Inheritance Tax

These are known as potentially exempt transfers (PETs). It sounds easy. You give the assets away, you survive 7 years then the job is done.

PROBLEM 1

Who should make the gift? The husband or the wife or both? You may benefit from a discount on the tax element known as Taper Relief if you die between 3 and 7 years of making a gift. But the relief is only on that part of the gift above £325,000. Most people don’t know that and getting it wrong could be an expensive mistake.

PROBLEM 2

You lose control of the asset that you’ve gifted.

ANSWER

Take expert advice on the best way to make the gift. We have solutions that enable you to protect that gift in the hands of the recipient so you don’t need to lose total control.

After 7 years that part is out of your estate for IHT. Simple.

PROBLEM

You must pay full market rent to your children for the proportion of the house gifted. Your children pay income tax on the rent received. Your children are liable to Capital Gains Tax (CGT) on the gain on their share going forward. And if you get it slightly wrong it fails entirely.

ANSWER

For couples, use our Annuity Scheme. One spouse sells a half share to the other in exchange for an Annuity which he or she then gifts to the children as a 7 year PET. After 7 years half of the value of the house is out of the estate for IHT. It works well if set up properly but it requires expert advice to ensure it is.

After 7 years they are out of your estate for IHT purposes. Couples can use our Annuity Scheme for other assets. One spouse sells the whole of an asset e.g. a share portfolio, second property etc to the other spouse for full value in exchange for an annuity which he or she can then gift to the children as a 7 year PET. If set up properly that will take the value of this asset out of IHT after 7 years.

5    Use the Deed of Variation Scheme

A relative dies and leaves you an inheritance.

PROBLEM

That inheritance gives you an IHT liability.

ANSWER

Use the Deed of Variation procedure to set up a Trust to take the inheritance for the benefit of you and your family. There are time limits but this works if set up correctly.

Use the normal expenditure out of income solution. You have an IHT liability and your income is higher than your expenditure.

PROBLEM

The excess income builds up as capital and will suffer 40% IHT when you die.

ANSWER

Make regular payments of your excess income to your children. These are immediately exempt from IHT. The rules can be a bit tricky to implement but this is a very significant exemption if used correctly. We can keep you right.

You have an IHT liability.

PROBLEM

You do not wish to give assets away and/or you are unlikely to survive the 7 year period before any gift is exempt from IHT.

ANSWER

Transfer assets into a Business Property Relief Scheme. There are lots to choose from. You change non exempt assets to business property assets, and after just 2 years, they are 100% exempt from IHT. You need to retain these assets until you die but you can receive an income and, since you have not given the assets away, you can encash some or all at any time. These schemes are easy to operate and popular but you need expert guidance to achieve the best outcome and choose a suitable scheme for your circumstances.

You want to gift an asset to your children to avoid IHT after 7 years.

PROBLEM

The asset has gone up in value and the gift will trigger CGT which you don’t want to pay. Also you don’t want to lose control of that asset. And you don’t want the asset to be part of your children’s estate and create an IHT liability for them.

ANSWER

Set up a Settlor Excluded Trust and transfer the asset to that Trust. You will be the Settlor and a trustee and therefore retain control of that particular asset. You will have no benefit from the asset but it will be out of your estate for IHT after the 7 year period. And you qualify for Holdover Relief so that the CGT is not payable until the trustees eventually sell or transfer the asset. We can guide you through this.

Our tip here is to avoid Discounted Gift Trusts altogether. They seem attractive. The IHT exemption is immediate. You don’t have to wait 7 years or even 2 years. And you receive a monthly income.

PROBLEM

If you put £100,000 into a DGT you don’t save 40% IHT on the £100,000. You receive a discount based on many factors mainly around your age and health. The discount could be 30% but is often less and sometimes nil. Even with a discount of 30% you only save 40% tax on the 30% discount i.e. £12,000 IHT on an investment of £100,000 not £40,000 as many people seem to think. And the “income” is actually repayment of capital. This is normally at 5% so if you put in £100,000 you would have to receive £5,000 per annum back. That usually just builds up year on year and will itself be subject to 40% IHT when you die. So you might put in £100,000, get a 30% discount and therefore save £12,000 IHT. However after 4 years you have £20,000 back which itself will result in £8,000 IHT. So the net saving is only £4,000. And if you live longer it can go negative.

ANSWER

Speak to us – we have many better solutions.

You have parents from whom you expect to inherit.

PROBLEM

When that inheritance is added to your assets (and any assets which you might expect to inherit from your spouse’s family) it will often put you above the IHT limit when you die. Remember if you are single or divorced your allowance is only £325,000. If you are married your allowance will normally be £650,000 but then again you might well inherit from both sides of the family. There is no point in your parents having no IHT liability or indeed avoiding their IHT and simply passing that liability on to their children.

ANSWER

Your parents each set up one of our (FPT) Family Protection Trusts and transfer their assets into those Trusts. If their assets are above their IHT limit there are ways to place the whole amount into their (FPT) Family Protection Trusts. When your parents die, the trustees will have three options. They can transfer the assets to the children if that is sensible. They can retain the assets in your parents’ Trusts for the benefit of the children without those assets becoming part of the children’s estate for IHT. Or they could lend the assets to the children in exchange for a valid ANNUITY SCHEME so that the children in effect get the benefit of the inheritance without incurring IHT liability.