As a high-net-worth individual, accumulating wealth and managing taxes are two of your main objectives. And, as we know, inheritance tax is potentially one of the biggest tax burdens. As a result, there are many inheritance tax planning considerations for high net worth individuals.
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?
This article explores the importance of inheritance tax (IHT) planning high net worth individuals, from using exemptions to using trusts and lifetime gifting.
Keen to understand the main inheritance tax planning considerations for high net worth individuals?
Let’s get started.
What you will learn?
- The main IHT planning considerations for high net worth individuals
- Key strategies to reduce inheritance tax liabilities
- How trusts and lifetime gifts can protect your wealth
- The role of Business Property Relief (BPR) and tax-efficient investments
Related reading: Investments for high net worth individuals.
Understanding your estate’s taxable value
When it comes to inheritance tax planning considerations for high net worth individuals, understanding the current and potential future value of your estate is vital.
For high net worth individuals, understanding the taxable value of your assets is one of the first steps in the inheritance tax 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 considerations for high net worth individuals 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 individuals.
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 IHT
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: 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 considerations 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.
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.