08 August 2017

Private client news - summer edition: managing inheritance tax in a more scrutinised world

Patricia Milner
Partner | UK

Since we have seen a focus and clamp down on tax avoidance/evasion and suggestions in the media that tax planning of any form is immoral if not illegal, some people have become nervous about taking any tax planning steps at all.

However, there are a number of simple actions that can be taken, mainly making use of exemptions and reliefs given by the legislation to assist ordinary taxpayers, which do not give rise to any problems with HMRC.

We have outlined some of these possibilities below.

  • Wills can save tax and avoid family problems, because if you do not have a will only £250,000 plus half the remainder of your estate goes to your spouse on your death (if you have children).The rest passes to any children at 18, and is potentially taxable. Major problems can arise if ownership of the family home is divided between the surviving parent and young children, including having to sell it to pay the tax. Will planning may also enable you to make best use of the new residence nil rate band – as pointed out in our Spring issue, this is fiendishly complicated so advice is needed.
  • IHT, or other expected costs can be funded by life insurance held in trust for your surviving spouse and/or children. If taken out early and for a fixed term only, the cost can be modest.
  • The IHT rules still allow you to pass any amount to any individual with no inheritance tax provided you survive for seven years. There may be a capital gains tax cost if the gift is not of cash.
  • Gifts out of income, which leave you enough income to fund your living expenses, are free of inheritance tax (no need to survive any period). Careful record-keeping is important for this and to show an intention to make regular gifts.
  • Subject to the concerns raised above, IHT reliefs for owning business and agricultural assets are very generous, potentially 100% after owning the assets for two years. Shares in trading companies listed on AIM qualify and a number of investment houses advise on portfolios of such investments. The costs are usually higher than those for than listed portfolios, and investment advice should always be taken, given the higher risk and lack of liquidity of these investments.
  • Anyone can give away up to £3,000 per year without any IHT, and this allowance can be carried forward one year if not used. Gifts of up to £250 can be made to any number of individuals and there are also exemptions for gifts made on marriage.
  • Gift and loan trusts are more complex, involving structures provided by insurance houses, but are accepted by HMRC as effective. They can be of use where clients want to give away assets but need to retain some benefit from them, as they allow withdrawal of an ‘income’ of up to 5% of the amount invested, each year over 20 years.
  • What should happen to pension death benefits is now a key part of any estate planning given that they can be passed to younger generations free of IHT and in a way which minimises any income tax liabilities.

In conclusion, there are a number of possibilities to mitigate IHT. There are pitfalls, such as the ‘gifts with reservation’ rules, and CGT issues, but the suggestions above will not cause difficulty with HMRC if they are properly carried out.