The Daily Telegraph - Saturday - Money
Three tax breaks that could reduce your death duties
Three readers tell Harry Brennan about the tactics they are using to minimise their families’ tax liabilities
All but the most vital inheritance tax (IHT) reliefs would be scrapped under a radical overhaul of the system proposed by MPs this week. The All-Party Parliamentary Group on Inheritance Tax & Intergenerational Fairness called for the 40pc death duty to be slashed to just 10pc and for the abolition of almost all the existing legal loopholes used to avoid the widely disliked tax.
This would force the richest, who currently get away with paying an effectively lower rate, to pay their fair share and ease the burden on middleclass families who are currently caught out, the MPs said.
Under the existing regime, loopholes are the only way for families to avoid the levy, which is trapping more people than at any point in the past decade, generating a record £5.4bn for the taxman.
Rising house prices mean more and more homeowners, who often have almost all of their personal wealth tied up in their property, are paying a tax originally designed for the super-rich.
This is one of the main reasons why Telegraph Money reader Peter Hollick resorted to a legal loophole to rewrite his late father’s will. He used a “deed of variation” to divert a seven-figure inheritance into a trust fund for his children and grandchildren.
Originally the sole beneficiary of his father’s fortune, Mr Hollick was saved from at least £400,000 in death taxes.
He said it was important for families to be able to preserve the wealth that they had built up over a lifetime as much as possible within the law.
“As far as I can tell, you earn money, pay taxes, save it, pay tax on interest, and if you sell investments you pay taxes again. You’re taxed three or four times over your life and then once again after your death,” he said.
“I wasn’t in dire need of the funds and I wanted my family to benefit. I wanted to retain some control over the money without almost half of it being lost to HM Revenue & Customs.”
John Hibben, 78, has been gradually shifting his property investments to riskier vehicles that promote the growth of Britain’s fledgling firms and, crucially, are free from IHT.
Mr Hibben, the son of an Army major and Dunkirk veteran, built up a residential buy-to-let empire of 12 properties over 40 years. He bought his first property in Leamington Spa in 1978 for just £3,000, but the house price boom means his portfolio of rental homes now has a value of about £4m.
Now he faces the prospect of handing over more than £1m to the taxman when he dies.
He has put about £200,000 into the Enterprise Investment Scheme (EIS), a venture capital project.
The scheme, which promotes romotes start-ups and innovative smaller companies, benefits efits from generous tax breaks s that act as an incentive for or investors.
The perks include 30pc income tax relief, exemption from IHT and d “deferral relief ”, which delays any capital gains tax triggered by the sale of previous investments until the EIS is sold at a later date.
Mr Hibben, a pensioner from the East Midlands, has also recently put £95,000 into a forestry investment, which is 100pc exempt from IHT if held for more than two years. This is because the investments typically qualify for “business relief ” – the same break extended to certain shares quoted on the London Stock Exchange’s Alternative Investment Market (Aim).
The investments are also free from income tax and taxes on gains.
Michael Green, 70, has taken a number of steps to avoid paying over the odds. The former businessman, who now lives in Derbyshire with his wife, Sue, retired at the age of 50 after he sold the toolmaking company he had managed for about 30 years.
He employed about 80 people and paid large sums in wages, taxes and National Insurance contributions. After years of paying into the system, he h said he wanted to leave as much of his estate – worth more than tha £2m – as he could for his two daughters d without losing inaH out in avoidable taxes. He uses his £3,000 annual an gift allowance every year ye and pays into a life policy p that will produce a £100,000 lump sum for his children when he dies.