Later life planning

COVID-19 and inheritance tax: the effect of the pandemic on estate values

a family around a table in the garden

There’s still a lot of uncertainty about coronavirus as many countries across the globe are experiencing a second wave of the virus. Financial markets across the globe are reacting to tighter travel restrictions and lockdowns that countries are placing on their citizens, leading to concern among investors.

You may have recently inherited shares as a beneficiary of an estate.  What you may not be aware of is that following a drop in estate values it is possible that you could be entitled to a refund of the inheritance tax paid. 

How is the current crisis impacting the valuing of an estate for Inheritance Tax purposes? 

When valuing an individual’s estate for IHT purposes, HMRC require that executors provide the value of all assets held by that individual at their date of death.  

When the shares are transferred to the beneficiaries or indeed sold by the estate, that value may differ from the date of death value. There may have been an increase in the share price and depending on the values, there may be a Capital Gains Tax charge. 

However, where the share price has fallen between the date of death and the date of sale or receipt, HMRC are willing to provide a concession to the estate or the beneficiaries that could result in an IHT rebate.  

An example 

For illustrative purposes, to make things more straightforward, this example assumes that the estate only holds shares and no other assets, such as property. 

Consider an estate that held shares which, at the date of death, were valued at £500,000. Assuming a straightforward IHT exemption position, where the first £325,000 (nil-rate threshold) is free of IHT, tax will be payable on the remaining £175,000, at the basic rate of 40%. This would result in an IHT liability of £70,000. 

However, in today’s climate, the shares have reduced in value by around 40% and are currently worth £300,000. Again, assuming the estate uses the nil-rate band of £325,000, the share value falls entirely within that exemption and thus no IHT is payable. Providing that the shares are sold within twelve months of the date of death, then that IHT of £70,000 could be reclaimed from HMRC. 

Historically, the stock market has always been subject to fluctuations, but during the crisis there has been a wholesale fall in value.  

Naturally, HMRC do not volunteer this refund and so, should you wish to discuss any possible refund and the process for claiming it, please contact our legal team who are here to help you. 

If you need legal advice, talk to us today

How can I reduce my inheritance tax liability? 

There are many ways in which our independent financial advisers will be able to ensure that your loved ones receive the most of their inheritance.  

Here are some key strategies for limiting inheritance tax liability: 

Making a will  

Making a will allows you to decide how your assets are distributed after you die. It also enables you to retain control over how your assets are dealt, with as well as peace of mind that your loved ones will be provided for. 

This is especially true if you are not married, or want to allow for assets to pass to step-children. 

A key benefit to making a will is the ability to avoid inheritance tax. Making a will is an opportunity get your tax affairs in order which in turn will enable you to shelter assets from inheritance tax.  

You may use your will to make gifts that use up your inheritance tax allowances, or to set up trusts. What’s more, using all the available inheritance tax exemptions at the right time will ensure maximum efficiency. 

Inheritance Tax Trusts 

You can make gifts to trusts, which can offer tax advantages. However it is important to note that trusts are taxed heavily, so you should only consider this after taking advice otherwise you could end up paying more tax than you need to. 

Most pension plans can be written into trust so that on your death the assets pass outside your estate and go straight to your relatives without paying inheritance tax. Life assurance policies can be managed in the same way.  

Lifetime Gifts for Inheritance Tax 

Making gifts can be the best way to reduce the value of your estate and therefore is a good way to avoid inheritance tax. You can make as many gifts as you like during your lifetime. 

With careful financial planning and advice we can help you work out how much you can afford to give away to avoid inheritance tax and still have enough left over to fund your future lifestyle, so you don’t have the worry of giving away money you feel you could need in the future. 

Potentially Exempt Transfers (PETs) 

Most lifetime gifts that are not exempt from inheritance tax are known as potentially exempt transfers (PETs).  

Potentially Exempt Transfers are useful tools for inheritance tax planning because they allow you to reduce the value of your estate. If you are able to make a sufficient number of Potentially Exempt Transfers, and survive for long enough, then you can reduce your inheritance tax liability – or even remove it completely. 

When you make a Potentially Exempt Transfer the gift is ignored for inheritance tax provided you survive for 7 years from the date of the gift – the “7 year rule”. The value of the lifetime gifts is not important, and will only be an issue if you do not survive for 7 years. 

Whilst the rules around PETs are complex, there are in fact many benefits to this method of inheritance tax avoidance. Our financial planners are expert in this field and will be able to guide you on the best way forward. 

Pension plans 

Pension plans can be an effective inheritance tax investment strategy as they can pass on lump sums outside of your will. 

When you die, your family would usually be entitled to receive the value of your pension at death. The pension death benefits depend on the type of pension plan you hold. In most cases, the pension death benefits are free of inheritance tax, but this may not always be the case.  

Usually, but not always, pension death benefits are paid via some sort of trust. This means that the payments pass outside of your will, and are usually free of inheritance tax. This depends on the rules of the pension scheme. 

We can undertake a review of all your pension arrangements and advise you on the most effective strategy. 

Life Insurance Policies 

Rather than a way to avoid inheritance tax, Life, or Inheritance Tax insurance is a way to ensure that the tax liability is funded when you die. 

You can set up a whole of life insurance plan which will pay out a lump sum on your death. This will then pay the Inheritance Tax due on your estate at that point. The advantage of this is that your relatives will receive the full value of your estate, and the life insurance policy will pay the tax due.  

It is important to write this policy in trust to ensure that you do not incur tax elsewhere as a result of this arrangement. 

The cost of the life insurance policy can become significant the older you get, however, many view it as a simple solution which leaves you in full control of your assets. 

Inheritance can be an extremely complex area, but planning for it in advance will help your loved ones to get the very most out of their inheritance.  

Tees’ expert wealth and legal advisers are here to help you every step of the way. 

We can combine your financial planning and legal tax management all under one roof, allowing us to understand you better and meaning that we can develop a financial strategy to suit your changing needs and an inheritance tax plan that is tailored to your specific circumstances. 

Tees Financial Ltd is the independent financial advice and wealth management arm of Tees. It has been awarded the Pension Transfer Gold Standard as well as Chartered Financial Planner status. 

Call our specialist solicitors on 0808 231 1320

Tees is here to help

We have many independant financial advisors who are based in:

Cambridgeshire: Cambridge
Essex: Brentwood, Chelmsford, and Saffron Walden
Hertfordshire: Bishop's Stortford and Royston

But we can help you wherever you are in England and Wales.

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Chat to the Author, Ian Johnston

Partner - Wills, trusts, tax & probate, Chelmsford office

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Ian Johnston, later life planning specialist in Chelmsford
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