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This article is for general guidance only and is not financial or professional advice. Any links are for your own information, and do not constitute any form of recommendation by Saga. You should not solely rely on this information to make any decisions, and consider seeking independent professional advice. All figures and information in this article are correct at the time of publishing, but laws, entitlements, tax treatments and allowances may change in the future.
You’ve spent decades saving diligently, watching your pension and investments grow – and being careful not to waste a pound. But what if spending a little more now could actually be one of the smartest inheritance tax planning moves you make?
While gifting money away is often seen as the go-to solution, enjoying your wealth during your lifetime can reduce the size of your estate, boost your wellbeing and still benefit those you’ll eventually leave behind.
From memorable experiences to everyday upgrades, here’s why splashing out on yourself might be both sensible and surprisingly tax-efficient.
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It’s less than a year until unspent pension pots will become liable for inheritance tax (IHT) – a change that will significantly increase the number of estates liable for the tax, and will increase the amount of tax due on estates that would already have been liable.
If the value of your estate is above £2 million, you start to lose the £175,000 residence nil rate band for IHT, making it advantageous to bring it below that level if you can.
James Scott Hopkins, founder of EXE Capital Management, says spending is an often-overlooked estate planning strategy.
“If you have worked hard to build wealth and you are comfortable financially, one of the most effective ways to reduce the eventual inheritance tax bill is simply to enjoy the money during your lifetime. Travel more. Be generous with friends. Take people on holiday. Buy thoughtful presents. Create memories rather than leaving a larger taxable estate behind.”
He adds: “There is also a slightly mischievous way to think about it. Inheritance tax is currently charged at 40% on estates above the available allowances. That means every pound you spend during your lifetime is a pound that will not be taxed later. In effect, every £1 you spend reduces a potential tax bill by 40p.
“For those who dislike spending money, or pride themselves on getting a good deal, this offers a rather satisfying perspective.”
Although gifting can be a reliable way of getting money out of your estate before you die and reducing the inheritance tax that will eventually be payable, it’s not always as easy as it sounds on paper.
You might not feel comfortable being relied upon for cash handouts, or you might want them to stand on their own feet first. Or you might not have family members that you wish to gift to.
Adam Vanstone, chartered financial planner at Chester Rose Financial Planning, says: “Parents typically want to help their children, with university fees and a deposit for a first home the main objectives, but with a common concern that their children should also learn the value of money and aren’t spoiled by receiving too much too soon from the ‘Bank of Mum and Dad’.”
Tense family dynamics can also make gifting tricky, adds Lee DeRedder, a financial planner at Shackleton Advisers: “One scenario I’ve encountered is parents who disapprove of a child’s lifestyle where, for example, there may be issues around gambling or other addictions. In such situations, parents will sometimes feel that making gifts to a child during their lifetime – not to mention making them beneficiaries of their will – is likely to have the effect of compounding the issues.”
Another option is that you could gift to charity, either in your lifetime or in your will. This has the advantage of reducing a potential IHT bill (and potentially reducing your income tax bill if you give the money in your lifetime), and can bring you personal satisfaction too.
Spending money doesn’t have to be about frittering money away. Rather, it’s an opportunity to enrich your life and potentially improve your wellbeing in retirement.
Vanstone says: “Are you doing the things you want to and enjoy doing in retirement? Is there anything you could be spending your money on that would improve your quality of life? These are the questions I make sure to ask all of my retired clients.”
“Many, particularly those who’ve spent a lifetime saving, find it genuinely difficult to switch gears and start spending on themselves, but these conversations and demonstrating what is affordable through good planning can be really positive.”
1. Holidays
DeRedder agrees. “As an adviser, one of the most fulfilling parts of my job is receiving a call from a client who wants to go on a wonderful adventure, like a world cruise. I recently had a client who wanted to go on two cruises. They weren’t even touching their pensions, also had investment savings, and it seemed there was a growing likelihood that the money they would spend on the cruises would otherwise have ended up in their taxable estate. The children had for some years been hugely supportive, encouraging them to spend the money.
“The end result was they booked both, rather than just one. This simple act brought them a lot of pleasure, and substantially reduced their IHT liability.”
2. Private medical treatment
If pain is curtailing your retirement and you’re on a waiting list for surgery, you might want to consider paying for private medical treatment yourself. Or, if you just want the peace of mind that you that you would get access to treatment quickly if you did develop health problems, you could consider taking out private health insurance.
Exactly what’s covered will vary between policies, but comprehensive plans will typically cover you for consultations, tests and in-patient and outpatient treatment. Just be aware that emergencies, chronic and pre-existing conditions are often excluded or limited.
DeRedder says: “Using cash assets to help pay for private healthcare or private health insurance can benefit you in multiple ways, it will give you more freedom for treatment along with reducing your IHT liability, as the asset will have been spent and therefore no longer in your estate.”
And of course, the sooner you’re treated, the sooner you will be back on your feet and able to make the most of your retirement.
3. Everyday upgrades
Spending doesn’t have to involve splashing out on new purchases or experiences, adds Vanstone. If you’re getting older and starting to find some physical tasks a struggle, it might be worth paying for help that you might not have considered previously. “‘Everyday upgrades’ such as hiring a gardener or cleaner can also have a noticeable impact, reduce stress and improve quality of life over time.”
Spending will in most cases get money out of your estate straight away. But DeRedder warns there are some cases where you could inadvertently end up increasing the value of your estate.
“Buying collectible art, or a high-end piece of jewellery that is going to have a substantial value is potentially going to count towards your estate, as they are likely to be considered among your ‘chattels,’ and would therefore ordinarily be liable to IHT at 40%, assuming you have exceeded your allowances,” he explains.
You might decide to spend some money on your home – whether that’s freshening up your interiors or fitting a new boiler. DeRedder says you need to be careful about major upgrades as you could inadvertently increase your IHT bill, if the value of your home rises as a result.
“The key here is to understand how the various allowances work. Each individual with full nil-rate band and full residence nil-rate band allowances can effectively give up to £500,000 away in their will free of IHT, if their home is worth equal to or more than £175,000 and it's going to direct descendants (e.g. children or grandchildren).
“However, if by making home improvements, the value of a property is then pushed up to, say, £200,000, this would have the effect of using up some of the normal nil-rate band allowance. Then, on top of that, other assets and investments would effectively be pushed into the scope of being liable for IHT.”
If you’re taking any steps to cut your beneficiaries’ IHT bill, it makes sense to get professional advice first: you don’t want any expenditure to jeopardise your own future financial security. It’s a good idea to plan for the possibility of future care costs.
A financial planner will be able to recommend the most appropriate course of action for you and will take into account your own worries or concerns. In many cases there could be solutions that you weren’t aware of.
Vanstone adds: “Good conversations mean that we’re able to balance tax efficiency with emotional comfort, family dynamics and peace of mind.”
Saga Legal has partnered with Co-op Legal Services, who provide regulated legal services, helping to ensure you have the right level of support and protection for yourself and your family. They can give advice on topics including how a will could reduce the impact of any potential inheritance tax, and why a trust will might better protect your home and savings. You can book a free legal review to get the guidance you need. After your free review, if you choose a product or service, they’ll explain any fees and costs to you clearly.
You can only use the free legal review service if you live in England and Wales. If you’re in Scotland or Northern Ireland, you can get estate planning help from Co-op Legal Service’s trusted partners.
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