Former Labour Chancellor Roy Jenkins famously described Inheritance Tax as ‘a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue.’ In this article we explain why this quote is often oversimplified and what it actually means. We’ll also explain why it’s important to be flexible in your estate planning to make sure you aren’t caught short in the future.
A great soundbite
It’s a great soundbite, but like so many soundbites it is over simplified and often taken out of context. Jenkins made the statement in 1986 when Capital Transfer Tax, which was the predecessor to Inheritance Tax, was repealed. Inheritance Tax brought in legislation around ‘potentially exempt transfers’ which, in a nutshell, means that I can make a gift of any size now provided that:
- The gift is outright and there are no strings attached
- I survive for seven years after making the gift, to prevent me from avoiding tax by making deathbed gifts
This means that theoretically, I could give away everything I own today to my beneficiaries and as long as I live for another seven years, I’ve got rid of my Inheritance Tax liability. The problem, however, comes in when I need some money to live on. Then I have to go, cap in hand, to the people I gave it to and hope that out of the goodness of their heart, they will give me some money back.
What did Jenkins mean?
Essentially, the point he was trying to make is how much would you trust these people to give that money back versus how much you dislike paying tax in the first place.
That being said, it’s not a case of whether the beneficiaries would give you the money back, because many people would trust their loved ones to do this, it’s more about whether they could. What happens if you give your money to your children and they get divorced? That money might not be there. What happens if you give your money to your children and they put it into their business and the business folds? Again, that money might not be there.
To me, this is what estate planning is all about. It’s not just about planning for what you think is going to happen, it’s about leaving flexibility in that planning so that whatever happens you don’t leave yourself financially vulnerable should unexpected situations arise.
How can we help?
There’s a huge array of estate planning solutions available, but it’s a challenge for those who aren’t immersed in it daily to understand what solutions are the most appropriate to use and when. These solutions can include:
- Leaving an inheritance in a trust, some of which allow you to retain some access to the money you’ve given away
- Preserving your pension fund and living off other assets so you can pass your pension to your beneficiaries inheritance tax free
- Making simple changes to your Will to make best use of any available nil rate bands and residence nil rate bands
To find out how our financial planners could help you, please book a no-obligation consultation.
This article was previously published on Tilney prior to the launch of Evelyn Partners.