Planning the key to reducing inheritance tax blow
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Many people do not take action to mitigate the impact of inheritance tax on their estate. At present, inheritance tax is generally only paid on death (or on lifetime transfers into trusts in excess of the nil rate band). There are a number of basic steps which can be taken to mitigate the impact: • Ensure you make a will and review it on a regular basis This will ensure it remains tax efficient and continues to benefit those you wish to inherit your assets. • Life Insurance It is possible to take out a life insurance policy to cover the inheritance tax liability on your estate. You will need to weigh up the benefit of this compared to the premiums, which can be prohibitively high. • Annual Exemption You can make gifts of up to £3,000 per year free of inheritance tax. It is possible to utilise the exemption for the current year and additionally for one previous year if it has not already been used. • Small Gift Exemption There is an exemption for a gift of up to £250 per year to as many people as you like. • Regular gifts out of your surplus income With proper structuring these can be exempt from inheritance tax. The exemption only applies to income and not capital. It will not apply if your own standard of living diminishes as a result of the gifts. ‘Surplus’ income will, of course, vary from person to person. The gifts must be ‘regular’, i.e. there must be an established pattern, so a one-off gift is unlikely to qualify. Regular payments of grandchildren’s school fees are a common example of a qualifying payment. • Gifts during your lifetime Gifts to individuals (and which are not covered by one of the exemptions mentioned above) are treated as potentially exempt transfers for inheritance tax purposes. Inheritance tax will only become due if you do not survive the gift by 7 years. You must not get any subsequent benefit from the gift (or from assets bought with the gift) as this can trigger a tax charge. Care is needed when giving away the family home if you continue to live in it (unless you pay a market rent for living in the property), as this will probably constitute as a gift with reservation of benefit for inheritance tax purposes. Additionally the capital gains tax advantages of the Principal Private Residence relief will be lost as you will no longer be the owner of the property on a future sale. • Business Property Relief It is often assumed that shares in an unquoted trading company will attract full BPR on death, provided various conditions relating to ownership etc are met. However, where there are excepted assets in the balance sheet, such as large holdings of cash or a property occupied by a director, this may be restricted. It is important that the company balance sheet is reviewed regularly and any such assets considered. Careful consideration of lifetime gifts of business property is essential, as when assets eligible for BPR are transferred between spouses during their lifetime, the BPR 2-year clock starts again in the hands of the recipient. • Use Pilot Trusts Consider setting up different trusts on different days during your lifetime and adding property on death into each trust. Each trust will have its own nil rate band for inheritance tax purposes. • Spend your money This is the simplest and possibly the most enjoyable strategy. If you spend more each year than your annual income, your capital will reduce and hence the value of your estate subject to inheritance tax also reduces. These are some of the most basic strategies that you can employ to ensure that you do not pay Inheritance Tax unnecessarily. However where your circumstances are complex there are other solutions that we would be happy to discuss with you. For further information please contact Peter Cass, Associate Tax Director on 07713 877 003 or peter.cass@rsmtenon.com More articles in
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