The tax you can ‘choose’ not to pay
INHERITANCE TAX is frequently referred to as “voluntary”. This is because of the possibility of reducing one’s assets during one’s lifetime, so you have insufficient assets to be caught by the inheritance tax rules. Therefore, a couple who have an estate worth less than £650,000 will not need to pay inheritance tax. The recent budget may improve the position, bringing a new transferrable main-residence allowance that will gradually increase from £100,000 in April 2017 to £175,000 per person by 2020/21.
This is in addition to the main nilrate band of £325,000 and will effectively raise the IHT tax-free allowance (for those with dependants) to £500,000 per person, although those with assets in excess of £2 million will start to lose the additional allowance.
We often focus on four principal methods of protecting against inheritance tax. A combination of these may be appropriate.
1. SPEND
While this is not a realistic solution for many clients, spending one’s assets so that they reduce is of course an effective way of lowering that IHT bill while having fun along the way!
2. GIFT
Large capital gifts will become exempt from IHT seven years after they are handed over, so it is important to not leave the decision of making gifts too late and then perhaps not survive the seven years after the gift. One important provision that is forgotten by many people is the “regular gifts out of income” rules, enabling one to give excess income each year if this does not affect your standard of living.
Such gifts will then immediately be exempt from inheritance tax, though it is important to maintain records for your executors.
3. INSURE
Some clients have an aversion to insurance but this can be a costeffective way of protecting one’s estate while providing time to consider other solutions to the IHT liability. If taken out at a younger age, a policy can be significantly cheaper. Furthermore, a couple can take out a “joint life second death” whole-of-life insurance policy, which again can be relatively cheap and gives you time to consider other solutions.
4. HOLD EXEMPT ASSETS
Certain investments can be exempt from inheritance tax after only two years. These fall within the “business property relief” rules and are effectively treated as investments into a “trading business”. Shares on the Aim market and Enterprise Investment Schemes (EISs) can also qualify and it is possible to obtain other tax benefits through holding such investments. Aim shares can now be held within Isas and be exempt from income and capital gains tax, while EIS investments qualify for income tax relief at 30 per cent and capital gains tax deferral. Adam Katten is managing director of NLP Financial Management, which offers investment management and financial planning services. EIS investments and AIM shares are high-risk investments and can fluctuate rapidly and by large amounts; they may not be suitable for everyone. You could lose some or all of your initial investment. For more details, contact Adam Katten on 020 7472 5550, adam.katten@nlpfm.co.uk