Inheritance Tax Advice

Inheritance Tax is avoidable and intentionally so.

For most people there is only one way to avoid significant amounts of Inheritance Tax (“IHT”) which is to make gifts above the IHT exemptions and survive by seven years. Such a gift is known as a "potentially exempt transfer".

Many clients are reluctant to give away their capital to save IHT in case they need it later in life – for example if they go into care. However the majority of people do not go into care, so inertia allows HMRC to collect IHT.

There is a perfect solution for such clients using an IHT trust that avoids Inheritance Tax after seven years survival, but which allows the client access to their capital. This trust may also be closed in favour of the beneficiaries at any time, unlike the discounted gift trust sold by so many providers. This allows those who may have been putting off IHT planning to take action.

Other clients may be willing to make gifts but feel fear that the recipient may lose the capital. A good example is a gift to a child with a rocky marriage, or perhaps one with a business in difficulties – very common at present. This means that IHT advice and commercial good sense can conflict. The Inheritance Tax plan described above could work here too.

Some clients have only their homes and pensions so they cannot see how to make IHT effective gifts.For these clients and subject to very specific independent advice, equity release coupled with an IHT trust may be a practical solution. Such a solution should only be explored with the involvement of the whole family because it could backfire if property prices fell and you died early. However used correctly this may cut IHT significantly (please note that Square One does not advise on equity release.

For clients who are very elderly and for whom survival by seven years seems unlikely, it is possible to invest in certain listed shares on the Alternative Investment Market (the “junior” stock market). This strategy is very risky as such shares are volatile and there may not be any market for them when you want to sell. However this may be the last chance to avoid Inheritance Tax for this with a limited life expectancy.

For all clients, make gifts every year – at least £3,000 is exempt from IHT and if you can show that you can make more gifts than this from income, without depleting capital, you may do so. If you seek to rely on this little-used IHT exemption, make sure you keep meticulous records of your income and outgoings and keep them until at least seven years are up.

Note that as IHT allowances are transferable between spouses (including civil partners) complex wills are no longer needed to avoid IHT. However they remain a vital part of estate preservation.

Finally, do something about Inheritance Tax and do it with specific advice for your own unique circumstances. Start work on your estate preservation today!Make sure you find an Inheritance Tax adviser who specialises in the subject.

For more help, contact our specialist IHT adviser and Chartered Accountant John Kelly.

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We are always happy to help individuals solve their IHT problems. If you would like to ask us a question, we will happily give you an answer on a single basic issue free of charge on the basis that we accept no liability.