Plan to Reduce the Impact of Inheritance Tax
I once heard it said that Inheritance Tax was a voluntary tax paid by those who don’t trust their families, which I felt was rather unfair.
With the growth in property values the nil rate band of £325,000 now seems very low, and giving money away to reduce an estate below this level is often impossible or at best impractical.
In reality IHT planning poses many difficulties. Rules were introduced many years ago to prevent people from gifting assets on their death beds and now large gifts usually need to be made seven years in advance to avoid IHT.
Rules were also introduced to prevent people from gifting assets away and continuing to use them, for instance if you gift your home to your children and you continue to live in it, then its value is added back into the estate to calculate the tax due, unless a market rent is paid.
There are however many legitimate ways to reduce the impact of IHT. Exemptions are available including gifts out of capital up to £3,000 per annum, smaller gifts up to £250 to any number of people, and higher limits for wedding gifts. Gifts out of income can also be exempt however, certain conditions apply.
There are several trust schemes that can be used for IHT planning. In general the potential tax saving increases as access to capital and or income decreases, however some benefit can still be obtained even if access to capital and income is retained.
For those who are unwilling or unable to make large gifts, life insurance can be arranged to provide beneficiaries with the cash needed to pay the tax when it arises. Incidentally the tax has to be paid before the estate is released, so sometimes the beneficiaries have to borrow to pay the tax and then sell assets to repay the loan.
Another approach is to invest in assets that are not liable to IHT, for example unlisted shares. These are usually considered to be high risk speculative investments, however there are some funds investing in unlisted companies deliberately set up to trade with very little risk.
Because IHT planning can be complicated, and involves some difficult decisions, I find that clients often delay taking action. However, as with so many aspects of financial planning the sooner issues are addressed the better the outcome, but good professional advice is needed.
To discuss this further, please contact Mark on 01473 408422 or barrm@wmibl.co.uk
