How much does Inheritance Tax Planning cost?
Please be advised that the information in this article regarding QNUPS and IHT is no longer accurate due to the recent changes announced in the UK Budget. Starting in April 2025, the regulations will have significant implications that may affect your understanding of these topics. We encourage you to stay informed and consult with a Soteria Trusts expert to navigate these changes effectively.
Inheritance tax (IHT) planning is essential for anyone with assets in the UK, especially if you’re a property investor or an expat with UK ties. Preparing for IHT can help you manage your financial legacy and ensure your beneficiaries receive their due without an excessively taxing bill from HMRC.
Inheritance Tax Basics
Understanding inheritance tax planning is crucial, as it can be the difference between a secure financial future for your loved ones and a stressful situation encumbered by tax woes. Grasping the cost of IHT planning is as essential as the planning itself – it helps set aside an adequate budget to achieve the desired tax efficiencies.
UK Inheritance Tax is charged at 40% on the total net value of assets over £325,000, or £650,000, depending on your marital status. Assets subject to IHT include property, businesses, investments, life insurance policies and cash.
Factors Influencing the Cost of IHT Planning
Several factors contribute to the overall cost of IHT planning in the UK:
Complexity of the Estate
An estate encompassing multiple types of assets, international elements, or business ownership typically requires more nuanced planning versus a relatively straightforward estate.
Your Domicile
Whether or not your estate is complex or simple, your domicile and your current residence add a new dimension and can have an influence on your IHT liability – so can the advice given and the solution proposed. A UK National living in the UK with only UK assets will have a different IHT planning journey than his friend, who is also a UK National but has been living overseas for the last 10 years and now owns assets in Bali and Australia and the UK.
Learn more about the importance of domicile for IHT purposes here:
DOMICILE AND IHT PLANNING
Value of the Estate
Generally, the higher the estate’s value, the more you can expect to pay for the advice received and the implementation of an effective tax planning strategy due to increased complexities and greater opportunities for tax savings.
Type of Assets
Different asset classes come with their own tax considerations, making some more challenging to plan for than others when contemplating inheritance tax. For example, shares V’s investment property V’s art, all have different rules attached to them and outside of IHT planning, they are also taxed at different rates.
Type of Solution
When it comes to reducing your IHT liability, there is no one-size-fits-all solution. That is not just because everybody’s circumstances and objectives are different but also because there are so many factors that influence the allowances and reliefs they are granted by HMRC. From having a basic Will to the strategic gifting and selling of assets, trust creation and tax-efficient investment structures, each solution has different levels of benefits and different running costs attached.
Engagement with Professional Advisors
Selecting reliable, professional advisors who have a focus on tax and, in particular, IHT planning can bring about more significant tax savings in the long run.
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Cost of Professional Services
Expert advice doesn’t come free, yet it’s often essential in navigating the murky waters of the UK’s tax system.
Solicitor Fees
A solicitor will typically charge either a flat fee or a percentage of the estate’s value, ranging from a few hundred to many thousands of Pounds.
Trustee Fees
If setting up a trust, trustee fees must also be factored in, these vary based on the trust’s complexity and value of assets held.
Financial Planner Fees
A financial planner might charge a one off upfront fee or an ongoing annual fee, it the better offer a combination of both when advising on your IHT position and any new or existing investments you have.
DIY Options and Costs
There are things you can do yourself to minimize IHT, whilst these are useful steps to take, they are far from exhaustive as a full IHT mitigating strategy. These are:
- Make gifts to family members during your lifetime that are within the annual £3,000 exemption or as part of regular expenditure out of income.
- Draft your own Will; although there is no upfront cost, professional advice can ensure more complex demands are accurately addressed.
- The risks of the DIY approach include overlooking potential tax reliefs and exemptions or creating a Will that doesn’t stand up legally.
Case Study
Mr Eric provides us with a perfect illustration:
At 50, with a UK spouse and two children, Mr Eric is a resident of Hong Kong. With all debt and allowances factored in, he has a net estate of £2,020,000 comprising of investments and UK properties. With IHT levied at 40% on his net estate, his children would face an IHT bill of £808,000 if both parents were to die today.
Assuming that Eric and his wife go on to live for another 30 years, and factoring inflation of 3% per annum, the £2,020,000 of their estate in 30 years will grow to be £4,962,000 – 650,000 (Nil Rate Band), leaving an IHT liability of £1,724,000 for the children to pay within 6 months of the death of the last surviving parent.
The IHT exposure could be significantly reduced with proper planning and utilising all available reliefs, including advice on domicile status, gifting, trusts, and investments. A professional advisor might charge between 0.5% to 2% of the net estate value for a comprehensive plan.
Assuming Mr. Eric would want to protect his estate and children from IHT the best way possible, he would choose a comprehensive, bullet-proof IHT plan. In such case, year one set-up costs based on £2,020,000 of assets being transferred into an IHT-eliminating structure could look like:
£2,020,000 x 2% = £40,400 paid in 2 x 50% tranches (application & transfer)
Subsequent years running costs:
Year 2 – 11 = £49,572
Year 11 – 20 = £73,275
Year 21 – 30 = £92,870
The total costs over 30 years would be £40,400 + £215,717 = £256,117.
The total IHT savings would be £1,701,228.
Eric’s structure also positively affected the tax he would pay on his property portfolio and other investments whilst alive. These additional savings were £806,420 in Capital Gains Tax and £1,666,365 in tax paid on rental income. Therefore, the total tax savings were a whopping £4,174,013, which meant the fees, when expressed as a percentage of the overall tax saved, was 6.1%.
Considerations for UK Property Investors
Property investors should consider using a structure that deals with multiple taxes at once, just as Eric did. Being able to legitimately head off taxes paid on rental income tax, capital gains tax on the disposal of any assets during their lifetime, and inheritance tax upon death provides both cost and tax efficiencies.
Other available reliefs such as Business Property Relief (BPR) and Enterprise Investment Scheme (EIS) can also be considered for those who own furnished holiday lets and other quirky asset classes. Soteria Trusts also offers a UK Stamp Duty Land Tax Reclaim Service – as often buyers overpay this UK property tax at acquisition.
Conclusion: How much can an IHT plan cost?
Inheritance tax planning can seem arduous and costly, but it’s an investment into your family’s financial stability and future. Weighing the costs against potential tax savings is crucial, and professional advice is invaluable.
Planning before it’s too late can save your estate and beneficiaries substantial amounts. Find out how to turn a possible tax burden into a manageable and well-prepared part of your financial strategy. Don’t let the tax man be the biggest beneficiary of your life’s work!
