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Mitigate tax with a family chat

Discuss financial matters with your family – especially if you are concerned about IHT or care costs
August 3, 2017

Many people feel awkward discussing money matters, even with close family members such as parents, children or spouses. But it is important to discuss important financial planning decisions with your nearest and dearest, particularly if you are thinking about estate planning or are worried about possible long-term care costs.

"While [financial] reticence may be deeply ingrained culturally, its consequences are often many times worse than taking the trouble to have a free and frank conversation before it's too late," says Wendy Spires, director of research at findaWEALTHMANAGER.com.

Issues that may be beneficial to discuss include inheritance tax (IHT) planning. "Wealth structuring and mitigating IHT are complex issues that certainly call for taking professional advice," says Ms Spires. "But we would always advise that you follow the maxim, 'when in doubt, do as the very wealthy do'. Ultra-high-net-worth individuals have long looked at their wealth on an intergenerational view, structuring it as efficiently as possible to minimise the IHT levied on their estates and ensuring that as much money stays within the family as possible. It behoves families of any means to do exactly the same."

There are several ways to mitigate inheritance tax but some of these become less effective the longer you leave it, says Gary Smith, chartered financial planner at Tilney Bestinvest. For example, you can make a potentially exempt transfer (PET) to give away assets such as cash and shares during your lifetime. PETs enable an individual to make gifts which will become exempt from inheritance tax if the individual survives for a period of seven years. Gifts made three to seven years before your death are taxed on a sliding scale known as 'taper relief'. Taper relief is only available if the value of the gift or cumulative gifts is in excess of the IHT allowance - the nil rate band (NRB) of £325,000.

For example if an individual gifted £100,000, then this would not have exceeded their NRB and no tapering would be applied. Their NRB would just be reduced to £225,000 to reflect the £100,000 gift. However, if the individual had gifted £500,000 and died within seven years, then tapering would be available on the £125,000 of the gift that exceeded their NRB of £325,000.

But this type of living inheritance may not be right for everyone.

"Parents tend to be naturally generous with their children and it's often the case that we have to rein people back," says Danny Cox, chartered financial planner at Hargreaves Lansdown. "The problem is that it's quite difficult to figure out how much money individuals might need for themselves as obviously they don't know how long they are going to live."

Those in retirement should focus first on ensuring they have enough income to meet their own needs, maintain the lifestyle they want and meet unexpected costs, before they look at giving assets away. He adds that financial advice can help as advisers will use forecast planning to determine your income needs and how much money you will need to meet contingencies such as the high cost of long-term care.

Also make sure you've written a will, and if you are over 50 you should consider giving a relative a Lasting Power of Attorney. "A will makes sure your wishes are respected after you've died while a power of attorney makes sure your wishes are respected while you are alive, but for whatever reason cannot make decisions on your finances or welfare," explains Mr Cox.

You can put a Lasting Power of Attorney in place long before it is activated and having one ready will make it easier to access the funds of an incapacitated relative. And as locating assets is often one of the hardest jobs for the executor of a will, Mr Cox suggests keeping a register of assets close to your will.