Preparing for the expected – Inheritance Tax Planning
If you want your loved ones to benefit from your assets in the most tax-efficient way after you die, it is important to plan ahead. Inheritance Tax planning can be complex and the right approach will depend on your individual circumstances, so it is important to take professional advice. We can help you assess all the available options to ensure you make appropriate plans.
If you make any kind of gift during your lifetime, you must usually survive for seven years after making the gift for it to be considered outside your estate and exempt from Inheritance Tax. However, there are a number of issues to be aware of.
Gift with a Reservation of Benefit (GROB)
If you make a gift, you must ensure that you no longer benefit from that gift for it to be exempt from Inheritance Tax. For example, if you gift your home to your children, but continue to live there, it will be considered to be a GROB and Inheritance Tax will apply. However, if you continue to live in it and pay rent at market levels, it may be exempt.
Gifts out of Ordinary Income
You can make regular gifts out of your income after tax, of any amount and to anyone. Unlike many gifts, if you can show a regular pattern of gifting, you do not have to continue for seven years before it becomes exempt from Inheritance Tax.
Capital Gains Tax (CGT)
If you gift assets that are not cash, you may be liable to pay Capital Gains Tax if the value of the asset has increased from the day you acquired it until when you gift it. We can advise you on any tax liability you may incur.
2. Inheritance Tax-efficient Trusts
Putting your assets into a Trust can be a tax-efficient way of passing assets on. In most cases, if you survive for seven years after the Trust is set up, any assets in the Trust become exempt from Inheritance Tax. However, it is crucial that you choose the right type of Trust to meet all your wishes.
The assets put into a Discretionary Trust are totally controlled by Trustees, who can advance any income or capital to beneficiaries at their discretion. If you ensure the value of the Trust does not exceed the nil-rate band, it incurs no charges and after seven years it becomes exempt from Inheritance Tax. However, if the value of the Trust exceeds the nil-rate band or any assets leave the Trust, tax charges will apply.
Bare Trusts of property
If you want to pass on a property, a Bare Trust allows you to gift a share of up to 100% of that property to beneficiaries, including any children aged under 18. There are no limits to how much you gift into a Bare Trust and there are no on-going tax or exit charges associated with them. However, the advantages of Bare Trusts can depend on the ages of the beneficiaries and if you own the property or rent it out. There may also be Capital Gains Tax implications, so if you are considering this type of Trust, we recommend you get professional advice.
These Trusts allow you to take a regular income for life, while gifting assets to a nominated beneficiary. The gift you put into the Trust is known as the Donor’s Fund, which is usually invested in a Life Assurance Investment Bond. You can take up to 5% of the total amount out of the Trust each year, without any tax liability. However, it is important that you spend any money you take out, or it becomes part of your estate and liable for Inheritance Tax.
The rest of the Trust is the gift and it becomes exempt from Inheritance Tax after seven years, unless you die before that date.
Gift and Loan Trusts
These two part Trusts involve making a gift and a loan, which can be equivalent to up to 100% of the value of the gift. You can take up to 5% of the total loan each year in regular or ad hoc repayments, with no tax liability.
The gift is invested in an Investment Bond for the beneficiaries. After seven years, the original sum and any increase in its value during that time are exempt from Inheritance Tax and when you die, your beneficiaries can receive their payments quickly, as there is no need for grant of probate or letters of administration.
3. Business relief
Whether you own a business or not, you may be able to claim business relief on Inheritance Tax. This is a very complex area and we strongly recommend that you ask us for advice based on your personal circumstances.
Business Property Relief (BPR)
You can claim Business Property relief (BPR) from Inheritance Tax if you transfer any qualifying business property to your spouse or children, either during your lifetime or when you die. Inheritance Tax relief applies after you have owned the business for two years and the amount of relief depends on the assets you transfer. Qualification for relief may depend on the nature of your business, so please talk to one of our advisers.
If you do not own a business, you can still take advantage of Business Property Relief through tax-efficient investments that have been held for more than two years.
You can pass business assets to your spouse or children through a Discretionary Trust. This allows them to receive income, dividends or shares from the Trust, at the discretion of the Trustees. If any of these assets are sold and the proceeds are retained in the Trust, they will also benefit from a more favourable Inheritance Tax rate – currently at 6%.
Enterprise Investment Schemes
These schemes allow you to retain ownership of any assets and provide Inheritance Tax relief as long as you have owned the assets for at least two years and you still own them when you die. If you hold them for five years, they also qualify for other tax relief. However, these schemes can be risky and not all qualify for relief, so we strongly recommend you take advice before considering them.
4. Agricultural Property relief
You can claim 100% Inheritance Tax relief on woodlands, agricultural buildings and farmhouses or cottages if you transfer them either during your lifetime or when you die. The extent of relief will depend on the nature of your ownership and to qualify, you must have owned the property for at least two years.
5. Insurance protection
Gifts Inter Vivos
If you make a gift worth more than the nil-rate band, but you are not sure if you will survive for seven years, you can take out an insurance policy for a seven-year term, with a sliding level of cover based on the Inheritance Tax taper relief. This can be useful if you want to make sure your beneficiaries receive the full gift.
Insuring against Inheritance Tax liability
If you have a lot of property or illiquid assets, you may consider taking out an insurance policy for the expected tax liability and writing it so the sum insured is paid into a Trust when you die. This can provide funds for your beneficiaries to use however they decide – including paying any Inheritance Tax.