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When you have worked hard to build your wealth, it is understandable to not want to see it eroded heavily by inheritance tax (IHT). Fortunately, there are many tax-planning tools available to investors in 2022-23 that can help you to keep this wealth within the family. Below, our team at Bure Valley Group shares some IHt planning ideas for high earners. We hope this is useful to you. To find out more about our EIS and other investment opportunities in our exclusive investor network, visit our portfolio page here. To enquire regarding our latest projects and funding (for investors and founders, respectively), you can reach us via:
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How inheritance tax (IHT) can erode wealth
When a UK national dies and was considered UK-domiciled, then his/her estate may be subject to inheritance (IHT) at 40% if this is valued over £325,000. For instance, suppose an individual owned £500,000 in cash and investments in a general investment account when he died. If we assume no special tax-saving caveats (e.g. no gifts were made under the annual exemption), then the estate could face a £70,000 IHT bill; i.e. 40% of £175,000.
For high net worth individuals (HNIs), therefore, IHT can be a potential threat to passing down wealth to your loved ones. Special tax planning may be needed with a financial planner to make sure you have an optimal estate plan. Here are some ideas for potential discussion with them:
ISAs and estate planning
Cash and investments held in an ISA are typically included in the value of an estate for IHT purposes. However, moving these into AIM (alternative investment market) investments can help to shield your ISA assets from IHT. This is because many AIM shares qualify for Business Relief which can provide 100% on “unlisted” companies. Bear in mind that AIM shares can be higher in risk level compared to listed shares.
Tax-efficient investment vehicles
There is only so much wealth you can realistically store inside an ISA, however. This is because you are limited to putting £20,000 into your ISA(s) each tax year. Another option is to consider investment “vehicles” such as the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS). IHT relief is offered on shares which qualify for either scheme provided they have been held for at least two years. Venture capital trusts (VCTs) do not have this benefit, but your beneficiaries can receive tax-free dividends if they choose to keep the VCT shares when they inherit them.
Pensions & IHT
In 2022-23 you can pass down wealth held in pension “pots” (defined contribution schemes) to beneficiaries without IHT. For higher earners, therefore, a pension can be a powerful tool both for retirement planning and estate planning. The two main limiting factors to navigate are the annual allowance (yearly limit on pension contributions) and the lifetime allowance (placing a total “cap” on how much you can save into your pensions without tax). The annual allowance stands at £40,000 per year or up to 100% of your earnings – whichever is lower. The lifetime allowance is £1,073,100; anything withdrawn as a lump sum over this threshold will be taxed at 55% (or 25% if taken as an income).
Pension planning is quite complex, however, and it is usually worth seeking financial advice if you are an HNI seeking to use them for your goals. In particular, care will be needed to make sure you do not inadvertently go over the lifetime allowance (e.g. due to excessive investment growth). Also, bear in mind that if you die after age 75 and your beneficiaries inherit funds from your pension, then this may impact their income tax bill (potentially pushing them into a higher bracket). Intergenerational planning can help to address this possibility.
Handing down business assets
Many HNIs own successful businesses which they hope to hand down to family members or trusted colleagues one day. Fortunately, the UK’s tax regime allows for 50% or 100% IHT relief on some of an estate’s business assets (whilst the owner is still alive and as part of the will). A business or interest in a business can be eligible for 100% relief whilst assets such as land, buildings or machinery owned by the deceased (and used in a business they controlled or were partnered in) might receive 50% relief.
Regardless of the relief, however, the deceased must own the asset(s) or business for at least 2 years before death to qualify. Also, be careful not to assume that all company assets will be eligible for IHT relief. Non-profit organisations do not qualify and neither do companies dealing primarily with securities, stocks or shares (e.g. those making/holding investments). A business cannot usually be inherited IHT-free if it is being wound up or sold.
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