Inheritance Tax - How to Plan With What You've Got

Doctors with an Inheritance Tax (IHT) liability have several options for minimising the tax bill their beneficiaries will face on receipt of their inheritance.  In practice, what can be done depends on the type of assets held. 

The main residence 

Where the main residence is the main asset, the value is tied up in the property so isn’t available for IHT planning that involves making gifts.  The only circumstance in which the main residence can be gifted while the occupant continues to live there is if rent is paid to the new owners at the full market rate. 

Pensions 

The NHS Pension may be valuable but it is effectively IHT-free as the unpaid pension doesn’t form part of your estate on death.  Your spouse or partner will in most cases receive an ongoing income after your death; however, there is no flexibility to pay the income to anyone else or take lump sum death benefits instead, so the IHT planning potential is limited.  This isn’t the case for any money you may have in a personal pension, where you can nominate beneficiaries of your choice who can take lump sum withdrawals and/or income or just leave the funds invested depending on their needs, all typically IHT-free.  

Business assets 

For doctors who have their own business, this can often be passed on IHT-free using Business Property Relief.  The main exceptions are businesses that deal mainly with securities, stocks or shares, land or buildings, or in making or holding investments, and not-for-profit organisations.  

Cash and investments 

Liquid cash and investments offer the most potential for IHT planning.  Options include outright gifts, gifts into trusts, or to other plans such as loan plans that allow you to retain access to the capital if your circumstances change or discounted gift plans that pay you an ongoing ‘income’ from the capital.  A further option is investing in businesses that qualify for Business Property Relief; typically small companies that are unlisted or listed on the Alternative Investment Market (AIM) and not the main stock exchange. 

Surplus income 

A simple IHT planning option is to use surplus income to take out an insurance plan that will pay off the tax liability on death.  A whole of life insurance plan is typically used for this purpose and it needs to be written in trust so the payout goes to the beneficiaries, who can use it to pay the tax.  When the insurance premiums are paid out of surplus income they are IHT-free under the ‘gifts from excess income’ exemption.  The payout is also IHT-free as long as it is made to trust.  

To discuss your circumstances and the most suitable solutions for you, please contact Richard Higgs CFP FPFS on 0117 966 5699 or richard.higgs@wealthwestmedical.co.uk.

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