RegulationAug 2 2016

Ways to mitigate inheritance tax

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      Ways to mitigate inheritance tax

      Loss of control is also an inherent part of gifting, as the individual making the gift cannot dictate when and how the assets are used by the person who receives them.

      A parent who gifts a sum of money over £3,000 during their lifetime to one of their children, for example, will have no real power to suggest that the funds are saved for a specific goal instead of being spent immediately.

      Loss of control is an inherent part of gifting

      Setting up a trust

      Setting up a trust is another common choice for mitigating IHT. A trust works by creating a legal agreement in which assets are given to an individual, also known as the beneficiary, to look after on behalf of the original owner or trustee.

      There are seven trusts in total including bare trusts, interest in possession trusts, discretionary, accumulation, mixed, settlor-interested and non-resident trusts. Trusts carry some of the same restrictions as with gifting, including the same seven-year qualifying period before assets held in the trust will become eligible for IHT relief.

      Unlike gifts, a trust does not require an individual to give up outright control to the recipient of the funds.

      For example, a trustee will typically be able to manage the funds held in the trust by investing them in either an onshore or offshore bond tax wrapper or through units or shares in various collective investment vehicles. However, the type of trust may also affect how much control the beneficiaries and trustees have at a later stage.

      With a bare trust, the beneficiaries have the right to all capital and income once they reach a certain age, while a discretionary trust allows trustees to make certain decisions about how beneficiaries use income, and sometimes the capital too.

      It should be noted that establishing a trust can prove a more expensive option when it comes to IHT planning, as a client will be required to seek legal advice both initially and on an ongoing basis to maintain the trust, in addition to the cost of receiving financial advice.

      Business property relief

      By contrast, investing in companies that qualify for business property relief (BPR) can be an efficient way to mitigate IHT. BPR works by providing shareholders in qualifying companies with 100 per cent IHT relief upon death.

      It takes just two years for BPR-qualifying shares to become exempt from IHT instead of seven, as is the case under gifting and trusts, and the control over assets stays firmly with the investor during their lifetime.

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