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cutting inheritance tax bills still worth a try

14/02/2007

Despite the spiralling numbers who will ultimately be caught for inheritance tax (IHT), and the efforts of the government to close so-called loopholes, there are still ways of cutting tax bills.

This was the key message from Martineau Johnson partner Keith Dudley at a seminar designed to help to consider alternative tax planning methods.

Rising IHT bills are threatening to raid the inheritance of millions of people across the UK caught by rising house prices and a relatively low tax exempt nil rate band for IHT of £285,000. To make the position worse, the government has been busy attacking trusts, long used for protecting family wealth.

But there are still actions that you can take to improve the position, as Mr Dudley explains. “Gifts of any kind to individuals, where the donor survives for a seven year period are exempt from IHT and this remains an attractive option.

“There is also a less well known exemption for ‘gifts out of surplus income’ where you make gifts to beneficiaries from the balance of your income after taking into account all outgoings.

“Gifts that come into this category can be exempt from IHT even if the person making the gift dies within seven years.

“You can in any event still give away £3,000 worth of assets each year from your estate, and you can carry forward any unused relief for one tax year.”

The government has made less attractive many of the trust-based schemes that have been used to help parents or grand-parents to pass on wealth to the next generation. These enabled there to be some control over how the money is used, through trustees.

Now, if you transfer more than £285,000 to a trust, there is a penal 20 per cent tax charge and other periodic tax hits on the value of assets held in the trust.

But Mr Dudley explained that it was still possible to make use of the new ‘relevant property’ trusts: “A husband and wife can still settle £285,000 each without an immediate tax charge.”

Owning shares in companies that are eligible for business property relief (BPR) has become an increasingly popular way of saving inheritance tax.

As the trading businesses concerned can be either unquoted or listed on the AIM market, there will be some element of risk, but the development of AIM has meant that many companies listed on it are substantial and have good trading records.

Agricultural land continues to be a means by which wealthy people can shelter inheritance tax liabilities, though the relief only applies to the agricultural element of any farm purchase.

“You can set up trusts that hold assets eligible for BPR and agricultural property relief” said Mr Dudley.

One area of IHT avoidance that has not yet been attacked by Chancellor Brown is the general power that trustees currently have to vary the terms of a will within two years of death. Such powers can still be used to reduce IHT bills and to redirect family assets, Mr Dudley explained.

Other speakers at the tax seminar were Chris Ward from specialist independent financial adviser The Ward Consultancy and Gary Wasdell from Ernst & Young. There was also an entertaining talk by former England rugby star Austin Healey.

For further information please contact Keith Dudley on keith.dudley@martjohn.com