In this article by David Dale, head at wealth management at Bond Dickinson, the law firm, he writes about attempts by the UK government to prevent types of inheritance tax avoidance.
The following item is by David Dale, who is head of wealth management at Bond Dickinson, the UK-wide law firm. He writes about the latest twists and turns concerning attempts by the government to prevent certain forms of avoidance on inheritance tax. This is always a controversial topic – and an emotional one too. His views are not necessarily shared by this publication but the editors are very pleased to share insights from an expert on such a topic. There will be more views about this issue in the coming days and weeks. As ever, feedback is most welcome.
“There are no pockets in shrouds” and that’s just as well if the latest scare stories doing the rounds are to be believed about HM Revenue & Customs demanding inheritance tax from taxpayers before they die.
Death and taxes are two of life’s certainties, but it is still inconceivable that HMRC would try to collect death tax in advance of someone’s demise and even this organisation has confirmed that “the government will not be asking taxpayers to make an accelerated payment of inheritance tax - which is due on death - during their lifetime”.
Although much has been written of late regarding “accelerated payments”, which means that HMRC can demand tax up front from individual taxpayers once they start to look into a tax avoidance scheme, before the outcome of the investigation is known, this is not being extended to target law-abiding taxpayers who are engaged in legitimate tax planning within the remit of the law to mitigate their IHT liabilities.
HMRC has been looking to overhaul the IHT system for some time. There is a consultation document in circulation which has been published by HMRC, entitled The Simplification of Trusts. One of the proposals outlined in the document is a single “settlement nil-rate band” (SNRB) for each individual, which can be used for settlements created in lifetime, or on death, effective from 7 June 2014; this will be in addition to the personal nil-rate band (NRB).
Prior to 6 June 2014, monies could be transferred out of an individual’s estate and into a trust arrangement and if the transfer was less than the value of the NRB, no inheritance tax would be due. Any amount settled in excess of the nil-rate band would be liable to a lifetime IHT charge of 20 per cent, so the concept of paying the tax whilst someone is still alive is really not that new.
After a seven-year period, the nil-rate band could be refreshed and a further transfer into a trust could be made up to the band without incurring any IHT charges.
Under the new proposals, with effect from 7 June 2014, when a settlor creates a new trust, or adds fund to an existing trust, he must decide what percentage of his settlement nil-rate band he wants to apply to that trust. If a trust is wound up during a settlor’s lifetime, the settlor can reassign the newly available percentage of his SNRB against either new or existing trusts settled by him. When a settlor dies any unused percentage of the SNRB can be applied to trusts he has created in lifetime or on death.
Although, the proposed SNRB is being seen by some as a move by the authorities to limit some accepted legitimate tax planning strategies, HMRC is more concerned about the increase in the number of sophisticated tax planning schemes that have been devised to avoid even basic IHT charges on setting up and operating trusts and it is these more aggressive schemes that blatantly avoid tax that HMRC is looking to "stamp out" and include in the "accelerated payment" scheme.
No doubt the increase in the popularity of these schemes has been fuelled by the fact that with the increase in property prices and the stagnant inheritance tax nil-rate band, the gap is widening and more and more “ordinary” families are now facing IHT dilemmas.
There are nevertheless still a good deal of tax planning opportunities which are within the spirit of the law that can legitimately reduce the value of an individual’s estate for IHT purposes and these are not subject to attack from HMRC if used properly.
For example, if someone is married or has a civil partner, they can inherit their other half’s estate without facing any IHT bill. In addition, they can inherit their unused IHT allowance if it has not been used, so in the above example this would be fully intact and would currently be worth up to £650,000 ($1.085 million) on the second partner’s death.
You don’t have to wait until you die to pass on your assets. During your lifetime, you can basically give “what you want to whoever you want” in the form of a “potentially exempt transfer” and as long as you survive for seven years, the PET will not form part of your estate for IHT purposes. There is relief available if you survive more than three years, but less than seven years from the date of the gift.
You can give away up to £3,000 in each tax year without it being included in your estate when you die and if unused, this annual allowance can be rolled into the next tax year allowing you to give away a maximum of up to £6,000.
There are other gifts which are completely exempt, no matter when you die after making them and these include, gifts to your spouse or civil partner, gifts to charities, museums, amateur sports clubs and gifts of up to £250 a year to as many people as you want. If someone marries and you are the parents, you can give up to £5,000, grandparents can give up to £2,500 and anyone else up to £1,000.
There are of course special anti-avoidance rules to prevent you from, for example, giving away your house and continuing to live there as this is classed as a "gift with reservation of benefit" and would still form part of your estate, unless you pay a full commercial rent for the use of the property.
Add to all this business property relief and agricultural property relief which are both available in certain circumstances to fully relieve or partly relieve transfers made in to trust in lifetime or on death and you will see that there are plenty of legitimate ways to reduce your IHT bill without getting getting involved in complicated tax planning schemes which are in danger of being attacked by HMRC, which may mean that death taxes are imposed well before their time.