Inheritance Tax – the importance of regular reviews - 02/01/2018
Part of our role as trusted family, business and tax advisers is to regularly review with our clients their potential Inheritance Tax (IHT) positions. These reviews need to be regular because circumstances change – there can be changes to the client’s “basket” of assets, or their use of assets, a change to marital status, health, a change in tax law, etc.
 
Meeting your own needs in life must come before worrying about tax, and looking after your potential beneficiaries. However, with a potential IHT charge of 40% on your estate, tax cannot be ignored.
 
It may be appropriate to consider giving an asset away to save IHT. However, gifts made within seven years of death can also accumulate back into the estate charged to IHT, so consider:
  • Once gifted, you’ve lost control - divorce and other family issues are always a concern.
  • The recipient could inadvertently increase the IHT liability by changing the tax nature of an asset - for example converting a farm barn into a home (and thus losing Agricultural Property Relief on the value gifted) or diversifying the business so far that H M Revenue & Customs will no longer consider it a trade (typically if rents in the business increase and farming activity reduces).
  • Can you forego the income generated from the asset?
  • For a gift to be effective for IHT, the donor cannot “enjoy” the gifted asset.
  • There may be a Capital Gains Tax (CGT) cost to making the gift, unless the gift qualifies for any CGT relief.
  • Gifts to Trusts can trigger lifetime IHT at 20%, depending on what reliefs may be available.

Insurance can be useful to cover the risk and IHT cost of a donor dying within seven years of a significant gift.
 
As a starting point, you may find it interesting to list out the market value of all your assets, deduct £325,000 (the Nil Rate Band available to everyone) and calculate your approximate IHT position at 40%. This is only a very simple approximation, but a useful place to begin.
 
We would then look with you at assets that either do qualify for Agricultural Property Relief or Business Property Relief, or could potentially qualify. Developing a strategy to “move” assets into the scope of these reliefs would be our next step.
 
Do ask us for advice before you consider buying or selling significant assets - typically property, or an investment in a business - so we can work with you to optimise your IHT position.
 
IHT can be saved by various planning tools, notably by making gifts, possibly using trusts, charitable giving, and by appropriate Will clauses.
 
We have several factsheets that you may find useful. Your regular Ellacotts contact would be pleased to discuss your potential IHT position with you, and to work with your solicitor to review your Will and any associated business documents (typically Partnership Agreement, Shareholders’ Agreement and perhaps Tenancy Agreements) to identify required actions, or perhaps just to give you peace of mind.

Using the latest technology, our App has been developed to provide you with useful tax tools and information via your mobile device. Available for iOS and Android mobile phones and devices.