Inheritance Tax Useful Tips

Inheritance tax advice useful tips

• On first death, using a suitably drawn up Will with appropriate inheritance tax advice, consider passing assets equal to the AIM nil rate band into a discretionary trust. The benefits of this are that (a) the nil rate band is fully utilised and (b) the surviving spouse, being a beneficiary under the trust, can access the trust funds via the trustees. They can then borrow from the trust and create debts against their taxable estate, helping to reduce the estate further. By using this option, joint estates of less than £936,000 shouldn’t pay any Inheritance tax – the most efficient Inheritance tax advice you will receive.

• Giving away your house but continuing to live in it will make Inheritance tax mitigation ineffective until you move out, or pay a full commercial rent. The charge to Inheritance tax would be on the property value at the date the reservation ceases and would remain for the next seven years. Once again consider careful inheritance tax advice from a specialist.

• Assess how much all your assets are worth (including house, life insurance, contents, cars, savings, investments, pensions etc) and then calculate the current inheritance tax liability. You may be surprised. Then seek Inheritance tax advice from a specialist.

• The changes in inheritance tax planning post 2006 are the most far-reaching changes since the anti avoidance legislation was brought about in 1986. You should immediately review your Will and any Inheritance tax plans you have in place as they may well be affected and seek immediate Inheritance tax advice.

• You can give away much more than £3,000 per year. In fact, you can give away whatever you want from your normal income as long as it’s regular, and does not affect your standard of living.

• Some inheritance tax trusts allow you to place your money outside your estate but provide you with an annual ‘income’ back. After seven years the capital is outside the estate along with all future growth, and is free from inheritance tax. There are many different trusts which suit for different reasons so be sure once again to seek Inheritance tax advice from a specialist.

• A Purchased Life Annuity (PLA) will take capital outside your estate immediately. This provides a very tax-efficient income and allows for the original lump sum to be returned to the beneficiaries free of inheritance tax. It gives an immediate reduction in the value of your estate by the amount you put into the PLA. Naturally do this in conjunction with any changes in the 2006 legislation and seek inheritance tax advice from a solicitor and inheritance tax specialist.

• If you have an estate that is mainly made up of houses and other fixed assets, consider raising a mortgage against your property to put into a PLA or a trust. The PLA should fund the cost of the mortgage and life assurance. You will have reduced the value of your estate equal to the amount you borrow, and the monthly cost should be neutral to you.

• Business assets can attract up to 100% business property relief for inheritance tax. Aim listed funds can be invested into which allow you to attract 100% inheritance tax relief after two years. The benefit is that your capital is also totally accessible. Be careful however that Aim listed funds will carry a higher risk than normal and seek inheritance tax advice before proceeding.

• On death, you are allowed to use a deed of variation to alter a Will to ensure it maximises current tax laws. You must do this inside two years of death and get agreement of all beneficiaries. It is quite a complicated area so seek clear inheritance tax advice from a specialist before acting.

• Consider writing multiple trusts to avoid the periodic and exit charges:

On entry to most trusts (other than absolute trusts) there is a charge of 20% of the transfer which is above the Inheritance tax nil rate band at the time. Today a gift into trust of £332,000 would attract 20% tax on the gift in excess of the nil rate band (currently £312,000). The immediate Inheritance tax payable is £4,000 on this £20,000. This should be paid by the trustees not the person who set up the trust (settlor) as the figure would be more. In the above example if the settlor paid the inheritance tax it would be grossed up so the transfer of value would be greater. On the tenth anniversary, a periodic charge may apply. The trust value is assessed and if it is more than the nil rate band at that time, a charge of up to 6% could apply to the value over the nil rate band.

Trusts can be split at the outset as on the anniversary each trust is assessed against the nil rate band. So rather than writing one large trust which could be over the nil rate band, better to write numerous which will each be assessed at the tenth anniversary and on exit. In the case of Rysaffe Trustee Co (ci) v IRC (2003) showed exactly that. Numerous trusts were set up on consecutive days. The revenue contended ‘that the making of all the settlements were associated operations and the settlor had made one composite settlement by an extended disposition’ Park J dealing with the associated operations made the valid point that it was not a valid reason to artificially import the associated operations provisions and to impose the false hypothesis there is only one settlement (trust) when in fact and in law there are actually five.

So there you go! Inheritance tax advice made easy!

Remember another key point – section 62 IHTA 1984 stated that for a trust to be a related settlement the settlor had to be the same in each case and the trusts had to be commenced on the same day. Therefore trusts created on different days do not fall within this definition.

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‘All information is based on our understanding of current tax practices, which are subject to change’