BESPOKE

IHT & ESTATE PLANNING SERVICE

Tax planning enables you to reduce and even eliminate inheritance tax by using various gifts, allowances and exemptions.

Inheritance Tax

Most people do not like the idea of paying inheritance tax when they die.

The amount of inheritance tax your estate will have to pay largely depends on how much financial planning you have undertaken.  The earlier you start the better, but last minute action can also be taken.

There are several exemptions from inheritance tax, such as the £3,000 annual exemption, and some small one off gifts are also exempt. 

Gifts out of excess income are also exempt, these gifts must be regular and habitual, so it would be wise to gift excess income monthly.  For any gifts made, it is essential that you document and keep a record, for which you can use the HMRC IHT 403 form.

Currently, inheritance tax is payable if the value of an estate is over £325,000 for an individual (or £650,000 for a married couple or civil partners) at a rate of 40%. 

From April 2017, the introduction of the new Residence Nil Rate band will be phased in.  This may make it possible to claim an additional relief where a main residence is left to a direct descendant on death.  However, this is a very complicated area and we recommend that you seek financial advice, as well as review any wills or Trusts that you may have made.

There are many different ways to eliminate inheritance tax.  One possibility is purchasing a whole of life insurance policy that could be used to pay the tax liability on your estate. 

Another option is to give away assets.  After 7 years, any gifts made should be outside of the donor’s estate.  The recipient of a gift should be aware however, that if the donor dies within 7 years, then they as recipients of the gift may have a tax liability to pay.  If you do not like the idea of physically giving away cash, then there are a variety of Trusts which can be used to either help reduce or limit your inheritance tax liability.

A lot people however do not want to give away assets which they may then need in later life.  As an alternative to gifting or placing assets into Trust, it is possible to invest in assets that attract Business Property Relief (BPR).  Such investments remain in your control and after 2 years, the investment will qualify for BPR and the investment will fall outside of your taxable estate. 

Finally, it is possible to vary someone's will within two years of death by a Deed of Variation, provided that all the beneficiaries agree.  This can be a very useful tool to restructure someone's estate to reduce the inheritance tax payable.

Case Study – Meet Elizabeth and Tim 

Elizabeth and Tim are both 70 years old and are concerned by the amount of potential inheritance tax payable on their estate.  They have assets of £1,300,000, which includes the family home worth £750,000.  Tim’s health has deteriorated recently and he would also like to know that Elizabeth is financially secure. 

They have an income of £40,000 per annum, however more than half of this is provided through Tim’s final salary pension, which will reduce by 50% if he dies.  

Elizabeth and Tim do not want to give away funds to their 2 children, as they want to use the capital to help fund any future care requirements that they may have.

They have £224,000 of savings held in bank based cash ISAs and a £326,000 investment portfolio, which has increased in value by £60,000.

Over the next few years, the introduction of the Residence Nil Rate band from April 2017, will help to reduce their inheritance tax liability as the additional £175,000 allowance per person is phased in, for people who leave the main family home to a direct descendent.

As interest rates have decreased recently, Elizabeth and Tim have invested more and more money to try and get better returns.  This has resulted increased the value of their net worth, which has only compounded their inheritance tax liability.

Following our advice, Elizabeth and Tim agreed to restructure their investments. 

The investment portfolio was sold and whilst this created a capital gains tax (CGT) liability for Elizabeth and Tim, we deferred the tax liability by investing in to a Venture Capital Trust (VCT) and using CGT allowances.  Investing in VCTs also created income tax relief, which meant that Elizabeth and Tim paid no income tax in the 2014/15 tax year.

The cash ISAs were transferred into investment based stocks and shares ISAs, and half of the portfolio was invested in an AIM ISA portfolio to attract Business Property Relief.  This resulted in half the value of the portfolio being exempt from inheritance tax after 2 years.  The remaining half of the ISA portfolio was invested in a cautious portfolio of funds to provide tax free income and growth.

The encashed investment portfolio was re-invested into 2 investment bonds.  Whilst investment bonds do not provide any inheritance tax saving, they can be placed into Trust in the future, and they can also be used to provide a tax deferred income, which is something that Elizabeth and Tim found attractive.

The combination of the introduction of the residence nil rate band and investing into an AIM ISA portfolio to attract business property relief reduced their overall inheritance tax liability.  An AIM ISA portfolio was used as they wanted a quicker solution due to Tim’s declining health and they did not want to gift assets away, which takes 7 years to be outside of their estate for inheritance tax.

AIM portfolios and VCTs are classified as high risk investments and only suitable for clients willing to take such risk.  The availability of various tax reliefs should not cause you to overlook the risks inherent in such structures and you may not recieve back all the capital you invest.