As time goes on more and more estates are falling within the embrace of Inheritance Tax, with central government, (flagged by the Office for Budget Responsibility, OBR), expecting the tax take to go from £4.7Billion for the years 2015/16 and 2016/17 to £5.0Billion in 2017/18 and up to £6.2Billion in 2021/22.
The OBR forecasts are driven by two factors; the rise in house prices, which does not seem to be abating and secondly; the continued growth of UK stock markets. Given that a rise in Inheritance Tax receipts mean that families are retaining less of a deceased’s estate, it stands to reason that there ought to be more interest in legal steps a potential, posthumous taxpayer can make to pass money to people of their choosing!
In a nutshell, there are three obvious possibilities and several less obvious ones, using reliefs like business property relief. Dealing with the easy ones first, we have:
Spend it. If you have spent all your wealth before your die, then there is nothing left for the taxman. Your children may not be pleased with you, but I take the view that it is your money and you can do what you like with it. The nil rate bands give you the ability to pass some to children without incurring tax, so perhaps the little cherubs may get something after all.
Give it away. Popular with recipients, but can get very complicated for anything other than a charitable donation. Gifts up to seven years before your demise will form part of your estate and tax may be due on the value of them. Gifts more than seven years before your demise will be outside scope of tax, but if you gift more than £325,000 in any seven year period, you may be liable for Advanced Inheritance Tax at the time you make the gift. The time period and the cap on the value before the taxman gets a cut mean that you need to start planning a distribution of wealth well in advance of your demise. To pass £1Million of value down the family tree without any additional tax costs means you would need to start 21 years before your actual death date, so start before your state pension age!
Provide for it. Typically, this involves a whole of life insurance plan, written in trust, accessible to the executor of your will to pick up the bill. The cost of premiums would either fall within the annual gifts to the family allowance or be in the normal course of your expenses. This is very popular with less scrupulous advisers, as the premiums, (and life commission generated), can be rather high.
There are some variations on the “Give it away” option that would allow you to give away the capital but keep the income, or give away the income but keep the capital up to your demise, but these will take between 3 and 7 years to become fully effective for Inheritance Tax purposes. These go by the description of “Discounted Gift Trusts” and can be very helpful, where you have some cash or investments that can be earmarked.
If you have a block of ISAs and can tolerate a significant level of investment risk, then there is an option that would become fully effective for Inheritance Tax purposes in only 2 years, using Business Property Relief. In 2013, investments in the Alternative Investment Market, (AIM), became eligible for ISAs; back in 1996, estates became able to claim 100% Business Property Relief on minority investments made in certain trading companies that are listed on the AIM market, so you can see that a selected AIM investment in an ISA wrapper would avoid Inheritance Tax!
This is not a universal solution for all your IHT needs; AIM investments have a number of hazards associated with them, volatility and potential liquidation being two of them. For someone who can accept a raised degree of risk, they would enable you to retain full ownership of your asset and benefit from the tax preferred status of an ISA.
Using a professional, independent adviser gives you access to more products that may, or may not fit your needs, but we will explore the market on your behalf and select the most appropriate product to fit your needs. Sometimes the best advice to manage IHT will be permission to spend; other times a niche product to use a tax relief.
If you would like to know more about how we can help you plan and realise your financial goals then contact us at info@martin-redmanpartners.co.uk or call us on 01223 792 196.
The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.