongside the travel and leisure plans, preparation for older age should always include drawing up lasting powers of attorney to ensure that someone you trust deals with your affairs if you lose capacity, making a Will if you have not done so already, or reviewing your Will to ensure that it is up-to-date, and considering whether you should plan to reduce the IHT on your estate.

IHT planning could help the next generation at a time in their lives when they may need it most, especially as we are also told that the younger generation now faces an uphill struggle to establish themselves in life. IHT saving should, however, be carefully considered to ensure that your own security is not prejudiced and it should also be carried out in the most tax efficient way. Plans should be scrutinised to identify any potential consequences that you might not have anticipated, particularly as tax legislation has become progressively more complicated and it is easy to slip up. For example, positive action might be needed to ensure that you preserve your entitlement to the various allowances and reliefs that are available.

Take the example of married couple Philip and Judith, who wish to make a gift of £50,000 to their only son James to help him onto the property ladder. Judith has been married before and widowed and Philip’s father died 18 months ago leaving him a share of his estate. Philip and Judith have Wills that leave their £2.5 million estate to the surviving spouse. If they sought advice they would find that:

  • the most tax efficient way of making the gift to their son is to vary Philip’s father’s Will to leave a legacy from Philip’s share of the estate to James;
  • Judith is entitled to transfer certain allowances from her first husband’s estate to her own estate and that the best way of maximizing these is to leave a certain amount of her assets into a discretionary trust in her Will, rather than leaving everything outright to Philip; and
  • the couple’s entitlement to the new IHT residence nil rate band (RNRB) is limited by the size of their joint estate but, by including trusts in their Wills, on the first death they can increase the amount of the RNRB that they can claim.

When the review is completed, Philip and Judith would find that the tax liability on their estate has been reduced by a six figure sum and, with the completion of lasting powers of attorney for them both, they can enter later life knowing they have put in place the best possible plans for themselves and for their family.