Many clients are keen to mitigate IHT. But, firstly it’s important to identify the needs and objectives of each individuals circumstances as it needs to be made clear that Inheritance tax planning can reduce flexibility and access to capital or income depending what steps are taken and every clients preferences and circumstances can be different.
There are a few options that maybe suitable for a client that the adviser may consider recommending:
Making use of exemptions
The most straightforward option for transferring wealth between generations. A Gift Allowance exempts from IHT total gifts of up to £3,000, and can be carried forward for one year. As long as enough assets are kept back for a clients own day to day living. If a client can demonstrate that gifts can be affordable out of normal income then it may be possible to exceed this amount. Wedding gifts can be made (before the wedding) of up to £5,000 to a child, £2,500 to a grandchild or great grandchild or £1,000 to another friend or relative. In addition to this, small gifts of up to £250 to any number of people are also exempt provided that an individual as already not received the maximum of the normal £3,000 gift allowance.
Potentially exempt transfers (PETs)
No Inheritance Tax is chargeable on PETs of any value if the giver of the assets lives for more than seven years after the gift (PETs made less than seven years before death fall back into the deceased’s estate and take first call on the nil rate band; a sliding scale of taper relief is available on tax due on gifts made between three and seven years before death). Assets that have been transferred into some forms of trust are treated as chargeable lifetime transfers (CL Ts). These attract IHT at the lifetime rate (20%) on any amount exceeding the nil rate band over a cumulative seven-year period and any other available allowances. However, transfers into absolute/bare trusts are treated as PETs. The nil rate band on any CLTs is reduced by any CLTs the donor has made in the preceding seven years.
Business relief (also known as business property relief)
Business assets may qualify for 100% business relief and will pass down free of IHT, if we were to sit down with a client and decide to transfer them as a lifetime gift or bequest at death more than two years after acquisition. This may well be helpful to clients who have run their own businesses and want to maintain a financial interest during their retirement. There are also ‘off-the-shelf’ business asset plans, including enterprise investment schemes (EISs), seed enterprise investment schemes (SEISs) or AIM schemes that qualify for business relief. We ensure the risks are well understood before recommending these and only use well established fund managers who have been in the industry for years and are experts in the inheritance tax planning subject, because they could also attract HMRC interest as tax avoidance schemes, which attract heightened attention.
Lifetime gifts of capital and/or regular annual amounts into trust for their beneficiaries. Discounted gift trusts may be appropriate for some clients who want to draw an ‘income’ from the gifted asset, while reducing the potential IHT liability on their death. Loan-based plans are a more flexible solution, but they usually achieve relatively little IHT saving on the early death of a donor.
A well-established approach to IHT planning, which will be readily understood by most clients, is to take out life assurance written in trust to pre-fund the potential tax liability. Affordability may be an issue where clients’ income and outgoings are closely matched as the premiums can tie up resources that clients may wish to use for other purposes, either for themselves or to provide immediate spending money for the beneficiaries.
Residence nil rate band
Since April 2017, additional IHT relief has been available where a residence is passed on death to a direct descendant, which is due ultimately, by a series of steps, to increase the total nil rate band for a couple to £1million (although the additional allowance is progressively withdrawn where the individual’s total estate has a net value over £2m). This extra IHT relief may still be available via the ‘downsizing addition’ even if the client sells, gives away or moves to a less valuable home before they die: the rules are complicated but should be brought to their attention if relevant during the wider discussion of their plans.
Use of trusts
Making gifts into trust or passing assets into a trust on death is not for everyone: they can be complicated and expensive to administer, and may add as many new risks as they mitigate. However, trusts may be a helpful tool if, for instance, concerns emerge during fact-finding that a beneficiary is financially unreliable or has marital difficulties. Trusts can also be used to hold assets for the benefit of a minor.
We are a firm of Independent Financial Advisers based in Shrewsbury and we serve clients in Shropshire and all over the UK. Please don’t hesitate to contact one of our Financial Planners if you would like to find out more about transferring wealth to the next generation.