Tax adviser Vantis head of IHT planning matters Peter Legg says recent moves by HMRC to erode the UK’s relatively liberal IHT regime are likely to continue.
He says there are still opportunities for individuals to effectively mitigate their potential inheritance tax liabilities by ensuring that the basics are not overlooked. Over time these exemptions could reap healthy Inheritance Tax savings.
– Using the nil rate band
Despite the changes, no Inheritance Tax will be payable if a gift by a donor to most types of trust (and any other gifts made to certain trusts within the previous seven years) is below £285,000 during this current tax year.
– Maximising business property relief
Certain assets qualify for business property relief at 100 per cent such as shares in an unquoted trading company which have been held for at least two years. This can allow even greater value to be gifted from the donor’s estate without triggering an immediate Inheritance Tax liability. Although the value of, say, a family trading company – and qualifying AIM listed shares – are currently fully relieved from Inheritance Tax now, (subject to certain conditions) they may not be in the future if business property relief is either reduced to 50% or even abolished.
– Potentially exempt transfers (PETS)
Outright gifts to individuals or “disabled” trusts qualify as PET’s. If the donor survives the gift by seven years the value of the gift falls out of the donor’s estate for IHT purposes, (providing that the donor does not retain either a direct or indirect benefit in the assets being gifted), but survival of the gift by at least three years may see a measure of Inheritance Tax saving due to the taper relief provisions.
– Annual exemptions
In any tax year, an individual can gift up to the annual exemption of £3,000 to a person or trust of their choice. Any unused exemption from the previous tax year can be carried forward to the current tax year but no further. A husband and wife could thus gift assets to a value of £12,000 in the 2006/07 tax year if they each have the previous years’ exemptions available. Over a 20 year period, both husband and wife could thus gift up to £120,000 of value out of their combined estates tax free and achieve a combined potential Inheritance Tax saving of £48,000.
– Small gifts
In any tax year, an individual may gift up to £250 to any number of donees free of IHT. A pair of grandparents, for example, could give each of their 8 grandchildren £250 annually over a twenty year period. This would dilute their combined estates by £80,000 and secure an Inheritance Tax saving of £32,000.
– Gifts in consideration of marriage
Subject to certain conditions, each parent can gift £5,000 to their child on the occasion of their marriage. Grandparents or remoter relatives can gift £2,500 and any other person £1,000, all free of IHT.
– Normal expenditure (gifts) out of income
A significant IHT exemption and possibly the most underused by high income earning individuals. This is an exemption for donors who make regular gifts of income .The donor must be able to show that the gifts are habitual (although this does not necessarily mean year on year), are made from post tax income and leave the donor with sufficient income following the gift to maintain their usual standard of living.
– Spouse exemption
Married couples – including couples who have gone through a civil partnership wedding – should also take advantage of the exemption for transfers between spouses whether made during their lifetime or on death. Transfers between spouses can be particularly useful as part of an “equalisation” exercise, to ensure each spouse has sufficient assets in their estates on death to satisfy the nil rate band legacy trust which should be standard Inheritance Tax planning in all properly drafted Wills. This is restricted to £55,000 in the case of a transfer from a UK domiciled spouse to a foreign domiciled spouse.
– Charitable donations
Gifts to charities made during lifetime or on death under a Will are also exempt from IHT. Gifts to political parties, gifts for national purposes and transfers to employee trusts will also qualify subject to certain conditions being met.