As a high-net-worth individual, accumulating wealth and managing taxes are two key objectives. And, as we know, inheritance tax is potentially one of the biggest, future tax headaches. As a result, we have published a guide on inheritance tax planning for high net worth individuals to help you get to grips with this key issue.
Without effective planning, a significant portion of your estate could be lost to taxes, leaving less for your beneficiaries.
Are you confident your current inheritance tax planning will minimise its impact?
Are you creating generational wealth, but leaving it exposed to taxes?
High net worth inheritance tax planning – benefits, process & strategies
This guide explores the importance of inheritance tax planning for high net worth individuals, from using exemptions to setting up trusts and lifetime gifting.
Keen to understand more about how to protect your financial legacy and preserve your family’s wealth?
Let’s get started.
What you will learn in this guide
- Why inheritance tax planning for affluent individuals matters
- Key strategies to reduce and eliminate an inheritance tax bill
- Why understanding the seven year rule is so important
- How trusts and lifetime gifts can protect your wealth
- The role of Business Property Relief (BPR) and tax-efficient investments
Related reading: Investment opportunities for high net worth individuals.
The importance of inheritance tax planning
Have you thought about how inheritance tax might impact the generational wealth you’ve worked so hard to build?
Inheritance tax planning is essential for high net worth individuals like you who want to ensure their family benefits fully from their legacy.
Protecting your financial legacy & preserving wealth
It’s about protecting your wealth and making sure your assets are passed on according to your wishes.
For wealthy individuals, planning for inheritance tax:
- Protects your family’s financial future by reducing tax liabilities.
- Helps you preserve high-value assets like property or investments.
- Takes advantage of exemptions and reliefs for high net worth people.
- Avoids unnecessary complications for your beneficiaries.
- Ensures your plans are executed tax efficiently
Without a plan in place, could up to 40% of your estate be lost to tax?
For every £1,000,000 unplanned for, £400,000 could be lost to taxes.
That’s the very definition of the risks high net worth individuals face by not engaging in a thorough inheritance tax planning process.
How do wealthy people avoid inheritance tax?
As you’ll see, there are many ways to wealthy, affluent individuals use to reduce or eliminate inheritance tax.
First, consider these two questions:
- Are you making the most of the available reliefs and exemptions available to reduce your inheritance tax liability?
- Are you aware of the seven year rule for gifts and inheritance tax, and do you know about taper relief?
Tax efficient high net worth people protect their wealth through careful, strategic planning tailored to their circumstances.
What are the main inheritance tax mitigation strategies?
These cover:
- Setting up trusts to protect assets and reduce taxes
- Using lifetime gifting strategies to pass wealth directly to family members.
- Leveraging Business Property Relief and other exemptions.
- Structuring your estate to make full use of available allowances.
Wouldn’t you feel more confident knowing your legacy and your family are protected?
Remember earlier we discussed how, without proper planning, inheritance tax could claim up to £400,000 of every £1,000,000 in your estate?
Hopefully, you now have a better understanding of how to reduce this tax’s impact on your financial legacy.
What is the inheritance tax planning process for high net worth individuals?
Now let’s look at some key parts of the planning process, starting with getting to grips with understanding the value of your estate.
Understanding your estate’s taxable value
When it comes to inheritance tax planning for high net worth individuals, understanding the current and potential future value of your estate is vital.
For affluent, wealthy individuals, understanding the taxable value of your assets is one of the first steps in the planning process.
This includes:
- Property
- Investments
- Business assets
- Global holdings
For example, a significant property portfolio, combined with other assets, and investments could push your estate way beyond the current threshold.
But try not to worry. Help is at hand. A skilled IHT planning specialist will help you to reduce, minimise and even avoid this tax, where possible.
Using exemptions and reliefs
Next up in our article covering the main inheritance tax planning strategies for high net worth clients is ‘exemptions and reliefs’.
The nil-rate band and residence nil-rate band are well-known allowances, but there are others tailored for business owners and high net worth people.
For example, Business Property Relief (BPR) can reduce the taxable value of qualifying assets.
Similarly, making regular gifts from surplus income or gifting within annual limits can lower your estate’s value.
Lastly, another option is using life insurance to cover your inheritance tax bill. A policy, written in trust is one of the ways to avoid inheritance tax on your estate.
The power of gifting property to children
Lifetime gifts can reduce your estate’s taxable value and provide immediate benefits to your beneficiaries. For example, gifting property to your children now could fall outside IHT if you survive for seven years. See more about this in the following section.
Furthermore, even smaller, regular gifts from income are exempt from tax, provided they don’t affect your standard of living.
The seven year rule for inheritance tax
When making ‘gifts’ you need to be aware of the seven year rule. This essentially means that if you gift your home to your children, and you die within seven years, the tax implications change. If you are new to this topic, understanding the seven-year rule for inheritance tax is invaluable.
Here’s a quick overview:
- Gifts are tax-free if you live for 7 years after giving them
- If you die within 7 years, IHT may apply based on when the gift was given
- Gifts made within 3 years of death are taxed at the highest rate
- Gifts made 3 to 7 years before death may qualify for taper relief on a sliding scale
- Taper relief applies only if the total value of gifts exceeds the inheritance tax threshold
Using trusts for tax-efficient wealth transfers
One of the main IHT planning considerations for high net worth individuals is the use of trusts.
If you are new to this topic, trusts allow you to transfer wealth outside your taxable estate while retaining control over how assets are managed. In summary, they can be an important part
For example, a discretionary trust can hold assets for your children, shielding them from IHT while ensuring funds are distributed according to your wishes.
Trusts can also protect assets from legal disputes or mismanagement. However, they require careful, detailed planning and ongoing management to remain compliant.
Diversifying with tax-efficient investments
Tax-efficient vehicles like Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS) offer growth opportunities.
However, if you are focused on reducing or avoiding IHT, EIS schemes could be a solution.
For instance, investing in an EIS can defer capital gains tax and potentially exempt the investment from inheritance tax after two years. Diversifying your portfolio with these options balances risk and reward while giving you a solid chance of reducing unnecessary taxes like IHT.
Related reading: The most tax efficient investments for higher rate taxpayers.
Using offshore bonds to reduce inheritance tax for high net worth individuals
High net worth individuals often use offshore bonds as part of their inheritance tax planning.
These bonds work like a secure savings jar, allowing money to grow in a tax-efficient environment with no immediate tax on withdrawals.
By placing the bond within a trust, it’s possible to remove it from your taxable estate while retaining some control over how and when the funds are distributed.
This approach ensures efficient wealth transfer to future generations.
Protecting global assets
Do you own assets abroad? Protecting assets overseas is another important IHT planning consideration for high net worth people.
Cross-border inheritance tax laws can complicate estate planning for wealthy individuals with international holdings.
For example, owning property in a country without a double taxation treaty with the UK could expose your heirs to taxes in both jurisdictions.
Summary – inheritance tax planning for high net worth individuals
So, as they say, that’s a wrap!
As you now know, there are many IHT planning considerations for people with a high net worth. Inheritance tax planning for high net worth individuals is a complex topic, however, if you want to reduce or avoid tax, an essential process.
There are many ways and methods to mitigate IHT. However, all situations are unique.
Therefore, although this article covers many points, the devil is in the details.
Professional advice ensures your plan remains effective and compliant, adapting to changes in tax laws and personal circumstances.
Related reading: The different tax planning options for high net worth individuals
Factors to consider
- Have you calculated your estate’s potential IHT liability?
- Are you using all available exemptions and reliefs?
- Do you have a lifetime gifting strategy in place?
- Are your investments tax-efficient?
- Have you addressed tax implications for global assets?
Need advice?
Call us now to request a callback with an experienced inheritance tax adviser.
Inheritance tax planning FAQs
Keen to learn more about this topic? Browse through our selection of related questions and answers.
What is inheritance tax planning for high net worth individuals?
Inheritance tax planning for high net worth individuals is the process of strategically managing wealth to reduce the 40% inheritance tax burden on estates.
By leveraging trusts, gifts, tax reliefs, and tailored investment strategies, it ensures that more of your hard-earned wealth is passed on to your loved ones.
What is the most tax efficient way to pass on my wealth to my family?
You’ve worked hard to build your wealth, so let’s make sure it stays in the family. Using tools like trusts, lifetime gifts, and reliefs such as the residence nil-rate band can minimise or eliminate inheritance tax, entirely.
With thoughtful planning, you’ll protect your legacy and provide for the people you care about most. Don’t let that generational wealth your creating, get eaten away by taxes.
Why is inheritance tax planning essential for high net worth families?
Without a plan, your estate could face a 40% tax. Therefore, significantly reducing your control over your financial legacy.
Inheritance tax planning ensures your wealth is preserved, your wishes are honoured, and your family’s wealth and security is protected. Don’t let tax be a bigger issue than it needs to be.
What is the true cost of not planning for inheritance tax?
Failing to plan could cost your family 40% of your estate above the inheritance tax threshold. This can force loved ones to sell assets like property to pay the bill.
Planning now ensures more of your wealth stays with your family, safeguarding their future and preserving your legacy. The earlier you start planning, the better.
How can setting up trusts help reduce the tax owed on my estate?
Trusts are a game-changer for estate planning. They shield assets from inheritance tax while letting you control how they’re distributed.
Whether it’s protecting wealth for future generations or supporting a loved one, there are many different types of trusts.
Selecting the right one, should be tailored to your goals, ensuring your estate is managed and distributed your way, and tax-efficiently.
What does a high net worth inheritance tax planning specialist do?
An inheritance tax specialist helps you work through the various options to protect your estate. They create tailored plan using methods such as, setting up trusts, gifts, and tax reliefs to minimise tax.
With their expertise, you’ll protect your family’s wealth, secure their future. And, most importantly, they’ll ensure your wishes are fulfilled exactly how you envision.
What are the different ways to mitigate inheritance tax?
Mitigating inheritance tax involves tools like trusts, lifetime gifting, and tax-efficient investments like AIM shares or EIS.
Although, changes in the UK Budget 2024 regarding AIM shares requires a careful review. Other inheritance tax mitigation strategies include using the residence nil-rate band or placing life insurance in trust also help reduce the taxed owed on your estate m.
With expert guidance, you can minimise tax and increase what you pass on to your beneficiaries.
Is life insurance a good strategy for covering my bill?
Yes, life insurance can be a smart solution. By placing a policy in trust, the payout bypasses inheritance tax and can cover the liability.
This gives your beneficiaries immediate funds to settle taxes, so they’re not forced to sell assets like property to meet the bill.
Is inheritance tax planning for high net worth individuals worth it?
Absolutely. The cost of working with a specialist is far outweighed by the potential tax savings. With strategic planning, high-net-worth individuals can save millions in inheritance tax.
For you, this means your wealth is preserved and efficiently distributed as per your wishes. For your beneficiaries, this avoids any need for assets to be sold unnecessarily.
Are there investments that can reduce my bill?
Absolutely. Investments in Enterprise Investment Schemes (EIS) or certain AIM-listed shares qualify for inheritance tax relief after a designated period.
These options don’t just reduce your tax liability, they give your wealth the chance to grow, creating opportunities to protect your family’s future.
What is the inheritance tax planning process for affluent individuals?
The process begins with valuing your estate and understanding your goals. Next, a specialist uses strategies like trusts, gifts, and reliefs to reduce tax liabilities.
Regular reviews ensure your plan adapts to tax law changes, protecting your wealth and preserving your financial legacy as per your wishes.
How do wealthy people and the super rich avoid inheritance tax?
The wealthy use strategic planning to reduce inheritance tax. This includes placing assets in trusts, making tax-efficient gifts, leveraging business property or agricultural reliefs, and investing in tax-exempt vehicles.
With expert advice, you can legally reduce or avoid inheritance tax and protect your estate and the generational wealth you’re creating.
What is the £60k inheritance tax loophole in the UK?
The £60k inheritance tax loophole applies to non-domiciled individuals holding UK assets through an offshore company. This structure shields assets from UK inheritance tax.
However, rules have tightened, and will likely continue to change over time, so it’s essential to seek professional advice to ensure compliance with evolving tax regulations and to protect your wealth effectively.
What is the threshold for wealthy individuals?
Inheritance tax applies to estates exceeding £325,000 (the nil-rate band). For high-net-worth individuals, this threshold is often surpassed. Additional allowances, like the residence nil-rate band, may increase the threshold slightly.
But, specialist inheritance tax planning for high net worth families is essential to reduce the 40% tax on the value above what’s available via the standard reliefs and exemptions.
Can I put my house in my children’s name to avoid inheritance tax?
You can, but it’s not always straightforward. If you still live in the house without paying market rent, it’s considered a “gift with reservation” and remains part of your estate for tax purposes.
A better option may be placing it in trust or using other tax-efficient strategies to mitigate this problem.
What are the benefits of getting estate planning advice?
Estate planning advice ensures your wealth is preserved and distributed according to your wishes. Experts help you reduce inheritance tax, protect assets, and avoid unnecessary legal complications.
With the right advice, you’ll gain peace of mind knowing your family’s financial future is secure and your legacy is honored.