How to Save Inheritance Tax
Not the sexiest subject, and one that people tend not to think about is Inheritance Tax. One thing that we teach is building a legacy – either for your children or for the benefit of others once you are gone. I thought I would read up a little on the subject – so ordered “How to Save Inheritance Tax” by Carl Bayley BSc FCA at TAXcafe.
We have used them before for property tax guides, and they do quite a few others. They are pretty dry reading as they are written by tax experts – but essential, as they give you up to date knowledge on saving money – which I like!!
“The truly wise taxpayer does not seek merely to minimise the amount of tax paid but rather to maximise the amount of wealth remaining after all taxes have been accounted for.”
Obviously, I am not a tax expert – so some of these interpretations are mine – speak to your tax advisor before doing anything! So here are a few things that stuck out for me:
- Lifetime transfers up to the nil rate band can be made every 7 years. Over that you pay lifetime transfer tax (20%). So, if you are way over the nil rate band gifting large lumps can be done over your lifetime, tax free
- Life insurance can be paid into a trust – Instead of drawing it out, money can be loaned out to the beneficiary then it stays out of their estate when they die
- Charitable legacies are fully exempt from IHT: An additional relief also applies where the deceased leaves 10% or more of their ‘net estate’ to charity. The ‘net estate’ for this purpose is the deceased’s remaining estate after deducting the NRB and other applicable IHT exemptions and reliefs. Where the estate qualifies for the additional relief, a discount of 10% applies to the IHT rate.
In other words, the IHT rate on the remaining estate is reduced from 40% to 36%. This can mean increasing charitable donations to 10% could actually save you IHT and benefit the charity at the same time. Only the tax man loses.
- Changing the business function can make you eligible for Business Property Relief. It is worth bearing in mind that a business only needs to qualify for BPR throughout the two-year period before the transfer. Hence, the business owner could build up a valuable non-qualifying business over many years and then change it into a qualifying business later. If the owner survives at least two years after the change, they can avoid IHT on the business. i.e. changing a buy and hold rental company to a flipping/ trading company for two years can save you tax.
- How to avoid inheritance tax and capital gains tax at the same time. The transfer of assets other than cash will generally be treated as a sale at market value for CGT purposes. However, because a transfer to a relevant property trust is a chargeable transfer for IHT purposes, the transferor is given the ability to ‘hold over’ any capital gains arising on the assets transferred. This means no CGT is payable on the transfer and the trust is treated, for CGT purposes, as having acquired the asset at the same price as that originally paid by the transferor.
Furthermore, when, at a later date, the trust then transfers the asset to the ultimate beneficiary, the trustees and the beneficiary may, once again, claim that the capital gain should be ‘held over’. Hence, by this method, appreciating assets may be passed on free of both IHT and CGT:
- A simple interest in possession trust will usually suffice for the purpose of this technique
- Not your own house as it invalidates the relief
- Stamp duty is payable if there is a mortgage – better if unencumbered
- Can give to adult children
- Must survive 7 years
- Can move up to £650K as a couple
I would highly recommend people spend time thinking about legacy planning. Particularly at this time of year as no-one really knows how long we have on this planet. Making some simple changes to how you operate can save hundreds of thousands in many cases.
As a first point of call I would recommend reading this book. After you have some knowledge speak to someone who can talk you through making an effective will and planning your estate with the aim of maximising what you can pass on to who YOU want to receive your legacy.