What if you really want to avoid Inheritance Tax?

25th November 2015

We have recently undertaken some planning for a disabled couple in their early 80s. Their assets exceeded £3m and they were worried about the inheritance tax (IHT) liability on their estate, wanting to pass as much as possible to their son.

We prepared a lifetime cashflow which demonstrated that, even in the scenario of them both needing long term care, they had enough income to cover their expenditure for the rest of their lives. We therefore turned our attention to the ways in which they could potentially reduce the inheritance tax liability.

We all know that tax rules change all too regularly, however it is only ever possible to plan in the context of today’s rules; no one has a crystal ball!  So we talked to them about their options:

  • Make a Lifetime gift to Trust151125 £ in box - 000015450920
    • Up to £650,000 could be gifted to Trust for the benefit of their children and grandchildren – this will not be included in their estate after 7 years, and the tax liability on the gift reduces in the interim. By making such a gift there is the potential to save up to £260,000 in tax. A gift in excess of this to Trust would be subject to an initial tax charge of 20%.
  • Make larger gifts to individuals
    • Such gifts will still count as part of their estate for seven years after the transfer and therefore could be subject to Inheritance Tax if they die in that period.

Sometimes gifting money (which in both the options summarised above then becomes inaccessible to our clients) is difficult but actually there are few options that are clearer – certainty and simplicity are important.

If it is ‘necessary’ to keep access to the money then there are some investment options:

  • Inheritance Tax ‘Products’
    • Most of these are designed to save tax without targeting a high return, the intention being to have a low investment risk but meet the terms for ‘Business Property Relief’ (BPR).
    • The investment becomes free of IHT 2 years after the investment date.
    • There is usually access to the money in theory – but sometimes in practice the liquidity is limited and it can take weeks or months to access the capital.
    • Returns (if any) are not often guaranteed and there is risk to the capital – this is usually necessary to access BPR rules.
    • Other BPR products are available with higher investment risk and potential return plus sometimes advantages for Capital Gains Tax or income Tax as well.

Our preference is to embrace simplicity, make gifts where they are affordable and add complexity only where necessary; for these clients we decided to start with the simple gift to Trust.