Mitigation of Inheritance Tax - Financial News Autumn 2007

01 October 2007

Inheritance tax (IHT) is fast becoming an issue for many due to the rise in the value of property and other assets. Despite recent changes in IHT legislation which will allow the transfer of Nil Rate Band available between husband and wife; beneficiaries may still be hit by large tax bills on inheritances from parents or grandparents. Fortunately, IHT is something that can be mitigated if careful planning is put in place at an early stage.

Firstly, we all have a Nil Rate Band available on death where the first £300,000 (2007/08) is chargeable to IHT of 0%. There are also a number of exemptions that can be used to allow gifts completely free of IHT. Gifts that do not fall within one of the exemptions will fall out of one’s estate after seven years’ survival of the date of the gift. Trusts are a very effective method of reducing IHT and although sometimes appear complex, can offer excellent opportunities to keep family funds away from the taxman.

Where there is a large amount of capital available to invest and IHT is a concern, discounted gift schemes may offer a solution. These are schemes offered by insurance companies and involve the use of investment bonds and a trust.

A lump sum is invested in an investment bond which is usually held offshore. The investor, or Settler, determines a fixed level of withdrawals to be made from the bond, which cannot be changed in the future. The bond is then held in Trust for a selected range of beneficiaries. By securing the pre-determined level of withdrawals, the value of the gift into the Trust is discounted, providing an immediate reduction in the value of the Settler’s estate. The discount is determined following full underwriting by the insurance company. An example for a healthy single life aged 70 investing £100,000 and taking level annual withdrawals of 5% would be a potential discount of £46,200 from their estate. This means an immediate inheritance tax saving of £18,480.

On survival of seven years from the date of the gift, and provided the Settler had not made any chargeable gifts in the seven years prior to that, any potential liability to IHT will disappear.

The withdrawals could be used to supplement income or make gifts using the available IHT exemptions. Any growths on the funds held in the investment bond are excluded from the estate from day one. On the death of the Settler, the Trustees will be able to encash or transfer the bond to the beneficiaries as appropriate.

For more information please contact Ruth Dolan, Taxation and Financial Planner.
 

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