Last month we discussed Inheritance Tax and why the yield from this will only increase in the future. 

    We considered gifting as one solution to minimise the tax, but there are many others. Let’s take a look at a few.

    Potentially Exempt Transfer (PET)

    To fully appreciate the issue of making gifts it is necessary to understand what constitutes a PET. 

    Broadly speaking, if you make any gifts in your lifetime and survive for seven years after making them, then their value will not be counted as part of your estate on death and will be exempt from IHT. 

    These lifetime transfers to individuals are called Potentially Exempt Transfers (PETs). The donor must have given up all rights to the asset for it to fall within the PET rules.

    This is possibly the simplest way of passing wealth down to the next generation without incurring planning fees or IHT, but it does mean that the donor needs to be certain that he/she will not require access to the funds gifted. 

    If funds for a gift aren’t readily available and the potential donor owns residential property they may wish to consider borrowing against the security of the property by way of Equity Release and gifting the funds generated. This is a whole subject of its own and it is essential that the person takes advice from a regulated party in that sector.  

    Where the donor dies within three years of the date of the gift then the PET fails and the whole amount of the gift falls back into the estate. Where the donor dies between three and seven years from the date of the gift, any IHT which becomes payable can be reduced by taper relief. 

    Taper relief reduces the amount of tax payable, not the value of the transfer. Relief is given at 20% increments for each year from year three onwards. Any IHT paid at outset can be offset against the IHT payable on death. It’s important to appreciate that taper relief does not reduce the value of the transfer so if no IHT was paid on the gift then taper relief is not available. A specific life assurance policy is available to cover the tax payable if the donor dies within seven years referred to as a ‘gift inter vivos’ policy with the premium dependent on age and health.

    Any tax on gifts in the years before death is the responsibility of the recipient. In the case of gifts to trusts the liability rests with the trustees.

    Business relief

    This was introduced in 1975 under the predecessor to IHT and was originally intended to avoid the sale of a business to meet taxes. Business relief of 1005 is available on:

    •     a business or interest in a business
    •     shares in an unlisted company

    You can get 50% business relief on:

    •     shares controlling more than 50% of the voting rights in a listed company
    •     land, buildings or machinery owned by the deceased and used in a business they were a partner in or controlled
    •     land, buildings or machinery used in the business and held in a trust that it has the right to benefit from

    You can only get relief if the deceased owned the business or asset for at least 2 years before they died.

    It‘s not necessary to have an interest in a family company, there are various companies established that carry on a qualifying trade and in which the taxpayer can invest in order to qualify for business relief. Naturally due diligence is required in order to weigh up the commercial risks and the charges.

    It’s also possible to obtain Agricultural Relief on land or pasture that is used to grow crops or to rear animals intensively. Agricultural Relief is due at 100% if:

    •     the person who owned the land farmed it themselves
    •     the land was used by someone else on a short-term grazing licence
    •     it was let on a tenancy that began on or after 1 September 1995

    In other cases, relief may be due at a lower rate of 50%.

    Business relief may also be due on certain shares traded on the Alternative Investment Market (AIM) once they have been owned for the minimum period of two years. The ability to invest in AIM shares through AIM ISAs has also increased their appeal for IHT planning purposes.

    It must be stressed that share prices on the AIM market can be volatile and the bid/offer spread can be wide in many instances. 

    The above are just a few fairly unsophisticated strategies to reduce IHT that may appeal; needless to say there are more complex solutions including those involving trusts. 

    The very important issue of Wills has not been mentioned either although it’s of course vital to ensure these are drawn up with IHT in mind.  

    While IHT is said to be a universally unpopular tax, it seems here to stay, and a lot will be written and spoken about over it over the next few years. It’s undoubtedly an area where competent advice is required on the tax, legal and emotional consequences of planning.

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