Paul Webster CTA ATT
- Private Client Tax Director
- +44 (0)330 124 1399
- Email Paul[email protected]
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With Inheritance Tax (“IHT”) chargeable at 40% and the current nil rate band of £325,000 here to stay until at least 6 April 2028, the importance of considering giving away cash or assets in a timely manner to reduce the value of your Estate cannot be underestimated.
Here are some key areas for your consideration in IHT planning.
If an individual holds shares in an unquoted trading company, the value on transferring the shares in lifetime or on death may be reduced to nil by Business Property Relief (“BPR”).
Should the company not retain its trading status during your lifetime, there could be a potential exposure to IHT on the share value due to the loss of BPR. However, if the shares are transferred whilst the company is trading, whether into a Discretionary Trust or directly, BPR can effectively be ‘banked’ and retained, even if the Settlor were to die within seven years of the transfer. Once transferred, the shares need not remain trading in the recipient’s hands, with the only requisite condition being that the company remains unquoted.
This presents a real opportunity to mitigate future IHT, particularly where the shareholder is elderly and may not survive the full seven years from the date of transfer.
It may also be worth considering banking BPR on death. By including a Business Property Trust in your Will, for the benefit of individuals of your choosing, you can transfer the value of the assets into Trust with no IHT. Should BPR then no longer be available, due to either a change in the status of the assets or the BPR rules, then you have secured the IHT relief on first death, thus benefiting the family longer term.
An unexpected terminal illness diagnosis could mean that IHT planning needs to be expediated.
The shorter the time available before death, the harder it is to eliminate IHT, but there are some steps that can be taken.
If surplus cash is held in bank accounts, this could be used to acquire BPR qualifying assets including shares in an existing family trading company or an AIM listed company, which would also qualify for BPR. If the shares are held for two years before death, there is the potential to reduce the value of your chargeable estate considerably. Due to the risky nature of AIM listed shares financial planning advice is recommended ahead of making any investments.
Another step would be to reduce your estate value to below £2 million to take advantage of the Residence Nil Rate Band, which can add another £350,000 to the available standard Nil Rate Bands of a couple, whether married or in a civil partnership, wishing to leave their main residence to lineal descendants. This can save a further £140,000 in IHT and may only be relevant on second death.
Where assets are held on death, they currently benefit from a Capital Gains Tax (“CGT”) free uplift in value. In some cases, it can be beneficial to transfer the ownership of assets between spouses or civil partners to the individual who is terminally ill. A review of the Will is important here to understand the assets are left to those who will want to benefit from them going forwards.
For many families, asset protection is a big concern, with the possibility of a surviving spouse remarrying and assets passing outside the bloodline. This often warrants some careful planning.
By including an Life Interest Trust in the deceased’s Will, the survivor can enjoy the assets and any income for their lifetime. The Trust Deed directs that on the death of the survivor or an earlier revocation of the life interest, the capital passes to their children. This circumvents a scenario whereby any remarriage can result in the wealth being redirected outside of the existing family. The property to be held in Trust is classified as an ‘Immediate Post Death Interest’ and as such, the value transferred to Trust is subject to the spouse exemption where relevant.
One further advantage of having this type of Trust is that the probate value (for CGT purposes) of the shares passing into Trust on death is not amalgamated with any base cost of shares already owned by the surviving spouse. In other words, they are ringfenced allowing more efficient future tax planning.
It is not uncommon for clients to diversify their investments by holding property, stocks and shares, pensions, and ISAs.
Those who have invested in buy to let properties may wish to consider redirecting one or more of their rental properties, for example, into a Discretionary Trust.
Take a situation where parents have four children aged 10, 15, 17 and 19. It is anticipated that all four children will attend university and given their ages, the parents will need to provide funds to cover the cost of their accommodation and expenses for the next decade.
Both parents are 45% taxpayers, meaning that after expenses, they have little cash remaining from their net rental profits. As a couple, they could place rental property into Trust worth £650,000, thus reducing their joint estate and deferring any CGT due to holdover relief. The rental profits will be taxed in the hands of the Trustees at 45% but the tax paid will be available as a credit for the children when distributions are made to them. These distributions can cover their rent and other university costs and if they are not using their personal allowance, the tax paid could be reclaimed in full.
Immediately, the parents have potentially saved 45% income tax and a further 40% inheritance tax on the value of the property leaving their estate. The cost of putting this planning in place is negligible in comparison to the savings made.
With children both over and under 18, advice will need to be sought to set-up the structure correctly to ensure that they are not caught by anti-avoidance tax rules.
With life expectancy continuing to rise, transferring assets to children who are already financially secure may not be tax efficient.
If that parent lived to be in their 90’s, whilst the recipient child is in their early 70’s and financially secure, a property that is surplus to requirements may been better directed to grandchildren or great grandchildren.
In many cases, Wills written twenty years ago may no longer be fit for purpose both in terms of destination of assets and IHT planning. If it transpires that a Will produces some tax inefficiencies, this can be remedied through a ‘Deed of Variation’. The Deed must be prepared within two years of the parent’s death to redirect the property away from the child’s Estate to a different beneficiary. It is also possible to create a Discretionary Trust to receive the property, with the deceased deemed to be the Settlor for IHT and Capital Gains Tax purposes, provided the appropriate elections are made. However, the original beneficiary would remain Settlor for Income Tax purposes so if minor children are involved, any payment to them by The Trustees would be taxed on the parent.
If you would like further information on inheritance tax planning, please get in touch.
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