What is the most important thing about inheritance tax planning?

This is a question not oft asked, but it really should be considered more often, by advisers as well as their clients.  I am sure most would quickly respond with "paying no more than you owe", "making sure you pay as little as possible" or even "taking advantage of the tax system, without breaking it".  Whilst all of these would have their place (except perhaps the last), they overlook matters such as affordability, desirability and of course the topic of the moment, moral suitability.

In short, inheritance tax planning is becoming, and should always have been a lifestyle choice.  A favourite example of mine when speaking with clients is that I can ensure they pay no more inheritance tax than they want to, however, this may well involve them downsizing their property, driving a smaller car and taking less holidays (if any at all).  This is because in order to do so they would need to reduce their estate down to under £650,000 (for a married couple, or £325,000 for a single person).  Not surprisingly over the years very few have thought this a good idea, and whilst it is never intended as such it illustrates the point well, that the elimination of tax has undesirable side effects and that what we must look to do is rather mitigate it so far as possible without affecting the clients lifestyle.

This means that with my clients I take a very different approach to how we look at this journey, and it often is one, taken over many years if the planning is to be successful.  Inheritance tax planning is not a "band-aid" moment for most, it is the careful structuring of their affairs over a number of years either to protect against inheritance tax, or even other detractions from the estate you intend to pass to your children.  First and foremost in this process is the need to establish a clients goals and objectives, what do they really want out of life.  There is little point in me advising them to give away the family holiday home if they intend to retire to it in their dotage, or to make a gift of the vintage car that they enjoy tinkering with so much.

On top of this one should also look to mitigate the financial pain of such planning, ultimately inheritance tax planning means giving assets away, or altering their structure so that they fall within certain reliefs and exemptions of tax law.  In doing this a proper assessment of a client's income is needed.  If one had to choose between making a gift from two assets, is it not pertinent to give away the one that generates the least income?  Coupled to this of course must be questions about access to the remaining capital, one should not seek to give away access to all of your liquid assets without being able to readily replace them.

When making such gifts you should also consider how they are made, are they simply made outright, or would you prefer to retain a measure of control over the gift?  Indeed, might you want to protect against your intended beneficiaries suffering an unpleasant life event, such as divorce or bankruptcy?  These are questions that raise their head more often than not in the course of such a journey, and the answers are of course relatively straightforward as a clients needs, whatever the answer to these questions, can easily be met with a little forethought as to the structure of their planning.

Funnily enough, the tax actually comes last, but that is not to say it is unimportant.  Countless times I have seen new clients that have made mistakes in their planning by not considering how one tax might affect another.  Capital gains tax for example, just because you are gifting something rather than selling it does not mean that a tax liability will not arise, and I have seen such things result in some unpleasant enquiries by the tax authorities in the past.  I cannot stress enough the importance of getting proper advice from a qualified tax professional, often simply speaking with your accountant will not be enough.

Hopefully I shown you the important things to think about, and I'll end with one last word of advice, if ultimately undertaking a tax planning exercise is to painful in terms of loss of income or enjoyment of assets you can always do nothing.  Yes, paying 40% inheritance tax is a galling prospect, however it won't be you paying it, as you'll no longer be here, it is in effect your children's problem rather than yours.  Therefore, there is always the option to "do nothing", which in my opinion is not considered often enough by advisers.