Inheritance Tax  

Covid-19's impact on IHT planning

This article is part of
Guide to IHT planning after the pandemic

Covid-19's impact on IHT planning

The looming deep recession is likely to mean lower asset prices, both in terms of property and stock market investments such as an Isa.

So how does this impact IHT planning?

Simon Harryman, investment director at Ingenious says it is too early to speculate about the extent to which the pandemic will impact the economy. 

“It will recover, but the speed and timing will depend on many factors, such as the length of ‘lock-down’ and how companies and consumers react when social distancing measures are relaxed or removed,” Mr Harryman adds. 

“While some asset prices could fall lower we cannot assume that all will behave the same.

For instance, in the UK there is a structural deficit in housing supply, which will remain, and so any reduction in house prices is likely to be less severe or sustained than perhaps commercial property where demand for retail and office units could be hit. 

“Of course, it is residential property that makes up a significant part of many estates and many will remain well above the nil rate band so demand for IHT planning should remain strong. 

“The financing of real estate development is a core trading strategy within our estate planning service generating consistent yields for investors. All lending is secured by a first charge and with average loan to value of around 67 per cent, there is a substantial cushion in the event of any reduction in asset values.”

Gifting one's assets

But with reduced asset values, gifting now may be an efficient way to pass on these assets so that the beneficiary can enjoy the asset growth before we move out of a bear market, while the original gift will have been made during a period of depressed values.  

Eamonn Daly partner at law firm Wright Hassall explains in a note that when a person gives assets away to other individuals and does not survive for seven years, the value at the date of gift is used to calculate the inheritance tax (IHT) due.

At the time the gift is made, any gain in value from when the assets were acquired is potentially subject to capital gains tax (CGT).

If asset values are lower than they were before the pandemic, the possible IHT charge if the donor dies within seven years of the gift will be less. With the level of gain reduced there will also be a smaller possible CGT charge.

Any future recovery in values will not affect the donor’s tax position.

The addition of the residence nil rate band which has provided an additional allowance since April 2017, is now £175,000.

For many people who have property and assets within certain limits, including the nil rate band of £325,000, this could provide a total IHT allowance of £1m for a married couple.