145- Record Keeping & Inheritance Tax Planning (Don't Make This Same Mistake)

In this episode, Benjamin outlines why record-keeping when it comes to your inheritance tax planning, is as important as the planning itself.

Yet, so few of us are keeping necessary detailed records, accounting for the information that your executors will need on your passing. 

Nailing this stuff down now will give you the peace of mind to know your IHT planning is effective and will provide your loved ones and executors with a huge freebie in the future. 

Join Benjamin Mitchell (themoneyscot), serial hater of financial jargon, as he helps make your finances clearer and ensures you never make another financial mistake.

Getting on top of your personal finances doesn't need to be complicated or scary. Arm yourself with the only knowledge you need to transform yourself from money novice to money nerd! 

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Disclaimer - please note that nothing in this podcast can be relied upon as financial advice and the content is provided purely for information and guidance purposes. Please seek independent, regulated financial advice relevant to your situation.

Transcript

SPEAKER_00 0:09

Hi there, money nerds, and welcome to this another episode of Heads Up on Money, episode 145. In this week's episode, we're talking around the importance of record keeping when it comes to planning for inheritance tax. I do see this a lot, is that individuals are just not keeping these records up to date. So as a result, any strategy that they may be pursuing to avoid inheritance tax can fall short, and the whole planning is futile. And it's something you can nail down fairly easily. So I'm going to go through the risks, what you need to be aware of, and ultimately what you need to do to avoid this in this week's episode. Otherwise, how are you, money nerds? Are we all well? Hope you've had a good week and are looking forward to the weekend if you're listening to this on Personal Finance Friday. In last week's episode, I was absolutely delighted to have a guest on the podcast, Fabrizio Zumbo from Vanguard. Talk to me about behavioral science when it comes to investing and how your behavior is the greater determinant to your long-term investment success journey, rather than the highs and lows of investments and focusing on individual stock returns and all the stuff that we love to distract ourselves with. Ultimately, it is our behavior and what we do or don't do as irrational human beings that will determine how smooth our investment path is when we do invest. So I hope you enjoyed that one, my nerds. If you have not listened to it, I really would encourage you to listen to it. Fabrizio comes at this with a wealth of knowledge in this area. He talked about some of the scientific evidence we have around why we are irrational human beings when it comes to investing. So I would really encourage you to listen back to that one. But in this week's episode, we're getting back to the nitty-gritty, to where tax planning interacts with financial planning, and I'm talking about inheritance tax. So I've done plenty episodes on inheritance tax before. We've talked about how it works in practice and ultimately how you can go about planning for inheritance tax. So there's lots of strands to this. Ultimately, you really have typically four ways in which you can plan for inheritance tax. You can insure your inheritance tax liability so you can take out effectively a life cover plan. Typically, when I run these for clients, you run them on a whole of life basis, obviously, so that regardless of when you die, the cover will pay out. So you can insure the inheritance tax liability that's going to crop up on your death, taking care there that any insurance plan you have is written under a trust vehicle to ensure that the proceeds are paid into a trust rather than the proceeds falling back into the estate, exacerbating the very inheritance tax liability that you've tried to circumvent. So point one, you can insure it. Point two, you can spend your wealth and just enjoy life. That's the best recipe often. Point three is you can invest in such a way that you obtain what's called relief from inheritance tax. So there's various products out there that can allow you to effectively get some relief against your inheritance tax liability. So there's business relief schemes, um, aim shares. A lot of these I typically don't recommend to clients because it's the tax tail wagging the investment dog, and often the investment dog underpinning it is not fit for purpose. So generally, generally steer clear of these is the advice I give to my clients. And the other way, of course, you can reduce your inheritance tax liability, which brings me nicely on to today's episode, is around gifting your estate. So we're talking here the idea of making those gifts in your lifetime rather than on your passing and in your will, but you're making gifts whilst you're still alive, whilst you can see the benefit of those gifts, which is obviously great just for general life planning because it's nice to see your loved ones, future generations, doing things like getting on the property ladder, helping them with paying off student loans, whatever it might be. It's nice to see this stuff in your own lifetime. And of course, this is the beauty with financial planning for individuals who are in the later stages of life, is you can understand how much you may conceivably need for the rest of your life and how much capital or income you have at your disposal and hence could be subject to inheritance tax. You could do something more clever with it by passing it on to your loved ones. Now, if you do go down this gifting route, there's various kind of intricacies and inheritance tax planning nuances that determine whether or not these gifts are what's considered exempt gifts or potentially exempt gifts. I'm not going to get into the weeds too much in this episode because I have covered it in previous episodes, but the general rules are there are effectively a seven-year clock commences once you make a lifetime gift, whereby that gift will gradually start to taper out of your estate. And once you have survived for more than seven years, provided you don't retain any benefit in that gift, and it is a gift and not a gift with what's called a reservation of benefit. So you've tried to make the gift, but you actually are still receiving a benefit from it, that wouldn't work. So you make the gift, you survive seven years, and hey, presto is out of your estate. So when you pass away, your executors will total up how much your estate is and hence how much HMRC are going to get in their tax pocket in the form of inheritance tax. Now, of course, what this means is that if you put bad information in, you'll get bad outcomes out. So when your executors come to administer your estate and notify HMRC of the gifts you have made that you have made with good intentions to be inheritance tax exempt gifts, it's part of an inheritance tax gifting strategy. Obviously, HMRC will only know about that if they are aware of the gifts that you have made. So this comes down to it's very basic, money nerds, but you have to keep the records. If HMRC aren't aware, or by extension your executors aren't aware of the gifts you have made, then it's impossible to determine if they are exempt from inheritance tax. So it's super important. And in the event that HMRC did some auditing and understood that there was a gift made historically, what was this for? Who was this made to, what date was this made, there's no real audit trail there. So keeping these records up to date is absolutely critical. The way I do this with my clients is we have essentially a blueprint document which says what I own and where I keep it. It shows all of your assets, all of your incomings, some of the more kind of mundane stuff as to who your insurance plans are with, the provod providers. It provides a great Bible for your executors to pick up your estate on your passing, but also crucially, in that document, you itemize who you have gifted certain amounts of money to, when, how much they are, and obviously whether they are immediately exempt gifts or if they are being claimed under other inheritance tax planning rules such as gifts out of normal expenditure. Again, not going to get into the weeds in that, but ultimately keeping this up to date as you go along will provide you with peace of mind, but also could be the difference between this tax planning strategy working or not working at all. In advance of doing this episode, I had a look at some of the research around this, and it makes for fairly sobering reading that typically more than half of over 55s who have given a financial gift in the last seven years have not actually kept any record of that. An Insurer Canada Life found. And just over one in ten, 13% specifically, reported keeping a record of their gifts in a secure place, and 15% wrote down how much they had gifted in an informal place. So clearly there's scope to be done here to improve our record keeping. We think that we've made the gift, and therefore that's it. The inheritance tax planning strategy has been ticked. Happy days move on. To an extent, you've almost done it, but you just haven't quite got there. And the last part is really easy, really trivial to do. So, as I said, when HMRC work out how much inheritance tax you're due, they will require your executors to complete forms in order to report the full value of your estate, and there'll be a separate form in which the executors will disclose any lifetime gifts you have made in the seven years before death. And this may include gifts such as cash gifts, property gifts, share gifts, jewellery. A lot of people don't realize that jewellery forms part of this. If you do gift jewellery, that should also be itemized. But as I said, without clear, accurate records of these gifts, how are HMRC to know? How are your executors to know? And this can cause delays in probate being granted, or just tax issues and taxes that need not have arisen in the first place. So, what does this actually look like? What does good record keeping look like? So, as a minimum, I would encourage you for every gift you make, you should specify exactly what was given, who it was given to, the specific date of the gift, the value at the time of the gift, and ideally some supporting evidence attached to that gift. So it could be a simple letter just stating, I Bob Jones am gifting you, my son, Brian Jones,£30,000 at this date. This gift is given as a lifetime gift, and I do not require access to the money back. It is not a loan, it is an irrevocable gift. It doesn't need to be particularly complicated, it just needs to be a clear and accurate audit trail that your executors know where it is stored and can use when they are completing your inheritance tax forms on your passing. For brownie points, you may want to mention if it's a gift in consideration of a marriage, because that brings with it its own inheritance tax exemptions, which again executors should be aware of. Similarly, if it is considered to be a gift out of your normal income, a gift out of regular expenditure, whatever you want to call this, similarly, you should itemize that, saying, for instance, I'm making you my son in this example, I'm making you a monthly gift of£1,000 per month. This is out of my surplus income, it will not affect my standard of living. Again, just having an audit trail in place and a regularity to those payments that can be evidenced in the future will pay dividends. Again, you don't need to worry too much on which of the exemptions you're claiming. For instance, if it's an exam annual exemption, a gift in consideration of marriage, small gift exemptions, gifts out of surplus income. If you've got a financial advisor or a solicitor that's helping you with this, they'll keep you right in that regard. But if you're just doing this alone, and at this stage, you just want to keep a clear audit trail of the gifts you're making to whom and how much they are, it really can be as simple as just itemizing this on an Excel spreadsheet. It really can be. Again, where people are falling short is not the complexity of the information they have, it's just having that information in the first place. And again, just to reiterate, what exactly is going to happen here if you do not keep appropriate gifts? Well, essentially, they may be incorrectly included in the estate. Reliefs and exemptions, as I've talked about, might not be claimed, which means the estate could pay more inheritance tax than necessary. Your loved ones will get less of your wealth than they would have done had you kept good records, and ultimately the probate process may be delayed significantly. So, on the flip side, good record keeping, it's easy to do. Do it at the point you make the gift, keep this up to date every year in conjunction with your wider annual check-in on your financial plan. Your inheritance tax planning should be one facet of your financial plan, and within that, you should make sure your record keeping is accurate and up to date because it will reduce the tax burden, it will speed up the administration of your estate, give you some peace of mind, give your loved ones an easy life in the future, and it'll just give you a lot of clarity and reassurance in the meantime. So again, it's not the most exciting thing to be thinking about. It's clearly, as I talked about, given the research that's been carried out here, is something that we are just not doing enough of. If you've got a professional that's helping you with this, then probably your records will be better documented and refreshed every year. But if you're just planning on your own, you do need to take ownership of this. Otherwise, the inheritance tax planning that you are carrying out could be futile. Okay, I'm going to wrap it up there, money nerds. Let's keep this to under 15 minutes if possible. If you've enjoyed this episode, do leave me a comment if you're listening on Apple Podcasts or like and subscribe to the show wherever you're listening or consuming your pods. It really does help get this to more people. Again, spread the word, I really appreciate it, Money Nerds. The more people that are armed with the financial information that we're trying to get across every personal finance Friday, then the more people that have taken ownership of their financial future, and there's less money and financial anxiety out there. Okay, let's wrap this up. Have a great weekend, and I will see you next Personal Finance Friday for next week's episode. In the meantime, stay safe out there. Thank you for your time and attention on an otherwise hellishly dull subject, but it does mean a huge amount to me. I'll see you next week. Goodbye.