Mitigating inheritance tax is something we all need to contemplate. Many people work hard to build up their estates, whether to enjoy retirement or to pass onto loved ones. However, inheritance tax (IHT) has increasingly become a complex area for individuals wishing to do the latter, with the tax substantially reducing the amount available for the next generation. In this article we review some of the options and allowances to help mitigate its effects and maximise investment returns.
If you are married, your estate will be passed on to your spouse IHT-free, but if you are passing your estate onto your children then IHT may be applicable on the amount in excess of the nil rate band “NRB”, currently £325,000. Two years ago, a Resident Nil Rate band was introduced for home owners which can protect £150,000 rising to £175,000 per person by 2020/21. However, it’s necessary to review your will in light of the Resident Nil Rate Band as it has several restrictions over its application. These two allowances can enable a single person to mitigate against IHT on their estate of up to £500,000 and this would be double for married couples.
‘Gifting’ may also reduce your taxable estate, subject to the seven-year rule and certain limitations on what constitutes a gift. Each year an individual has an annual allowance, currently of £3,000, which they can gift without incurring IHT along with the ability to gift smaller sums of up to £250 a year to as many people as they wish. In addition regular gifts out of income can also be free of IHT along with gifts of up to £5,000 from a parent to their child for a wedding or £2,500 from a grandparent. Such gifts, especially those from regular income, need to be recorded in detail so that they can be proved to the taxman if necessary. The area of gifting has been recently reviewed by the Office of Tax Simplification (‘OTS’) and several recommendations have been made, although these are not guaranteed to be implemented in future.
Trusts can form a valid part of estate planning, in particular where a beneficiary is not quite ready to receive funds directly. There are a wide range of Trusts with one of the main attractions being the flexibility they have over who ultimately receives funds from them. Placing funds into trust is a taxable event for inheritance tax and hence a 20% chargeable lifetime transfer “CLT” charge is usually due on funds over the NRB along with 10 yearly periodic charges calculated on the assets held in the trust.
As with gifting, some assets placed in a trust may only fall outside of your estate for IHT purposes if you live for at least seven years after establishing it. One of the he main drawbacks of a trust is that the investor loses control and access to these assets as control is passed to the Trustees. Depending on the type of trust this can be a complex to set up and administer and professional advice may well be required.
Taking out a life insurance policy is commonly used to create a pot of money which will cover the IHT liability. Monthly premiums are calculated by insurers based on age and health, so the final pay-out may not justify the money policyholders forego every month. Moreover, if circumstances change (e.g. assets increasing in value more quickly than expected), the eventual pay out may be insufficient to pay the whole tax bill.
Business relief enables the investor to keep control of their assets providing flexibility should they need the funds for their own retirement or care whilst also protecting them from IHT after just two years.
If you own a trading business, shares in an unquoted trading company or certain companies quoted on AIM, and had held these shares for a minimum of two years and at the date of death, the shares may qualify for 100% Business Relief. This means that the shares value is then free from IHT.
For those seeking returns that are uncorrelated to traditional equity markets, unquoted trading companies may be a good alternative to mitigate IHT. There is a wide pool of sectors covered by business relief qualifying holdings such as businesses focusing on areas like leasing and lending, property and renewable energy. Triple Point’s approach is to target business relief through specialist leasing and lending companies that arrange funding for both the public sector and private corporations, ranging from Local Authorities, the NHS, Housing Associations and large corporates, to tens of thousands of UK SMEs. Leasing and lending has previously been the preserve of banks and financial institutions but Triple Point’s Estate Planning solutions enable investors to access this unique strategy benefitting from a diverse trade uncorrelated to equity markets.
Last year our strategies provided £18m to the NHS to acquire new ambulance fleets, £13.5m to local authorities to fund social housing projects, and £67m across 88,000 SMEs for payment card terminals, amongst others.
Belinda Thomas is a partner and head of investor relations at Triple Point.
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