Family estates liable for Inheritance Tax (IHT) have more than doubled in the last six years, with the Office for Budget Responsibility estimating that the number has increased from 15,000 in 2010 to 40,000 in 2016.
The current IHT threshold means that individuals pay tax on estates worth £325,000 or more. From next April, the introduction of the transferrable main residence allowance (TMRA) means that this figure will potentially be increased by an extra £100,000 per person, rising to £175,000 in 2020. This means that married couples and civil partners could pass on £1 million to their beneficiaries without incurring any Inheritance Tax charges.
Rising property values mean that many more ‘ordinary’ people have to deal with the complex nature of IHT planning. Therefore, FT Adviser has put together a shortlist of some of the more common ways to mitigate IHT.
• Gifting – Each person has a gifting tax-free annual allowance of up to £3,000 per year which they can pass onto their children. If the gift is over this allowance, the individual must live for seven years after the gift has been made before the assets will be exempt from IHT.
• Setting up a Trust – A Trust works by creating a legal agreement in which assets are given to an individual, also known as the beneficiary, to look after on behalf of the original owner or Trustee. There are seven different types of Trusts and they carry the same restrictions as with gifting, including the same seven-year qualifying period. Establishing a Trust may be a more expensive option when it comes to IHT planning as a client must seek legal and financial advice throughout the process.
• Business property relief – Investing in companies that qualify for business property relief (BPR) can be an efficient way to mitigate IHT. BPR works by providing shareholders in qualifying companies with 100% IHT relief upon death. It takes two years for BPR-qualifying shares to become exempt from IHT.
• Platforms – Platforms and investment companies work together to offer clients access to packaged IHT investment solutions, including portfolio services. These work by providing advisers with access to a discretionary portfolio of select companies that qualify for BPR, which allows each business and its shareholders exemption from IHT.
Tom Curran, Chief Executive Officer at Kings Court Trust said: “Soaring property prices have meant that the number of families liable for IHT has grown significantly in recent years. With the forthcoming changes to IHT legislation and the introduction of the transferrable main residence allowance next year, the landscape is likely to only become more complex for clients and advisers alike.
When it comes to the actual payment of IHT, we recommend using a tax specialist to ensure that all tax work is dealt with professionally. At Kings Court Trust we can deal with the whole estate administration process, including IHT, on the client’s behalf. We take on full responsibility and liability so that they don’t have to worry; we also have a unique estate insurance policy which protects the family against any claims on the estate for ten years.”