For many property owners and business families, inheritance tax (IHT) planning sits on the “we’ll deal with it later” list. But what happens to the family wealth when you’re no longer here?
When estates start growing beyond a few million pounds, leaving planning too late can result in a significant proportion of family wealth being lost to inheritance tax rather than benefiting the next generation.
Recently, we worked with a family whose circumstances will sound familiar to many successful landlords and business owners. Over many years, they had built a substantial property portfolio, generating healthy rental income and providing financial security. The challenge wasn’t creating wealth; it was working out how to preserve it.
Their situation highlights several important lessons for anyone with a valuable estate.
The Challenge Facing Many Wealthy Families
The family had accumulated assets worth over £6 million, largely made up of investment properties and their family home.
Like many people in a similar position, they had three key objectives:
- Maintain their current lifestyle and income.
- Keep control over decisions surrounding their assets.
- Reduce inheritance tax wherever possible.
Those goals sound simple enough. However, they often pull in different directions.
Many inheritance tax planning strategies involve giving assets away. But what happens if those assets are producing the income that supports your lifestyle?
That is where careful planning becomes essential.
One of the first exercises we always undertake is establishing the potential inheritance tax exposure.
Many people are surprised when they see the numbers. As you may be aware, inheritance tax is currently charged at 40% on assets that exceed available reliefs and allowances. For larger estates, the tax bill can quickly run into hundreds of thousands or even millions of pounds.
The challenge is often compounded by timing. Inheritance tax generally needs to be settled within six months of death. This creates a practical problem.
If most of the wealth is tied up in property, where will the cash come from to pay the bill?
Without proper planning, beneficiaries can find themselves forced into selling valuable family assets simply to meet the tax liability.
And usually, those sales need to happen quickly, which rarely achieves the best financial outcome.
Could Trusts Form Part of the Answer?
A large part of our discussion focused on trusts.
Many people assume trusts are only for the ultra-wealthy or that they’re designed to hide assets. Trusts can be useful tools for families who want to balance three competing needs:
- keeping control without giving away the assets outright
- protecting assets in case of divorce settlements or potential bankruptcy
- passing wealth down to the next generations in a structured way.
For example, many grandparents are comfortable leaving assets to grandchildren but want some control over when those assets are received. However, there is a catch. Trust planning is not a magic solution.
Whilst assets transferred to a Trust can escape IHT on death, it can sometimes trigger immediate tax charges, including potential inheritance tax and capital gains tax liabilities.
This means trust planning needs to be carefully modelled before any decisions are made.
The right answer is rarely obvious without proper calculations. We do this often for clients because once a number is established, it really brings the focus back to the two main questions:
- how can we reduce the IHT liability
- how will the estate and beneficiaries pay the liability?
If you have not thought about either of these questions, now is a good time to start. We are sure you are aware that there was an IHT overhaul last year, bringing more of your assets, including your pension, into your Estate.
In the next couple of weeks, we will send you a 60-second quiz to measure your exposure to IHT and suggest the next steps for you. If you are not working with us, please find the quiz on our LinkedIn page or you can contact us directly. Have a look at how we can help you with your taxes
The Most Urgent Issue Wasn’t just Tax
Interestingly, when we met the family, the inheritance tax wasn’t the most pressing issue identified during the discussions.
The immediate concern was much simpler.
No wills were in place. This is something we see surprisingly often.
Families spend years building wealth but never get around to documenting how they want it distributed.
Without a valid will:
- intestacy rules determine what happens,
- family members can face delays and additional complexity,
- planned trust arrangements may fail completely,
- inheritance tax planning opportunities can be lost.
If you are not sure how the laws of intestacy work, here’s a good link. We suggest that you at least have a look, so you have some understanding of why making a Will and keeping it up to date is so important.
We understand this can be a difficult topic, but we are here to help. Please speak to your usual manager if you would like to discuss this further, as we can refer you to local lawyers.
Don’t Forget Lasting Powers of Attorney
The other area that is frequently overlooked is Lasting Powers of Attorney (LPAs).
Many people understand the importance of a Will.
Far fewer think about what happens if they are still alive but unable to manage their affairs.
Without appropriate LPAs in place, family members can face significant difficulties managing:
- property,
- investments,
- bank accounts,
- healthcare decisions,
- and day-to-day financial matters.
The consequences can be expensive, stressful, and entirely avoidable.
Final Thoughts
Good estate planning isn’t about avoiding tax at all costs.
It’s about asking bigger questions:
- What do I want my wealth to achieve?
- How do I protect my family’s future?
- How do I maintain my lifestyle while I’m here?
- What legacy do I want to leave behind?
Tax considerations are part of the discussion we would like to have with you, but they shouldn’t dictate every decision. These conversations can be quite personal, and there should always be more to them. It’s important to think about what will happen to your family when you are no longer here.
In a couple of weeks, we will send you a short quiz to complete. It won’t take more than a few minutes, and it will offer you some comfort. If your exposure to IHT is either medium or high, we would like to invite you to an open and frank conversation that may lead to some IHT planning.