Inheritance Tax Planning. The Facts
Inheritance Tax (IHT) is payable on death at 40% on a value above £325,000 for individuals and £650,000 for married couples / civil partnerships. With the IHT threshold unchanged since April 2009 and Property/Shares likely to rise further in the medium term, more and more people could well now exceed this threshold. IHT has always prompted vigorous debate. On the one hand there is the view that the better off should pay the tax. On the other hand there is the opinion of possibly many more that IHT was not designed for the owner of the nice semi on the outskirts of London but more for the major property owner. In any event it is certainly true that over many years the IHT exemption has not kept pace with the growth of many types of asset and so has become a creeping back door tax.
So what is to be done?
A gift to a spouse or civil partner on death is exempt and any unused proportion of the £325,000 exemption is transferred to the survivor. This can obviously result in an increased IHT liability on the second death, where the estate increases in value but the nil rate band does not. Gifts of cash or assets are “Potentially Exempt Transfers”, with the value of the gifts falling out of the calculation after seven years. Up to £3,000 per year can be gifted without any IHT consequences as can any number of £250 gifts to separate individuals. There is also a useful exemption for regular gifts out of income and gifts made in contemplation of marriage. Due to anti-avoidance legislation however, where a gift is made but benefit is retained by the donor, (for example a gift of a property in which the donor continues to live), it is not effective for IHT purposes.
Trusts can also be used to mitigate IHT and are particularly useful where the donor wishes to retain control over how funds are applied, especially where some beneficiaries are vulnerable. Gifts to UK registered charities, political parties and certain national institutions are exempt from IHT and if an individual leaves at least 10% of the estate to charity, after deducting the nil rate band, debts and exempt gifts, a reduced IHT rate of 36% can be applied.
It is also important to seek specialist legal advice. IHT can be avoidable but time is of the essence.
Ashley Partridge, Trusts deptGeorge Ide, Private Client