Belfast Telegraph

Friday 26 December 2014

Plan ahead for the hereafter

John McClelland takes a closer look at inheritance tax planning following the Chancellor of the Exchequer's latest IHT ruling.

In the wake of the recent pre-Budget fiscal fist fight that erupted over inheritance tax, the spectre of the grim reaper has been hanging around many a family.

The changes, which took effect immediately, allow married couples and those in civil partnerships to transfer their inheritance tax allowance – currently £300,000 – to their spouse when they die, meaning couples will no longer pay tax on their estate unless it is worth more than £600,000.

With the individual inheritance tax thresholds due to rise to £350,000 in 2010, this will give couples a joint allowance of £700,000 from the start of the next decade.

The changes will be backdated indefinitely, ensuring that widows and widowers will also benefit. The change will cost the Treasury £1.4bn by 2010.

The Chancellor, Alistair Darling, also promised to take inflation and house price growth into consideration when reviewing the thresholds in future, ensuring that only the wealthiest families pay the tax.

Rapid house price inflation over the last decade has doubled the number of families paying the tax.

Despite these changes, many people will still be caught with a substantial inheritance tax liability.

There are many possible ways to reduce the inheritance tax liability. The most obvious one is to tell your children that you plan to take up SKI-ing - Spending the Kids' Inheritance.

However, if that is not your preferred option, and you think there are seven years left in you, you might gift your assets to your children or grandchildren, or set up some sort of trust.

Setting up a trust is a way of giving assets away to other people without necessarily giving them full control.

Putting assets in a trust is a way to possibly exclude those assets when calculating your inheritance tax liability on death. They are also useful in protecting assets for future generations and vulnerable beneficiaries.

Life assurance policies, pension death benefits, capital investment bonds and many other assets can be put in trust. And it doesn't necessarily mean that you can't have access to your assets while you're still alive.

Another method of reducing your inheritance tax liability is to make gifts to charities, as they are exempt from inheritance tax. You can also gift to some national institutions, such as universities, and to UK political parties. In addition you can make an annual gift of £3,000.

Also, when someone marries, they can receive up to £5,000 tax-free from their parents and £2,500 from grandparents. Anyone else can give them £1,000 without the risk of the gift attracting inheritance tax.

You don't have to be elderly to be concerned about inheritance tax. Younger people that have acquired wealth at an early stage in their lives should consider putting in place what is known generically as an inheritance tax protection policy, written in trust for beneficiaries other than the surviving spouse.

This will provide a tax-free sum to help the beneficiaries meet the eventual inheritance tax liability. The monthly/annual premiums are likely to be relatively modest.

If you are a high net worth individual, and considering retirement, your main priority may be to reduce the value of the estate while keeping sufficient capital and income to fund an appropriate standard of living.

There are methods available (using trusts) that allow you to receive an income for life from your capital, and at the same time you have gifted the capital to your beneficiaries.

Furthermore, succession planning for a business is also crucial while preserving any inheritance tax business property relief (BPR) which is available.

If you prefer not to use trusts, there are certain investments that can offer inheritance tax exemptions.

For example, if you bought a portfolio of shares in the Alternative Investment Market (AIM) and survive the investment for two years, the total value of your investment will qualify for business property relief.

Under current tax rules, business property relief enables the value of the investment to be excluded for inheritance tax purposes if you survive for two years from the date of the investment.

You may also consider investments into enterprise investment schemes (EIS).

Provided an EIS qualifying investment is held for no less than three years from the date of issue, or three years from commencement of trade, if later, an individual with no more than a 30% interest in the company can reduce their income tax liability by an amount equal to 20%.

Tax on gains realised on a different asset can be deferred indefinitely where disposal of that asset was less than 36 months before the EIS investment or less than 12 months after it.

Importantly, EIS investments are generally exempt from inheritance tax after two years of holding such investments.

Naturally, all readers should consider making a will even if you don't have an inheritance tax liability.

As mentioned above, if you have an inheritance tax liability you can reduce a potential inheritance tax bill, or even eliminate inheritance tax altogether, and all with a little forward planning.

However, your inheritance tax solution will depend on your personal needs and circumstances.

It is therefore very important that many people, whatever their age and circumstances, at least consider their position and take advice on the options available to them.



John McClelland is principal of Knightsbridge Financial Services.

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