Inheritance tax planning is often framed around the size of a potential liability.
What is the value of the estate? Which allowances may apply? What could ultimately become payable?
Those are important questions and should be addressed with appropriately qualified tax and legal advisers. But identifying a future liability is only part of the planning.
There is another question that can be just as important:
Where will the liquidity come from when it is needed?
Wealth Does Not Always Mean Liquidity
Many families hold substantial wealth without holding an equivalent amount of readily available cash.
An estate may be concentrated in a family home, investment property, business interests or long-term investment assets. These may have considerable value, but they are not always assets a family would want, or be able, to realise quickly.
That distinction matters.
An estate can be sufficiently valuable to create an inheritance tax liability while still leaving beneficiaries with a practical funding challenge.
Without planning for that liquidity in advance, families may be left needing to sell assets, restructure investments or raise borrowing at a point when their options are more limited.
Inheritance tax planning should therefore consider not only the potential liability, but how that liability could actually be funded.
Protection Can Help Create Liquidity
For some clients, life insurance can form part of the solution.
Where appropriate, protection can provide a defined source of capital following death, helping beneficiaries meet financial obligations without immediately relying on the sale of estate assets.
A policy may also be written in trust where suitable. Depending on the structure and individual circumstances, this can help ensure proceeds are directed to the intended beneficiaries and may allow funds to become available outside the wider estate administration process.
The purpose is not simply to insure against an estimated tax bill.
It is to create greater flexibility around how the family manages the estate when liquidity is required.
The suitability of any protection arrangement, including policy ownership and trust structure, requires appropriate advice.
Borrowing May Form Part Of The Wider Picture
Protection will not be suitable or sufficient in every case.
Families may also need to consider cash reserves, investments, existing facilities or property-backed borrowing as part of the wider liquidity strategy.
For older clients, this is particularly important because borrowing should not begin with the assumption that one product is the answer.
Depending on the circumstances, a mainstream mortgage, specialist term facility, Retirement Interest Only mortgage or lifetime mortgage may warrant consideration.
The appropriate route will depend on factors including affordability, assets, repayment strategy, long-term cost and the potential impact on the estate.
Where borrowing forms part of wider inheritance tax or estate planning, our role is to advise on the lending. The underlying tax and legal strategy should remain with the client’s appropriately qualified advisers.
The Practical Position Of The Next Generation Matters
Estate planning is ultimately about more than the value transferred from one generation to another.
It is also about the position beneficiaries may find themselves in when that transfer takes place.
Will sufficient liquidity be available?
Could important assets need to be sold to meet liabilities?
Is suitable protection already in place?
If borrowing may be required, has that been considered while there is still time to plan rather than react?
These are practical questions, but they can have a significant influence on how effectively an estate strategy works in practice.
A Joined-Up Approach
Inheritance tax planning can bring together several disciplines: tax, legal, investment, protection and lending.
Each has a distinct role.
At Henry Dannell, we do not determine a client’s tax or legal strategy. Our role is to work alongside the client’s existing advisers and consider how protection and borrowing may support the liquidity requirements created by that strategy.
The objective is to bring coherence to the wider position, so that the planning considers not only what may become payable in the future, but how the family could meet that obligation when the time comes.
Calculating a future liability is one part of the process. Planning for the liquidity to meet it is another.
Henry Dannell does not provide tax or legal advice. Clients should seek advice from appropriately qualified tax and legal professionals in relation to inheritance tax and estate planning.
Protection policies are subject to eligibility, underwriting, terms and conditions. A mortgage or other property-backed borrowing is secured against property, which may be repossessed if repayments are not maintained. Later life borrowing can affect the value of an estate and entitlement to means-tested benefits.
