Getting wise to the inevitable stings of death and taxation
Spiralling property prices demand that more of us put an IHT strategy in place, writes Jeff Salway
www.scotsman.com: e-mail scotsmancash@yahoo.co.uk.
GOVERNMENT revenues from Scottish families dragged into the inheritance tax (IHT) net are on the rise, yet simple methods of avoiding the charge are being overlooked.
A combination of higher asset prices and a frozen IHT threshold has sent government tax takings from the socalled “death tax” close to a pre-crisis high. UK families paid £3.4 billion in IHT in the 2013-14 tax year, according to the Office for National Statistics, an increase of 8.6 per cent on the previous 12 months.
And while the families that ultimately pay IHT are still in a small minority, a growing proportion is set to fall into the trap over the coming years.
One reason is a freeze in the threshold – or nil rate band – above which assets are charged IHT at 40 per cent. It remains at the 2009 level of £325,000 and will stay there for at least another five years, under a UK government measure funding social care in England and Wales but which also hits Scottish households.
By 2019, the number of estates liable to IHT will rise by some 60 per cent, the Office for Budget Responsibility estimated earlier this year. However, that forecast came before a recent spike in property values sent
“If you do not want your beneficiary to have immediate access you can place the capital in a trust” Brian Steeples
house prices in Scotland to a four-year high. The rate of increase north of the Border outstrips most areas of the UK, the latest data from LSL Property Services showed this week.
The good news is that there are several ways for families at risk of falling into the IHT net to reduce the amount they pay or even avoid it altogether.
Unfortunately, however, many fail to take those steps. Almost half of Scots who expect to leave their families facing an IHT charge when they die do not know the point at which the tax kicks in, a report warned earlier this year.
Close Brothers Asset Management found that more than one in four people in Scotland with assets (such as their home) worth more than £325,000 has no measures in place to mitigate against the tax.
Many people fail to tackle IHT because they feel their financial affairs are too complicated, said Brian Steeples, managing director at the Turris Partnership in Glasgow.
“They might not want to include liquid assets such as properties or private limited company assets, for example,” he said. “Others might have family situ- ations where IHT planning could potentially cause family disputes.”
Some will take the view that they don’t want to make any changes that might affect their current lifestyle.
“Most people fall into that middle ground of being happy to consider some planning provided it doesn’t reduce their standard of living,” said Steeples. “But they also need to provide for potentially expensive future care costs because they won’t want to go ‘cap in hand’ to their children after giving too much money away too early.”
So what are the best ways to avoid or reduce IHT?
The most obvious is to use the various reliefs and exemptions available. Up to £3,000 can be gifted each year and one-off gifts of up to £250 can be made at any time without them being liable to IHT, for example. There’s also a rule that allows people to gift as much as they like IHT-free provided they sur- vive for seven years after making the gift and no longer have an interest in the asset.
Trusts can be effective too, said Steeples. “If you do not want your beneficiary to have immediate access to the gift you can place the capital in a trust,” he said.
The seven-year rule still applies here, but there are specialised trust arrangements on offer here that can create an immediate IHT reduction, Steeples pointed out.
“Around half of the gift would come out of the estate immediately, with the other half being subject to the seven year rule. The person gifting can receive a regular withdrawal from the trust as spendable amounts for themselves,” he explained.
“These are called the discounted gift trusts and can be a useful tool in the right circumstances.”
Another easy option that’s frequently ignored is the ability to place life insurance policies in trust, which ensures the proceeds are kept outside the estate.
Yet up to £530 million will be spent needlessly on IHT this year because policies have not been placed under trust, unbiased.co.uk has estimated.