You have more control over the Inheritance Tax your family pays than you might think, but each option to mitigate the levy has to be carefully weighed in the balance.
You have far more control over Inheritance Tax than you might think. Harness the new year energy building by considering some clever strategies to reduce your liability. Here, wealth management experts from our panel weigh up some of the IHT workarounds affluent individuals are deploying today.
We recently wrote of the tax traps families all too often fall into, leading them to far higher Inheritance Tax bills than they might otherwise quite legitimately pay.
There are a number of workarounds that might work well for your family, but this is a complex area of tax planning which certainly calls for professional advice. Here are insights from expert wealth managers to help you weigh up your options.
Giving assets away while living is a well-known strategy, but a tricky one, since the donor must live on a further seven years for IHT not to apply. The relief is tapered so that surviving three years grants 20% tax relief and six up to 80% (on the tax levy, not on the value of the gifted assets).
Extra care needs to be exercised with gifting properties since so many families are being forced to move in together to cope with the pandemic. Unless market rent is paid by the older generation, this can trigger Gift with Reservation of Benefit (GROB) strictures, risking the value of the gifted property remaining in the estate and a hefty bill for heirs.
“Giving away money to children is effective for IHT planning as usually the amount given falls outside the estate after seven years, saving 40%. Parents like to do this during their lifetimes as opposed to, (or in addition to) on death as they get to see the benefit and happiness it brings to their children or grandchildren.
Regular gifts over time can result in considerable tax savings, however it is important not to give away too much too soon, as often things like care fees or other liabilities could crop up in the future
“Regular gifts over time can result in considerable tax savings, however it is important not to give away too much too soon, as often things like care fees or other liabilities could crop up in the future. Also, you wouldn’t want to compromise your standard of living to save some tax that you would not be alive to pay!
“Lastly, it could be a good idea to take out a special seven-year life policy to cover the gift. The idea being if the donor does not service the full term and tax is payable, this is settled by the life policy.” [See section on IHT insurance below]
The media reports some elderly parents are gifting half their home to children, moving in and then sharing the running costs to get around the GROB rules and generate CGT savings. As well the IHT exemption kicking in after seven years, the property can automatically become the heir’s main residence.
Approach such loopholes with care. HMRC’s clampdowns under the GROB rules have clawed back more than £300 million in IHT in the past three years alone.
“The idea of elderly parents and children sharing a big home might seem very practical, and be tax efficient, in practice it might turn out to be something very different. The pleasure may quickly wane.
This arrangement would have to be set up with the intention of being a long-term one; HMRC is clear that if you are gifting something it has to be without strings
“This arrangement would have to be set up with the intention of being a long-term one; HMRC is clear that if you are gifting something it has to be without strings. So, you can’t gift a holiday home, for instance, and then carry on using it without paying rent. It would not qualify as a potentially exempt transfer (also known as the seven-year rule) by which gifts become exempt from IHT after seven years.
“If elderly parents give away half their house to live-in children and the children quickly decide to move out, then they would have to pay rent to them for the gift to remain valid. Now that might be a good thing – it’s another way of reducing assets and IHT liabilities.
“Generally, however, whenever people suggest these sorts of things, I advise them not to let avoiding tax drive you to making poor decisions. I warn them to ensure that they have sufficient to meet all their needs before giving away too much – you should not compromise your financial independence. You do not want to be dependent on your children or the state.
It might help to look at
and the costs. If you really are going to put yourself in the hands of the state to leave a legacy for your loved ones, check out what kind of care the state might provide: you might have second thoughts
“It might help to look at care homes and the costs. If you really are going to put yourself in the hands of the state to leave a legacy for your loved ones, check out what kind of care the state might provide: you might have second thoughts. And I encourage them to take professional advice – financial and legal. There may be a more sensible way to meet their objectives.”
Settling assets into trust can take them out of your estate and the IHT net (although other taxes will apply), as well as helping protect family wealth against divorce and other disasters.
Costs for trusteeship and administration also have to be factored in, but there are reasons trusts are a time-honoured way of passing on wealth efficiently
Costs for trusteeship and administration also have to be factored in, but there are reasons trusts are a time-honoured way of passing on wealth efficiently.
“Trusts can be a highly effective way of reducing future Inheritance Tax liabilities. After seven years, a gift into trust usually escapes any IHT due on the estate following death and any investment growth within the trust is free of estate IHT straight away.
“A discretionary trust is probably the most flexible type of trust as there are only potential beneficiaries; no one has a right to benefit. Many people want to separate the decisions to make a gift, therefore starting the seven-year clock, from who is to benefit and when.
A discretionary trust is probably the most flexible type of trust as there are only potential beneficiaries; no one has a right to benefit. Many people want to separate the decisions to make a gift, therefore starting the seven-year clock, from who is to benefit and
“If you don’t like the idea of simply gifting funds, or prefer to think about future generations, consider having a closer look at trusts.”
Family Investment Companies (FICs) are a lesser known wealth structuring vehicle, but are an increasingly popular option due to the control and planning benefits they hold out by each family member being a shareholder with differing rights over assets and dividends.
The tax planning opportunities are myriad, not least profits being subject to normal corporate tax and efficient wealth transfer. However, FICs are being put under the microscope by HMRC, so must be deployed with great care under expert guidance.
More and more estates are being caught in the IHT net, in many cases due to runaway property prices.
Many people will be worried about their family being hit by a huge IHT bill at an already very difficult time and a beloved family home having to be sold
Many people will be worried about their family being hit by a huge IHT bill at an already very difficult time and a beloved family home having to be sold (IHT must be paid within six months of death, whereas it typically takes a year or more to obtain the Grant of Probate).
Insuring against an IHT liability expedites the settlement of affairs, removes worries and is lauded by experts as an elegant, simple solution.
“Using insurance as an IHT management strategy has the primary beauty of allowing you to keep all of your assets in your name for your future use and benefit, rather than having to give them away.
“Second, insurance proceeds are payable before probate is granted, allowing for the prompt settlement of any bills and distribution of funds to heirs. Third, the proceeds from insurance policies aren’t liable for tax.
Using insurance as an IHT management strategy has the primary beauty of allowing you to keep all of your assets in your name for your future use and benefit, rather than having to give them away
“We would typically begin with the IHT liability being assessed as it stands today, which in the case of a of a married couple would be on the second death. Then, a wealth adviser would consider the future liability, building in inflation before writing a policy on what is called a ‘joint last survivor basis’, so the proceeds pay out on the second death.
“A trust wrapped around the insurance policy ensures the proceeds are payable into a trust and remain outside the estate, with the trustees then making funds available to the beneficiaries of the estate to pay off the IHT bill.”
A range of investments are eligible for Business Property Relief, which means they can fall out of your estate for tax purposes after being held for two years. These include shares in an unquoted company or one listed on the junior AIM stock market.
Business Property Relief can be significant, can be used in tandem with other tax breaks like loss relief (including carry back) and offer the potential for significant capital growth if winners are backed.
However, these will generally represent riskier investments and may be suitable for only a modest part of your estate.
As we have highlighted, there are numerous strategies deployed as a matter of course by wealth management experts to help their clients keep their IHT liabilities down.
Many of them call for a significant lead time for the benefits to be maximised, however, so getting guidance as early as possible is critical. The potential gains are well worth the effort – it’s simply a case of working with an expert who can understand the totality of your financial affairs and put appropriate solutions in place with ease.
To have a no-obligation discussion with an expert to explore IHT mitigation strategies available to you, just complete our quick assessment of your needs. We’ll do the rest!