OK boomer, what’s your inheritance tax strategy?

In the 17 years David Hartles has worked as a tax planner, the age of clients seeking professional advice about inheritance tax has dropped.

“Typically, it used to be people in their 70s and 80s who reached a stage where they were far more aware of their own mortality,” he says.

“Today, it’s often people in their 50s and 60s who know they’re going to have a future problem. However, advisers are increasingly contacted by the children of wealthy people who think their parents should be doing more to plan for this — they don’t want to see 40 per cent of their future inheritance disappear off to HM Revenue & Customs.”

Hartles is tight-lipped about his client base, but he’s a partner at Shipleys — the accountancy firm known for advising big names in the entertainment industry.

However, the “inheritance problems” faced by these household names are shared by an increasing number of UK families.

In the run-up to the new tax year, the chancellor’s coffers have been boosted by “fiscal drag” as wages rise with inflation, but income tax thresholds remain frozen.

Similarly, soaring property prices have boosted the value of family estates — yet, since 2009, the nil-rate band has been frozen solid at £325,000.

Married couples and those in civil partnerships can pool their allowances to make £650,000, and the addition of the residence nil-rate band (RNRB) in 2017 could top this up to £1mn if you are leaving the family home to your children.

These thresholds will also be frozen until 2026, by which time experts believe annual IHT receipts will be considerably higher than the £5.4bn collected in 2020-21.

If you’re reading this and thinking — blimey, I had better check what arrangements my parents might have made — Hartles has a few pointers.

First, do not underestimate the sensitivity of this topic. Conversations about wills and inheritance are naturally difficult — nobody wants to face up to their own mortality — and there’s a risk that well-intentioned concerns could be seen as a grasping attempt to secure more than your siblings.

He suggests a conversation along the lines of: “I’ve been finding out about this, and suggest you take some advice.” You may find out they already have.

Nevertheless, persuading older clients to face up to their potential IHT liabilities is also a problem for advisers.

Some tell me that putting a number on it — if you died today, this is what your family would have to pay in inheritance tax — gets things moving.

“Having an indication of your future liability certainly focuses the mind,” says Rob Hodgson, a wealth planner at Cazenove Capital.

Clients who have gone through probate on their parents’ affairs are often surprised by the level of tax due, as well as the complex administration involved.

“They don’t want their children to have the same experience, so they’re keen to take a staged approach and begin having these conversations earlier,” he says.

One of the simplest ways of avoiding inheritance tax is making an outright gift (and then surviving for seven years afterwards). Easy. Of course, the much harder part is knowing how much you can afford to give away without running out of money yourself.

Hodgson often starts with a cash flow forecasting exercise, which helps clients better understand their financial position, and consider the impact of making gifts earlier.

“If and when gifting has been deemed appropriate, it is noticeable that clients enjoy seeing the next generation benefit from the money they’ve received,” he says.

Large gifts will be subject to the seven-year rule. It’s possible to take out cover — known as “inheritance tax insurance” — in the event that you die before the seven years is up and tax is due.

You need to keep careful records to avoid bequeathing your relatives the nightmare of an HMRC inquiry after your death

Sold via regulated financial professionals, the premium will reflect the age and health of whoever is buying the policy, but could be cheaper than you think, as the tax liability tapers down over the seven years.

However, the seven-year rule does not apply to gifts made from surplus income (or those from your annual gifting allowances).

Hartles has had clients who gifted six-figure sums every year in this way. He and other advisers say that paying the grandchildren’s school fees is a popular way of using this tax break.

I recently met an FT reader at a conference who proudly informed me he had decided to give his nieces, nephews and godchildren regular amounts to pay their energy bills. “That way, they can spend their own money on what they want,” he said.

However you give it, you need to keep careful records to avoid bequeathing your relatives the nightmare of an HMRC inquiry after your death.

When making major gifts, Hartles suggests his clients write a formal letter to the recipient setting out the sum gifted and file away their reply accepting the gift.

As well as documenting when the seven-year clock starts ticking, this should satisfy executors that your gift was not intended as a loan. “A loan would still be within your estate, but a gift might not be,” he adds.

Another good habit is printing off and filing away your bank statements so that gifts (and your level of income) can be proved if questions are later asked. “Some banks won’t give your executors seven years’ worth of statements — you’ll get six if you’re lucky,” he says.

Other methods of mitigating IHT are more costly and complex — and the longer you leave it, the more complicated it gets.

Discretionary trusts give the settlor more control over who the money goes to, and when, but married couples and civil partners are limited to placing up to £650,000 into trust (their combined nil-rate band) every seven years without an immediate tax charge.

If less time is left on the clock, using business property relief rules — available on some (but not all) Aim-listed shares — is a popular route, as these only have to be held for two years to become IHT exempt. There is quite an industry of specialist managers offering “inheritance tax Isas” which invest in such companies — Isas being transferable to a spouse upon the first death, but fully within the estate for IHT purposes.

People are also using equity release to manage IHT liability — although this tends to be more common where a family home worth over £1mn is the main or sole asset.

Of course, there are simpler solutions.

“With everything that’s happening in the world around us, wealthy people are increasingly taking the view that they’ve given their children enough help over the years, and want to leave more of their estate to charities they’ve been supporting throughout their lives, which are exempt from IHT,” says Hartles.

And another sure-fire solution to IHT problems? Spending the money. Our How to Spend It section is dedicated to helping you do just that.

Claer Barrett is the FT’s consumer editor: [email protected]; Twitter @Claerb; Instagram @Claerb