Inheritance Tax planning – not just for the wealthiest in society

8 June 2017

Inheritance Tax is charged on the value of an estate in excess of the nil rate band – currently £325,000. The tax is not progressive and once the threshold is reached tax is payable at a flat rate of 40% on the full value of the estate over and above the nil rate band.

An additional nil rate band, introduced from 6 April 2017, is available where all or part of the value of the estate can be attributed to a main residence and that residence is transferred on death to a ‘direct descendant’ defined as a child, stepchild, adopted child or foster child of the deceased and their lineal descendants. For deaths during 2017/18 the additional nil rate band available is £100,000 and this is set to increase annually until it reaches £175,000 in the 2020/21 tax year. So, the maximum nil rate band available to an individual will be £500,000. When you take into consideration that in 2017 you needed wealth of £85 million to even be considered for the Sunday Times Rich List of the 1000 most wealthy individuals in the UK, it is clear that there are many individuals who are far from being part of the super-rich for whom Inheritance Tax is a real issue.

Planning options

Whilst many people feel that they should consider estate planning, many fall at the first hurdle when they understand that in most instances this planning will involve making large gifts of capital with no means of accessing either the capital or the income that it generates after the gift has been made. Any planning which involves retaining access and control of capital is likely to be attractive. The other issue faced by advisers is that people leave it too late to consider planning and many options require the person making the gift to survive for seven years after the gift is made. There are however several alternatives available which can accommodate individuals with these particular issues.

Financial services products – Discounted gift trusts, loan trusts and wealth preservation trusts are all products marketed by the financial services sector and can be a way of gifting in an Inheritance Tax efficient manner whist retaining some access to capital albeit with considerable restrictions. These products have their place in Inheritance Tax planning and can be useful where fairly modest sums are involved. Of the three, only the loan trust does not have the requirement for the donor to survive for seven years after the gift to become totally effective.

Business property relief (BPR) – Although this relief is aimed at allowing shareholders of qualifying companies and sole traders and partnerships to pass their businesses down the generations without an Inheritance Tax charge, it is also available in respect of qualifying companies quoted on the Alternative Investment Market (AIM). This relief is particularly suitable for individuals with a limited life expectancy along with the desire to retain access to capital and income and, if the conditions are met, 100% relief is available. The conditions for the relief are:

  1. The investment in the qualifying business must have been held for at least two years at the date of death.
  2. There is no binding contract for the sale of the investments at the date of death.
  3. The business undertaken by the company or companies invested in is not non qualifying – broadly a company who was wholly or mainly undertaking the holding or making of investments. A property management business would fall into this category.

There are now many providers in the market who will offer the investor BPR investments, particularly now that these type of shares can be held within an ISA wrapper.

Enterprise Investment Scheme (EIS) – Investment in this scheme, which is aimed at funding business start-ups, also qualifies for business property relief as well as additional tax benefits. In recent years this market has seen real growth and providers have marketed investments of this type solely as an Inheritance Tax shelter by establishing businesses which fall within the rules but which carry a lower level of risk than an AIM portfolio for example. This type of investment may be attractive to an individual who has modest Inheritance Tax exposure and would like to minimise their risk but still have access to capital should it be required.

For further information on Inheritance Tax efficient investments and estate planning more generally, please contact me or your local UHY adviser.