• Sharply rising property values have brought many taxpayers who would regard themselves as of modest means into the inheritance tax net.
• Whilst IHT is far from the ‘voluntary tax’ as which it is sometimes portrayed, there are a number of effective planning measures that can be undertaken to reduce exposure.
Transferable nil rate band
• It is now possible for a taxpayer to transfer his/her unused nil rate band to their spouse. As this is measured at its level at the date of the surviving spouse, and the IHT nil rate band in general goes up rather than down, this means that taxpayers whose wills contain discretionary will trusts, required under the previous regime to use both nil rate bands, need to consider whether to update their wills to leave the entire estate to their spouse
Deeds of variation
• Should the will of a deceased person not achieve the desired IHT effect, whether for the reason outlined on the previous slide or for other reasons, it is possible to vary the will within 2 years of death with retrospective effect for IHT purposes, provided all affected beneficiaries agree. This can also apply to vary the intestacy rules where no valid will is in place.
• To be effective for IHT, lifetime gifts must be irrevocable, and thus a donor must be sure he/she can do without the assets given away.
• If the donor survives the gift by 7 years, it becomes exempt from IHT.
• The gift freezes the value of the asset at the date of the gift, so any subsequent rise in value occurs outside the estate, even if the donor dies within 7 years of the gift.
• Always consider the capital gains tax impact of any lifetime gift.
Normal expenditure out of income
• If a taxpayer has income in excess of their requirements, they can give it away free of IHT.
• It is best to establish a pattern of giving away excess income, perhaps by use of a deed of covenant, or at least documenting the intended pattern of giving.
Life assurance policies
• Life assurance can be a cost-effective and simple way of meeting an anticipated IHT liability. However, ensure that the proceeds are written into trust for surviving relatives; otherwise they will fall into the estate for IHT purposes, and contribute to the problem they were intended to solve
Domicile and deemed domicile
• If your father was of non-UK origin it may be possible for you to establish yourself as domiciled outside this country for tax purposes.
• However, for IHT purposes you are deemed domiciled here if you have been resident here for at least 17 of the last 20 tax years.
• If you are able to establish non-UK domicile and are not deemed domiciled here, it is possible to avoid UK inheritance tax on all of your non-UK assets by placing them into a trust for the benefit of yourself and other family members, even if you subsequently become UK domiciled or deemed domiciled.
Use of trusts
• Trusts are useful where you do not wish donees to have full control over the asset you are giving away and/or the income it generates
• Of particular value for IHT planning is the discretionary trust, where the trustees are given discretion as to which of a variety of beneficiaries will enjoy income and, ultimately, capital
• It is possible to guide trustees in the exercise of their discretion with a letter of wishes, but not to force them to comply with your desires in this respect.
• A major advantage of a discretionary trust is that no individual beneficiary is deemed to own the trust assets for IHT purposes. Instead the trust becomes effectively a person in its own right for IHT, with its own special IHT regime
• Care is required in dealing with the trust because of this special IHT regime, but with careful planning of timing of trust distributions it should be possible to avoid any IHT arising within the trust. Of particular value in this respect are pilot trusts, which with careful planning can each enjoy a full IHT nil rate band.
Discounted gift trusts
• These are life assurance bonds in which the donor retains a right to a fixed level of income and gives away the underlying capital.
• They are a useful tool in lifetime planning, particularly as they create an IHT advantage even if the donor does not survive the gift into trust by 7 years
IHT planning using property
• It is in general unwise to carry out IHT planning with the family home, except in relatively unusual circumstances.
• It can be highly effective to give away to family members shares in a holiday home which the donor and other family members occupy infrequently
Business property relief
• This is a very important relief, giving full exemption for businesses, including those operating through family companies.
• It is vital to consider what assets are held by a family company, as items such as surplus cash will not be eligible for relief. A documented business case for holding cash reserves should be established where possible.
• Ensure that the shares are not subject to a binding contract for sale, as this will invalidate relief.
• Be careful with lifetime gifts of business property. If the donor dies within 7 years, relief will be lost if the shares are no longer business property at the date of death.
• Shares quoted on the Alternative Investment Market are eligible for relief once they have been held for 2 years, and can thus be worth considering as an investment for IHT planning purposes, although risk factors need to be considered.
• In certain cases it is possible to obtain the benefit of relief twice, once in the estate of each spouse.
• On the first death leave the property to the children. The spouse then buys the property back from them and carries on the business.
• Each spouse thus obtains relief on the value of the business property.
• So if your will would benefit from a review, or if there is planning you would like to undertake, please contact Mark Simpson for a discussion of your inheritance tax position:
• Telephone 0161 886 8062
• E-mail firstname.lastname@example.org