TT23: Inheritance Tax Planning
IHT is often perceived to be the most unfair of all taxes. As a percentage of Barnes Roffe Topical Tips revenues for the Government it provides a tiny fraction of income, yet on bereavement, when a family least needs the problem of a large tax bill, it can prove to be a great worry. Careful planning can avoid this.
Key points about IHT
“Give it away before you die” – the Inland Revenue will include in your taxable estate any gifts made within the last seven years. There is a reduction in the rate of tax for gifts made over three years and up to seven years ago, but often this produces no savings at all as the amount of the gift is not reduced.
“Put your house in the name of your kids” – wrong. No IHT saving is achieved if gifts are subject to a reservation of benefit to the donor e.g. you could not give away the family home and continue to live there rent-free.
The rate of tax
At the time of your death your taxable estate is based on the open market value of your assets at that time. The first £250,000 of your assets, the nil rate band, is not subject to IHT. This amount is reviewed each year in the budget. All assets in your estate in excess of this amount that do not pass to your surviving spouse will be subject to tax at 40%. On an estate worth £500,000 this could be £100,000 tax!
If you are a shareholder in a private limited trading company then it is likely this asset will benefit from a valuable allowance called Business Property Relief (“BPR”). This exempts such assets from IHT. Shares must be held for two years to qualify.
Non taxable transfers (i.e. IHT free)
Certain gifts can be made during your lifetime that are not added into your estate when assessing tax. The most common are small gifts up to £3,000 per year and normal expenditure out of income.
Barnes Roffe Topical Tips
- Include a nil rate band clause in your will. On the death of the first spouse an amount of value equal to the nil rate band passes onto children, etc. with the residue of the estate being passed on to the surviving spouse. This simple strategy can save up to £100,000 of IHT.
- Remember the double dip (see Topical Tips No.6). Use the valuable BPR available on your family company shares to shelter a significant proportion of your otherwise taxable assets.
- Use Trusts – they are not just for the wealthy. Trust arrangements can give the donor a degree of control over lifetime gifts without causing reservation of benefit problems.
- Be aware that will and trust planning is important. With the increasing value of most family homes many couples could easily end up paying IHT.