Thursday, October 14, 2010 | Posted by: Sue Knight
Categories: Protecting your wealth | Tags: tax, entrepreneurs, tax planning, Sue Knight, IHT, debt, reduce, inheritance, pilot trusts, minimise, BPR, strategies, personal
Using one of the search engines to find information on inheritance tax (IHT) will bring up some simple steps to reduce it, but once these are exhausted what other ideas are available?
I wrote Five ways to reduce your inheritance tax on 4 December 2009 and within five days two of the ideas were stopped by the Government in the 2009 Pre-Budget Report. While frustrating, the good news was that the planning is still effective for those who took advice and managed to get the planning in place before 9 December 2009.
There were no changes in the Emergency Budget to IHT, with the nil rate band remaining at £325,000 and the rate at 40%. The main concern continues to be inflation, which will erode the real value of the nil rate band, meaning that even more estates will fall into the IHT net.
So where can you go from here? There are a few options:
- Business property relief (BPR) is still a valuable relief at either 50% (eg, business premises owned outside of a company) or 100% (eg, shares in an unquoted trading company). It is worth reviewing your business assets to ensure that they do qualify in full. With careful structuring, it may be possible to obtain BPR for investment assets in a company that would not normally qualify for BPR. Taking this on a stage further, and following the Balfour tax case, the very latest thinking is that it may be possible to restructure an investment company, such that the shares qualify for 100% BPR… a new and interesting angle on BPR.
- Entrepreneurs wanting to set aside a fund for children/grandchildren should seek advice prior to a sale of their business. This may be a great opportunity to transfer assets into trust without incurring the usual immediate IHT charge on amounts above the nil rate band of £325,000 (the impact on other taxes and in particular, entrepreneurs’ relief need to be considered).
- Pilot trusts: If you are establishing a trust, either in lifetime or on death, think about using a number of different trusts rather than just one. Providing this is carefully structured, it should be possible to reduce future IHT charges on the sums settled (often referred to as pilot trusts).
- Create a debt: If you hold assets that do not qualify for any IHT reliefs, such as equity portfolios, main residences, investment properties etc, you could create a debt to set against the asset. This could be gifted to your heirs, thereby reducing the value of your estate so that only future growth in value of the asset is subject to IHT at 40%. This can be structured to allow the family to retain control of the asset and access to income and capital. The planning does require the individual to survive seven years from the gifting of the debt, but some fairly significant IHT savings can be achieved at outset which more than outweigh the cost of putting the planning in place. Historically, this planning has only been available for married couples, but it has been adapted and now it works for all individuals.
- Death-bed planning: If planning has been left to the very last minute, two ideas come to mind, both of which aim to avoid IHT at 40%. So-called ‘death-bed planning’ does limit your options and one idea in particular is not for the faint-hearted. That said, if the amounts involved are sufficiently large, the only downside is the professional costs of putting the planning in place so there is little to lose.
I’ve heard it said that those who pay IHT dislike their heirs more than HMRC, but perhaps they just haven’t got around to getting specialist advice. Would you look to reduce your IHT liability, to protect and maximise wealth for the next generation?
As always, I am pleased to take questions about IHT planning and to hear your views.
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