Family IHT planning: the risks to navigate

The previous article in this series set out the tools available for managing inheritance tax within a family, from gifting and trusts to family investment companies and life insurance. 

This article moves on to the risks that can arise once those tools are put into practice, many of which come down to family dynamics, timing and communication. In this piece, we look at where these risks tend to show up, and what can be done to mitigate them.

Your own financial security

Good IHT planning is always a balance between reducing what your estate will eventually pay and making sure you have enough left for yourself. People often gift away assets such as company shares as part of a wider strategy, without first working out whether their remaining income, after tax, will be enough to live on.

Before any gifting takes place, it is worth quantifying what you need, both now and later in life, and building that into the plan from the outset. Reducing your IHT liability should never come at the cost of your own financial security.

Protecting assets against a future divorce

Once assets have been gifted, protecting them from a future divorce becomes far more difficult. This is why it is worth thinking about protection before any gifting takes place, rather than after.

For those who are not yet married, a prenuptial agreement adds a layer of protection. To carry weight, it needs to be entered into well in advance of the wedding, with both parties’ taking independent legal advice, full financial disclosure, and no suggestion that either side felt under pressure to sign.

For those who are already married, a postnuptial agreement can achieve a similar outcome. These are becoming more common and can be easier to put in place than a prenup, especially in situations where the postnuptial agreement is linked to a specific gift, since this gives the conversation a clear focus rather than feeling like a general discussion about the marriage.

Having an advisor raise this suggestion directly, rather than it coming from within the family, often makes it easier for all parties to understand and accept.

As well as the tax benefits covered in the previous article, trusts can also offer real protection here. Since trustees retain control of the assets rather than the recipient owning them outright, using a trust can help shield the gift from a claim in the event of divorce, and can offer similar protection if the recipient were to face bankruptcy.

Getting the timing of family gifting right

Often the timing of a gift to your family matters just as much as the value of the gift. Parents often worry that a large amount of wealth landing all at once, particularly with a younger recipient, can leave them unprepared to manage it responsibly. Introducing wealth gradually, whether through a family investment company, a partnership, or staged gifting over time, allows a recipient to grow into that responsibility, while giving parents the chance to see how it is handled before committing to the next stage.

Many parents are ready to pass on wealth but are not ready to give up their own right to the income or capital it provides entirely. The right structure can separate these elements, allowing a parent to retain an income interest without triggering a gift with reservation of benefit, so it is worth taking advice before deciding what to give away, and when.

Fairness between family members

Fairness does not always mean giving everyone an equal share. Where one child has already received significant help, towards a house deposit or a wedding for example, treating the rest of the estate as a blank slate can leave the other feeling that history has been ignored. Where a business is involved, giving every child an identical stake can also create problems, especially if only one family member is involved in running it.

Take for example a mother who owns a business worth £4m and other assets worth £3m where one son works in the business, one does not. Even with these figures in hand, there is no clean answer to what is fair. Leaving the business to the son who runs it may mean he spends years building value that ultimately benefits a brother who has no part in creating it. Splitting the assets to bring the two sons closer to parity is rarely straightforward either, since a business valuation is rarely fixed and will likely change significantly from the time of planning. Whatever is decided, the son who ends up with less today may still feel hard done by, regardless of the reasoning behind it.

There is no one size fits all solution to fairness between siblings in this situation. What helps is talking to children openly about the reasoning behind a decision, rather than leaving them to discover it after the event and considering lifetime planning or tools such as insurance that can help to close the gap.

Treating your IHT plan as a one-off decision

A plan that worked well when it was put in place will not necessarily still work years later. Wills that have not been looked at in twenty years, valuations based on figures that are long out of date, and tax rules that have since changed can all leave a family relying on a plan that no longer reflects their situation.

We recommend reviewing your plan every year, since catching a problem early is far easier to fix than untangling a problem which has been left for a decade or more.