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Mitigating Inheritance Tax - September 2013



    These taxes, originally aimed at those with very substantial wealth, have progressively drawn in more and more people thanks to rising property prices, particularly in London and the South East, so IHT is going to be problem for many people who are unlikely to regard themselves as wealthy at all.

    While there are ways to immediately mitigate a potential IHT liability, for example by making annual gifts of up to £3,000 or regularly contributing towards grandchildren’s school fees from ‘excess income’, the majority of methods, such as establishing trusts for grandchildren, only become fully exempt from IHT if you live for a further seven years. There are also more esoteric options available, for example by investing in portfolios of Enterprise Investment Scheme or qualifying Alternative Investment Market (Aim) shares which are exempt from an estate after being held for two years under Business Property Relief.

    However, these carry high levels of risk and require liquid assets to make the investment, so while useful for some wealthy investors, they will have limited appeal for those whose wealth is principally tied up in their home.

    Those tempted by overly ‘clever’ IHT mitigation strategies should think which attempt to find loopholes should think again as the HM Revenue & Customs is taking an ever more robust approach to challenging and closing these down and the fees can be very high.

    While the prospect of seeing a large slice of an estate being swallowed up in tax is far from alluring, it is important to keep a sense of perspective. In particular there is a fine balance to be achieved in how far ahead one should start planning to mitigate a potential IHT liability.

    Life expectancy has increased significantly during the past half century, so many of us will now live well beyond our 80s. This means we need to be able to fund ourselves through retirement.

    By starting to give money away too early to mitigate IHT, one could find themselves struggling to fund their lifestyle in their twilight years. For those who feel unable to gift assets, then there is the option of taking out an insurance policy to cover some or all of a future liability. The proceeds of a ‘whole of life policy’ written under Trust will pass straight to the beneficiaries, assisting them with the payment of the IHT liability.

    Insuring the inheritance tax liability doesn’t limit the amount of IHT payable but gives individuals who are unwilling/unable to gift assets the ability to take out insurance to cover some/all of their IHT liability. In essence, a ‘whole of life policy’ is affected under Trust which enables the proceeds to bypass the Estate and pass straight to the beneficiaries. The beneficiaries can then use the insurance policy proceeds to assist with the payment of the IHT liability.

    Discounted Gift Plans plans are ideal for individuals who are willing to give up access to their capital but need to receive regular distributions from this capital. Under such plans, a lump sum is invested and a proportion of this typically, immediately, falls outside of the Estate for IHT purposes; the exact amount is dependent upon age and health and is calculated in line with HMRC guidelines.

    The remainder of the investment falls outside of the Estate after seven years. The benefit of this plan is that it will provide monthly payments to the individuals for as long as the investment has sufficient value to fund them, which with good planning should be for life.

    Unquoted shares of trading companies benefit from 100 per cent relief from IHT provided the shares have been held for two years or more at the time of death. This is because such investments are subject to Business Property Relief (BPR), a tax relief introduced by the UK government in 1976 to incentivise investment in a trading business.

    While attractive from an IHT saving perspective, AIM share portfolios are fraught with risk and are therefore unsuitable for the majority.

    There are various other investments that take advantage of Business Property Relief that facilitate the investment falling outside of the estate after two years. Many of these schemes are significantly lower risk than AIM schemes as they are frequently asset backed, for example, invest in children’s nurseries, and/or offer protection against the investment falling – typically by up to 20 per cent.

    David Smith is wealth management director at Bestinvest

    Mitigating IHT: What is not allowed

    • It is not permissible to gift an asset and continue to enjoy its benefit, for IHT purposes

    · It is not possible to sell an asset at a discount to try and reduce IHT, as the actual market value will be used for the purposes of calculating the value of the estate.

    Source: Bestinvest

    This report is sponsored by Zurich. The editorial content is independent.

    In this special report


    Please answer the six multiple choice questions below in order to bank your CPD. Multiple attempts are available until all questions are correctly answered.

    1. What does BPR stand for?

    2. After how many years, under BPR, will assets fall out of an estate?

    3. An initial transfer to a discounted gift trust will be liable to what rate of tax?

    4. Under which prime minister was the EIS introduced?

    5. After how many years would a ‘trust’ fall out of the estate?

    6. How much did the government derive in income from IHT in the tax year to April 2013?

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