Inheritance tax planning - don't leave it too late

17 March 2017

The tax take from inheritance tax (IHT) hit £4.6bn in 2015/16, up 21 per cent on the previous year and 35 per cent on the year before that. Despite very generous reliefs and allowances being available, many are not fully utilised, often because of small oversights.

A will is the first key document that anyone with assets, and especially with children, should have in place. It allows control over where assets pass and, therefore, control over the tax payable on death.

IHT is payable on death at 40 per cent on the value of assets in excess of the nil rate band (NRB) (currently £325,000) plus the new residence nil rate band (initially £100,000 for deaths after 5 April 2017). With property prices still high in many parts of the UK, and the main home often forming the largest part of wealth in an estate, the limit can be easily reached. 

Consequently, the many reliefs and allowances which can help reduce the IHT payable should be considered carefully.

Spouse exemption

Assets left to a surviving spouse or civil partner are usually passed on tax free, but there is an exception where the recipient spouse is not domiciled in the UK. In such cases, there is a limit equal to the nil rate band and anything above that is taxable. It is possible for the recipient spouse to elect to be treated as UK domiciled, but this would also have an impact on other taxes and should therefore be considered very carefully.

Nil rate band

Where, on death, the NRB pf £325,000 is not fully used (often because most of the assets have passed to the surviving spouse), the surviving spouse will receive a further allocation of NRB on their death.

In the past, before the NRB became transferable, it was common practice for wills to have a survivorship clause to ensure that utilisation of the NRB was maximised on the first death. Often these clauses are no longer needed now and, in some cases, can have a detrimental effect on the IHT payable. If your will has a survivorship clause, it should probably be reviewed.

Potentially exempt transfers

Of course, gifts can be made during an individual’s lifetime and will fall outside of the donor’s estate after seven years and therefore not subject to IHT.

It is worth noting that these gifts must be outright, with no benefit being retained. For example, artwork cannot be given away but remain hanging on the donor’s wall in their house, unless an annual fee is paid.

It is also worth noting that whilst a gift falls completely outside the donor’s estate after seven years, the tapered reduction in IHT payable on it starts after three years. So making gifts early can be effective, provided the assets are no longer needed. It is also important to consider other taxes, such as capital gains tax, when gifting assets.

Business and agricultural property

Business property relief (BPR) and agricultural property relief (APR) can mean that no IHT is due if the assets qualify. Usually, these are assets used in a business, shares in a trading company or land and buildings used for agricultural or business purposes.

Certain conditions need to be met, and for BPR there are often complexities around the extent of trading activity, groups of companies where some are trading and some are not and excess cash reserves. For APR, complexities can arise round the nature of activities and finding the boundaries between agricultural land and the individual’s main home. 

Given that the difference in IHT is either full relief from 40 per cent tax or no relief, a review of whether BPR and/or APR applies is often worthwhile. In many cases, there are only small changes needed to ensure that relief applies.

It is also worth noting that many shares in companies listed on the Alternative Investment Market (AIM) qualify for BPR. Investment and tax advice should be taken, but as AIM shares can also be held in an ISA, this could provide a very tax friendly solution for income tax, capital gains tax and inheritance tax.

Summary

IHT can be expensive at 40 per cent, and often requires the selling of assets to meet the liability. A review to ensure that reliefs and allowances are fully available wherever appropriate is always worthwhile, whether that is for the individual themselves or, as is common, for their parents’ estate. In some cases, changes may be required or gifts may need to be made, which will most likely require action at least two years prior to death, so early consideration is essential.

Other more bespoke planning may also be suitable, using either trusts for asset protection or companies to hold personal investments.

For more information please get in touch with Gary Heynes, or your usual RSM contact.