Posted by Nick Day on 20 Mar 2020
Inheritance Tax Planning (IHT)
The new government has published its first post-Brexit budget and Inheritance Tax was not on the agenda. Given the current economic uncertainties, it seems that Inheritance Tax, rarely much of a priority for governments given that it invokes passionate feelings while in reality representing a small part of the total tax take, is unlikely to change for the foreseeable future.
Inheritance tax (IHT) planning is often at its most effective if carried out long before death, but early planning usually requires significant measures to be taken to mitigate a tax that may not exist, or may exist in a very different form, by the time death occurs.
A change of government creates the expectation that inheritance tax may be reviewed, but it seems that this is not currently on the cards. This provides some stability for considering your current exposure to IHT and designing a strategy that balances your IHT risk against the extent to which IHT is a pressing concern at your stage of life.
Stage 1 – Family
IHT reduces the amount of your estate that is left following your death, and therefore most people don’t consider IHT until they have a family to survive them. Given that exemptions exist to allow assets to be transferred between spouses and civil partners without IHT being due, it is usually the arrival of children that triggers initial IHT planning.
Planning at this stage of life is complicated by the fact that it is often impractical to transfer assets away, because:
- Children will often be too young to be trusted with assets
- Parents often still require access to the income and capital generated by the family assets in order to fund what is usually the most expensive stage of life
- Any complicated structure that is put in place is likely to remain in place for many decades to come, which may limit options or generate significant costs
However, in some ways, this is the ideal time to put IHT plans in place, as assets may not yet have grown significantly in value allowing assets to be moved into appropriate structures without triggering the capital gains tax (CGT) liabilities that are often the key obstacle to IHT planning later in life.
This may be the right time to consider putting in place a family investment company (FIC). This structure allows parents to retain control of assets and have access to the current income and capital of family assets while granting children the right to share in future growth.
FICs are not short-term IHT planning, but by protecting future growth from IHT, can avoid IHT problems in future.
Stage 2 – Growing Wealth
When children have left home, or are starting to earn their own income, parents may find that they have more income than they need for their day to day needs, while also arriving at a point in life where the possibility of death becomes more of a consideration.
This is the stage at which it may be more practical to move assets down a generation, but CGT may be a barrier. A full analysis of your assets could reveal gifts that may not trigger significant CGT due to tax reliefs or fluctuations in asset values. If IHT is a concern but gifts of assets would not be suitable, you may consider taking out an insurance policy to cover the calculated potential IHT liability.
Stage 3 – Retirement
In later stages of life, IHT is becoming a more immediate concern and some tough decisions may be required in order to minimise tax exposure.
CGT can be an obstacle to IHT planning but is charged at lower rates than IHT on death, and is only chargeable on capital growth, while IHT is by reference to the full value of assets. It may be beneficial at this stage to incur a CGT cost in order to avoid the higher rates of IHT.
Many people find that their private residence is the main asset in their estate, and this is protected from CGT, but not from IHT. This may be the time at which you consider selling your private residence and downsizing, reducing the value of your estate that is tied up in your private residence.
It may also be the case that your property at this time is of a sufficient scale and type to enable you to gift part of the property to your children without retaining a benefit, which could also reduce IHT.
There are also reliefs that offer opportunities to reduce IHT exposure, including charitable gifts, and care should be taken to ensure that all opportunities for relief are considered.
Whatever stage of life you are at, a sensible IHT strategy (adjusted as required over time due to changing circumstances and legislation) can help make sure opportunities are not missed and that you are not trapped by CGT into making difficult decisions in the later stages of your life.
Contact us for a full IHT review, whatever your stage of life.
If you would like any advice regarding inheritance tax strategies or would simply like to discuss other ways in which we could help you or your business, please contact us on 01962 856 990 or customerservice@taxinnovations.com
See also…
HMRC to Force Accelerated Payment of Inheritance Tax
Inheritance Tax on Trusts to Increase
Inheritance Tax – couples with “mixed” domiciles
Inheritance Tax on Holiday Lets
Britons are set to waste £1.3 billion in inheritance tax
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