Estate Planning – Reducing the Inheritance Tax Burden
Estate planning is often discussed but not always implemented, whether due to the apparent complexity or simply because we rarely like think about our own mortality and the need to take action.
Despite the nil rate band for Inheritance Tax (IHT) which stands at £325,000 (£650,000 for married couples and civil partners) many have assets above that level which would become liable to IHT at 40% on death.
We have summarised in brief below the main exemptions, reliefs and planning ideas to reduce the level of IHT payable on death. Should you wish to discuss your IHT planning further or to obtain a copy of our technical note on IHT please contact [email protected] .
Each individual can gift up to £3,000 per year free of IHT, any unused annual gift exemption can be carried forward for one year. It is also possible to make gifts of up to £250 a year to an unlimited number of recipients, although this cannot be used in conjunction with the £3,000 gift allowance.
REGULAR GIFTS OUT OF INCOME
For those with surplus income, gifts can be made without limit as long as the gift does not reduce the standard of living of the person making the gift and it must be regular in nature.
GIFT TO TRUST
Gifts in to trust will generally fall outside of the settlor’s estate after a period of 7 years, although care needs to be taken where the gift is above the nil rate band as this may attract immediate charges. Such arrangements may be appropriate where an individual has surplus capital that they will not require access to in the future and that they will not require any income from.
GIFT AND LOAN TRUST
Where an individual wishes to make a gift of capital but to retain potential access thereto in the future a Gift and Loan Trust may be appropriate. This form of arrangement enables an individual to make a loan to a trust which is repayable on demand, therefore retaining access to the capital for the settlor. Any amount of the loan that remains unpaid on death will form part of the deceased’s estate for IHT but any investment growth on the monies will fall outside the estate. The repayment of the loan can be set up to be regular in nature, thereby providing a steady stream of “income” to the settlor.
Where there is a requirement for income but definitely no requirement to be able to access capital in the future, a Discounted Gift Trust may be appropriate. Monies are invested in a bond which is gifted to a trust. A fixed level of income is agreed at outset and cannot be amended once the arrangement has been set up. After 7 years the assets held within the trust are exempt from IHT. The discount is intended to take account of the rights the settlor or settlors have retained, thereby reducing the residual value of the gift. The discount takes account of the level of income selected and the life expectancy of the settlor(s).
Relief from IHT of up to 100% can be obtained through investment in assets qualifying for Business Property Relief (BPR). The asset must be held for a period of at least 2 years to qualify for BPR. Qualifying assets include shares in an unlisted trading company. The most common investments of this type are in family businesses and shares in a company listed on the Alternative Investment Market (AIM). Other arrangements available provide for investment in property, farming and forestry. Enterprise Investment Schemes also qualify for BPR as well as providing valuable Income and Capital Gains Tax reliefs.