By Barnes Gladman, Financial Designer with Anstee & Co.
Inheritance tax (IHT) is paid on the value of a person’s estate when they die. However, after a lifetime of paying taxes and making provisions for the future, a 40% charge on assets upon death can be difficult to accept. With years of house price rises, this is a challenge many people now face.
Every individual is currently entitled to a £325,000 Nil Rate Band, before paying any IHT. This is extended by a £175,000 Residential Nil Rate Band if a property is owned and passed on to direct descendants, provided that the total estate does not exceed £2million. This means a married couple can have an estate worth up to £1million, before paying any Inheritance Tax.
Whilst tax planning has long been a core component of financial planning, the term “ESG” has rapidly become more prominent in the investment world. It is defined as the consideration of Environmental, Social and Governance factors alongside the traditional financial elements of investment decision-making.
For people whose estates exceed the IHT allowances, planning is not solely around passing on assets to the next generation, but also ensuring they can enjoy the now.
When it comes to passing on assets or protecting them from IHT, there are a few options. However, can they be achieved in a sustainable, socially responsible manner… Can Inheritance Tax planning really be “green”?
Aside from spending, the simplest way to reduce the value of an estate is through gifting. A gift can be money, property or possessions, and every individual has an annual tax-free gift allowance of £3,000. Larger sums become Potentially Exempt Transfers, which enable individuals to make gifts of unlimited value that become exempt from IHT should the donor survive seven years. Taper relief, also known as the seven-year rule, gradually reduces the amount of IHT chargeable over the seven years from the date of the gift.
Pensions can be a very effective tool for mitigating IHT, as they are not considered part of an estate upon death. They can be passed on to nominated beneficiaries completely tax-free if the owner dies before age 75. If the owner lives beyond age 75, the nominated beneficiary will inherit the pension and only pay tax at their own marginal rate of income tax.
Pensions can facilitate socially responsible investments screened for environmental, social and governance factors. This means they can be hugely successful in mitigating possible IHT bills, whilst also investing in companies and projects having a positive impact on the world and society.
A trust allows people to remove assets from their estate, whilst maintaining an element of control over them. Trusts are a very useful way of mitigating IHT without having to make outright gifts. Assets placed into a trust from which the settlor cannot benefit will fall outside of their estate after seven years, whilst any growth on the assets will be outside immediately. There are many types of trust that serve different purposes and can be used in differing circumstances.
Within the trust itself, investments can be made into socially responsible investments screened for environmental, social and governance factors. Like pensions, trusts can be hugely effective with regards to Inheritance Tax, whilst also investing sustainably.
Business Property Relief
BPR is a valuable form of tax relief, allowing individuals to claim IHT relief on business assets they own, including shares in qualifying businesses. Once a Business Property Relief qualifying share is held for two years, it is no longer considered part of the estate for IHT purposes. Examples of BPR qualifying investments:
AIM Shares are stocks in companies listed on the Alternative Investment Market, the London Stock Exchange’s market for small and medium-sized growth companies. These AIM shares can be held within ISAs for added Income and Capital Gains Tax benefits, on top of their IHT relief.
Enterprise Investment Schemes
Enterprise Investment Schemes are tax relief initiatives created by the UK government to encourage investment into a start-up, early-stage businesses. Investors can invest a maximum of £1million per annum (or £2million if at least £1million is in knowledge extensive companies).
As the aforementioned investments are slightly more niche, there are fewer opportunities for true ESG offerings in this area, however, providers are striving to increase them. One leading investment manager in this field is quoted:
“We only invest in companies that meet our quality benchmark and strict due diligence requirements. This includes alignment with our ESG policies… We work to ensure that they continue to run in line with our business plan, investment strategies, and ESG factors”.
People who know their estate will be liable to IHT upon their death can take out a Whole of Life insurance policy to cover all or some of the IHT bill. To avoid the proceeds of the policy incurring IHT, it must be written in trust. The premiums paid on the policy will also reduce the size of the estate, and in turn the IHT charge.
With regards to social responsibility, some insurers are now offering policies with fitness trackers. The life insured can earn points, and in turn reduce their premiums, by committing to exercise and regular health checks. Large insurance companies lower premiums, whilst promoting healthier living and having a positive impact on society.
So, can Inheritance Tax Planning be green?
In summary, yes… Inheritance Tax Planning can be “green”. It is possible to ensure future generations are looked after financially, whilst also contributing to a more sustainable, prosperous environment and society for them to live in.
Do you need some Estate Planning? Is ESG investing right for you? If you want to reach your financial goals, whilst also considering the environment and sustainability, then socially responsible investments may be the perfect fit for achieving your objectives.
How Anstee & Co can help you with Inheritance Tax Planning.
We are a firm of Independent Financial Advisers (IFA’s). This means that the financial advice we provide is unbiased. We look at all the financial options open to you from “the whole of the market”. Our expertise covers all aspects of financial planning including pensions, investments and estate planning.
To find out more and to see how we can help you, why not arrange a meeting today. The initial meeting is at our expense and is without obligation.
- Kettering, Northamptonshire
- Market Harborough, Leicestershire
- London, Greater London
- Stamford, Lincolnshire
Additionally, we have financial planners who live and make use of meeting rooms in-
- Bedford, Bedfordshire
- Northampton, Towcester, and Wellingborough in Northamptonshire.
We make full use of video conferencing facilities such as-
- Microsoft Teams
We can also arrange a conference telephone call. So, there is no need to visit an office as all work can be handled remotely. The choice is yours. Our expertise covers all aspects of financial planning including pensions, investments and mortgages.
So, to find out more and to see how we can help you why not arrange a meeting today. The initial meeting is at our expense and is without obligation.
If you have any thoughts on this article, “Inheritance Tax Planning – Can it be “green”?”, then we would love to hear from you.
Finally, the information contained in this article is for information purposes only and does not constitute financial advice. Anstee & Co. is authorised and regulated by the Financial Conduct Authority (FCA).