The recent fall in asset values brought on by Covid-19 may offer a silver lining when it comes to personal financing and inheritance tax reliefs.
Transfers to trusts can be maximised within tax free limits and any exposure to other taxes on direct gifts is minimised.
In addition, HMRC is marching forward with its plans to drastically overhaul the inheritance tax system.
If the changes materialise as proposed there will be significant alterations to the tax incurred on certain gifts and transfers of assets.
Taking both these aspects into consideration, there are several suggestions to bear in mind when it comes to advising clients on their tax planning opportunities.
What tax exemptions and reliefs are available?
Even if a gift is subject to Inheritance Tax (IHT), there are several exemptions available which can reduce the amount which is charged to tax.
First and foremost, each individual is entitled to a £3,000 annual IHT exemption.
If this has not been taken advantage of in one year, it can be carried forward to be used in the following tax year, enabling a gift of £6,000 in that year.
Secondly, it can be advisable to make regular gifts out of an individual’s income.
Gifts can be made free from IHT if they are regular and made out of the donor’s income rather than capital.
The principle here is that making the gift should not impact on the individual’s normal standard of living so with careful planning, the amount that can be gifted, can have a real impact on an estate value.
One of the most valuable reliefs currently available is Business Relief (formerly Business Property Relief).
For many business owners this relief can mean that the entire value of their business, including shares in a trading company, can be free from tax in their estate.
This relief can be reduced where there are investments or large amounts of cash held in the business.
It is therefore worthwhile reviewing the business position regularly to ensure the relief applies, as structural changes can be made to the business to secure or maximise the relief available.
It is worth pointing out that this nil rate opportunity is one aspect currently being reviewed as part of HMRC’s IHT overhaul.
Invest in inheritance tax efficient assets
Furthermore, to take full advantage of IHT reliefs and benefits, there should be continual reviews made regarding investments and their structuring towards assets which qualify for Business Relief.
After they are held for two years, the value of the asset held should be free from IHT on death.
Some assets investments that would be advisable include:
- AIM portfolios
- property development
Some of these investments can also qualify for tax relief under the Enterprise Investment Scheme.