Reflecting on IHT - the most “emotive” of taxes

Amid the various strains of outrage being aired, I want to bring some nuance to the thinking and guidance on the matter. IHT looks quite different for different people, whether they’re in town or country, whether they’re business owners or employees, even before earnings are taken into account. Foremost, rising property values and frozen thresholds mean that more estates across the board are being dragged into the scope of IHT. People who may not consider themselves wealthy could now incur a liability because their home has increased in value and their private pension pot will be considered part of their estate from April 2027.

This means that, first, more people need to be aware of their likely liability. Second, if they haven’t considered it before, they need to decide whether embarking on estate planning is right or necessary for them.

We ask people in all walks of life to consider universal questions before beginning any disposal of assets. These include, have you made sufficient provision for yourself (and your spouse) for the rest of your life? And, do you accept that you will give up control of these assets by giving them away?

Questions like this require careful consideration, conversations with beneficiaries, and a generous quantity of acceptance. Estate planning should not be done in a hurry or as a knee-jerk reaction to fiscal changes.

The financial advice profession is, rightly, sounding the alarm about the dangers of taking estate planning into your own hands. Of course we have an interest here, but IHT is a complex piece of legislation with a high potential for expensive mistakes, and HMRC oversight is increasing. In-the-round guidance tailored to your particular case from private client solicitors, personal tax accountants, and financial planners is essential.

For those who already have estate planning underway, the legislative changes on the horizon have made reviewing arrangements imperative. At Calton, we are already making sure clients are informed of the impact of changes and helping them take reasonable action if they wish to do so.

For high-earning clients whose assets comprise, say, a family home, a large personal pension pot, and an ISA or two, that action will be to make sure that they use the gifting allowances available to them, that they consider whether remaining in a large house is preferable to downsizing, that they consider spending more of their pension.

These are all big decisions, but they relate to assets that are either liquid or can become so.

Clients who own a business or a farming estate are in a different situation. Their assets are difficult to liquidate and, in many cases, essential to the continuing success of their enterprise. This is why the change to Agricultural and Business Property relief, arriving in April, struck so deeply across small businesses and the rural sector.

Introducing an effective IHT rate of 20 per cent when previously no IHT was due hits those affected hard, and older farmers especially.

While these clients were always aware of the necessity for succession and estate planning, people must act quickly. Under the new conditions it is imperative to plan rather than just wait and see.

As with all planning, gifting with a full understanding of the rules and properly documenting such actions is vital. Trusts have long been used strategically to move value out of an estate while still retaining some family control. They are not simple structures and require ongoing professional management, but for larger estates they can be a cornerstone of long-term planning.

Building a pot specifically to pay IHT is arguably the most important piece of planning, and is often overlooked in the public discussion. Even with gifting and trust strategies in place, many farming estates will face a residual IHT bill.

A whole-of-life insurance policy pays out a lump sum on death, directly into a trust for the benefit of beneficiaries. Crucially, it sits entirely outside the estate so is not itself subject to IHT. Premiums are paid from income and the payout can be structured to match anticipated tax liability.

What is universal is that tools to manage the impact of IHT exist for everyone. They require a thorough understanding, time to work, and expert advice tailored to your circumstances.

Calton is the official wealth management partner of the GWCT Scottish Game Fair. Visit them at Scone Palace near Perth from 3-5 July.

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