With increased property values and frozen Inheritance Tax exemptions, Inheritance Tax is becoming more of an issue for many. We can help with bespoke planning to minimise the potential liability and maximise the available reliefs and exemptions.
When reviewing your estate’s exposure to Inheritance Tax, there is no one-size fits all approach to reducing this. However, here are our top 5 tips for reducing the Inheritance Tax liability of your estate:
Gifts out of income
It is possible to make regular payments to another person, so long as you can afford the payments after meeting your usual living costs, and these can be classed as ‘regular payments’. Previous case law has shown larger one-off payments can be treated as such, so long as there is evidence that smaller payments have been made regularly to the same parties. It is imperative that detailed records of all income and expenditure, as well as the amounts gifted, are kept for the executors of the estate. In our opinion, this is an under-utilised mechanism when looking to reduce an estate’s IHT liability.
Potentially Exempt Transfers (PETs)
You can make gifts of the capital within your estate, known as PETs. Should you survive 7 years from the date of the gift, this is then outside of your estate for IHT purposes, reducing the amount charged to IHT. Should you fail to survive the full 7 years, the asset may still be subject to a lower rate of IHT, from 32% down to 8%, dependent upon how long you survive from the date of the gift. PETs can be an extremely effective way of reducing the value of your estate, and we recommend seeking relevant IHT advice as early as possible, to allow you as much time as possible for the 7-year period to be met.
Annual exemptions
Every individual can gift up to £3,000 of the value of their estate each tax year. If the previous year’s allowance was unused, you can also gift this amount in the same year, so £6,000 can be gifted without IHT implications. You can also utilise the small gift allowance of £250 per recipient, per tax year, as well as other allowances for things such as wedding gifts etc. Using these allowances, whilst the amounts may seem trivial, can add-up over time, and allow you to reduce the exposure to IHT on your estate.
Business Property Relief (BPR)
Investments made into certain share portfolios can qualify for BPR, such as companies listed on the AIM market, or unquoted qualifying shares. These investments can qualify for either 50% or 100% relief from IHT after 2 years, rather than the 7 years required for PETs. Such planning can therefore be essential for short-term planning, or planning for those who are undertaking IHT planning later in life.
Using trusts
This can be another effective way of reducing your exposure to IHT. Using trusts means that, subject to certain conditions, the assets put into trust no longer belong to you, and the value of your estate is therefore reduced.
A trust also allows you to keep an element of control of the assets that have been given away, especially whereby the beneficiaries are young and/or vulnerable. There are different types of trust, and we would always suggest having a more detailed conversation with us to determine which type of trust best suits your individual needs.
Alternatively, it may be beneficial for those individuals with a high net worth to set up a Family Investment Company (FIC) which can hold investments such as property or shares.
One of the main purposes of a FIC is for it to be used as a vehicle to pass on wealth to the next generation, free of Inheritance Tax. In addition, a FIC can also be much more flexible than a trust. We can advise on whether a FIC will be suitable in your situation.
If you have any questions about any of the subjects covered in this article, or simply want to know more, get in touch with one of our experts here at Gravita.
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