December 10, 2024What are Mitigation Strategies for Inheritance Tax?
This article aims to help you to negotiate the complexities of IHT liability and enable you to reduce or eliminate the risks posed by Inheritance tax to your estate.
Background to IHT
Due to existing inheritance tax (IHT) rules, when an individual dies, his or her estate is subject to a sizeable claim from HM Revenues and Customs.
Tax is 40% on assets that exceed the threshold (the nil rate band) which is currently £325,000. In addition to this, there is a family home allowance of £100,000, allowing individuals to pass on assets including a family home worth up to £425,000 to their children or grandchildren tax-free. For now, the government plans to keep the nil rate band frozen at its current level and this has led to an increasing demand for products that mitigate or even eliminate IHT liabilities.
Consequently, it is important to understand the IHT mitigation strategies available to you as an investor. Your decisions now could have a critical impact upon the options that you leave your beneficiaries, should you pass away.
Discounted Gift Trusts (DGT)
Discounted Gift Trusts (DGT) are one of the most popular IHT solutions presently available in the marketplace. With a DGT, HM Revenue & Customs places no limit on the amount that you can invest. The effective limit is the nil rate band, and it is important to note that with this option, you do not have to ‘gift’ your money to your beneficiaries to obtain tax breaks.
Importantly, a DGT also allows you to continue to receive the tax-deferred income from your investments during your lifetime, at the pre-determined level that suits you. In addition, part of your investment will be exempt from inheritance tax immediately.
It should be noted, however, that there are limitations to Discounted Gift Trusts. For many people, a Discounted Gift Trust takes too long before it becomes fully IHT exempt. Although there is some immediate relief, part of the investment made into a DGT does not fall outside of the taxable estate until seven years have passed and consequently, this uses up part of the nil rate band in the meantime.
Crucially, this means that the investor remains liable to IHT if they die within that period. This can be a cause for concern. For elderly clients, seven years is simply too long to wait, particularly for those with health problems as they are unlikely to receive a ‘discount’ from HMRC, allowing immediate IHT benefit.
Business Property Relief (BPR)
An alternative solution to DGT which uses a tax incentive called Business Property Relief (BPR). It can be used as a way for investors to essentially ‘speed up’ the timescale for getting full IHT exemption on their investment, but without losing control over their money.
Originally, BPR was created to allow small businesses to be passed down by business owners to future generations, without incurring an IHT liability. Fortunately, it’s application has been widened in recent times, making it significantly more attractive to private investors looking to address potential inheritance tax liabilities.
The greatest benefit of BPR are simplicity, speed, and control. Instead of being forced to wait seven years for IHT exemption, BPR rules mean that after just two years, any qualifying investments benefit from 100% IHT relief. Investments that qualify for BPR include unquoted UK businesses, and shares in trading companies quoted on the Alternative Investment Market (AIM).
Inheritance tax solutions using BPR also offer several other benefits over and above a traditional DGT. As an example, the use of BPR can ensure that you, as an investor, retain access to your investment, allowing you to build capital value and potentially take a regular income. Alternatively, you may opt to dispose of holdings, should you experience a change of circumstances.
Critically, unlike DGT as an investment option, BPR-based products are structured to allow investment into a portfolio of BPR qualifying companies without involving complex legal structures, client underwriting or medical surveys. This includes the ability to transfer between spouses, following the death of the first spouse, with no requirement to ‘reset the clock’ on the two-year BPR qualification period. So, within a marriage or civil partnership, only one spouse or partner needs to survive for two years for their BPR-based investment to be exempt from IHT.
Equerry can help
If you would like further information regarding Inheritance Tax, please contact us here at Equerry Investment Management.
Click here, for more information.
Important information: With investment, your capital is at risk. AIM investments can be illiquid in nature and carry a higher degree of risk than other securities and are not, therefore suitable for some investors. Tax benefits and allowances described in this document are based on current legislation and HM Revenue & Customs practice and depend on personal circumstances. You should not take, or refrain from taking, action based on the content and no part of this document should be relied upon or construed as any form of advice or personal recommendation.
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