Inflationary times are a great prompt to undertake inheritance tax planning

If you ask most people what they think about a falling stock market and high inflation, it’s unlikely they will be particularly enthusiastic. However, there’s a silver a lining for those who have been thinking about their inheritance tax (IHT) exposure and what they can do about it.

At RSM, we have seen an increase in clients wanting to talk about estate planning. This may be due to people having more time to think during the pandemic and perhaps, becoming more realistic about their own death and realising they want to be proactive about estate planning.

In this context, falling asset prices can be seen as a good thing. This is because lifetime IHT planning commonly involves giving assets away. Unless the asset is cash, a gift is a disposal for capital gains tax (CGT) purposes, and where there is a gain, CGT will typically be due. If an asset is gifted, the donor could have the double whammy of not having sale proceeds from which to pay the tax due, so they may have to find the cash to settle the tax elsewhere. There are sometimes ways of deferring the CGT due on gifts of certain assets, for example on shares in a family business. However, for many people, a CGT liability is often a reason to not make lifetime gifts.

As certain asset prices may currently be depressed, and the value of certain assets may increase at a later date due to inflation, if assets are gifted now then any gain (and resultant CGT liability) could be lower than if the asset is gifted at a later date.

In other words, the pain of having to fund the CGT liability now could be much less than a CGT or IHT bill in the future.

For those wanting to give away assets of a substantial value, it may also be sensible to take out gift insurance, i.e. insurance to cover any IHT liability that may become due if the donor dies within seven years of making the gift. The lower the value of the assets being given away, the lower the insurance premium will be.

The current economic turbulence could provide an opportunity for IHT planning – but don’t leave it too long. Higher inflation could be here to stay, at least in the short term, and may push up prices unless you act quickly.