SPECIALIST INHERITANCE TAX PLANNING (IHT)
This most famous words about Inheritance Tax...
"Inheritance Tax is, broadly speaking, a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue."
Roy Jenkins MP, Commons debate, 1986
While the above certainly holds true, planning your estate to reduce IHT cannot be left to the layman nor the inexperienced...
As there are so many rules that govern Inheritance Tax, knowing what to implement, when and how requires not just professional advice, but a specialist who has bit of creative flare too, because any solution must be effective as well as fit in with your circumstances and needs. In this section, we'll have brief look at the factors which have deterred people from planning, and then we'll consider some of the tools available to overcome them. Further planning ideas also feature in the articles and links section of this website.
What is inheritance tax?
Inheritance Tax is a tax charged on a deceased's estate whose value exceeds their available nil rate band at the time of death. Inheritance tax is charged at 40%. For married couples, on first death, no inheritance tax is charged if everything is left to their spouse and on second death two nil rate bands will be available.
For tax purposes, the value of an estate includes not just the assets, but any gifts made in the 7 years prior to death (these gifts use up the nil rate band first), life assurance policies or pension plans not held in trust, as well as any loans still owing to you, for example a director's loan. Outstanding loans, such as a mortgage obviously reduce the estate for IHT purposes.
Some Factors affecting Inheritance Tax Planning
- Normally when you make a gift, you have to survive seven years for it to fully escape inheritance tax at 40 per cent. The rules dictate that you can’t use the asset once gifted, otherwise it is a “gift with reservation of benefit” and caught for inheritance tax. This is the first hurdle. Many clients cannot afford to lose access to an asset. One answer may be to gift and then pay a market rent for the use of the asset, for example gifting away your home to your children, and then paying them a full market rent to continue living there - this will avoid the IHT, but in practice most won't have adequate income to fund a market rent.
- If you are able to gift away an asset, then doing so immediately triggers Capital Gains Tax (CGT), as if you had sold the asset at FULL market value. Faced with the prospect of a large tax bill on an asset which you havn't sold, few ever go down this route.
How we can help
With extensive experience spanning nearly three decades, our practice provides expert guidance on inheritance tax mitigation through tailored solutions.
Other mechanisms
Other mechanisms are available to address IHT, particularly through the use of other types of Trusts. Usually these can be set up through a lawyer specialising in private client tax. We can recommend such professionals to you where appropriate. Please contact us for more information.
For further advice, please contact us.