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Planning for inheritance tax savings now

Inheritance tax (IHT) planning may feel like one of those distant priorities that does not need attention until you’re approaching your twilight years. Recent rule changes confirmed in the Budget will enable many family homes to be passed onto loved ones exempt from inheritance tax, but a potential side-effect of this positive reform is the risk of not paying significant attention to the detail and planning necessary to mitigate the impact of this corrosive tax.

In the emergency Budget in July, the Conservatives confirmed the total IHT threshold for those who own a family home will increase from April 2017 until it reaches £500,000 in 2020. This means that married couples and civil partners will be able to pass onto their children assets worth up to £1m, including a family home, without paying any IHT. However, don’t get too excited and dismiss the possibility that IHT will impact you. While the family home allowance seems generous, there are restrictions on who may benefit and it is not coming into effect just yet and is therefore subject to change in the future.

So let’s look at other actions that can be taken to ensure your IHT liability is reduced even if a new government throws out the family home allowance by the time you die. After all, it is a very difficult feat to estimate what the value of your estate will be when you die. Luckily, there are actions that can be taken during your lifetime that can reduce your potential inheritance tax liability on death by looking at what can, under current legislation which is of course always subject to change, be exempt from IHT.

One of these is tapping into Business Property Relief (BPR), a tax concession that can for example help families pass on a qualifying trading businesses to their family beneficiaries and avoids them having to sell the business just to pay inheritance tax.

Under BPR, an individual must have owned the company, or shares in the company, for at least two years at the time of their death to be able to pass them on free of IHT.

However, this concession doesn’t just apply to family businesses. It is possible to benefit from the relief simply by holding shares in a small, privately owned or AIM listed company.

As long as it is a trading business, HMRC may decide it qualifies for BPR. The most notable companies that do not qualify for BPR status are those that primarily hold or trade cash, property or shares.

Shares bought through Enterprise Investment Schemes are also exempt from inheritance tax, but similarly to AIM, they are new shares in small businesses. Thus, they are more risky and tend to be more volatile than established companies. Using a range of AIM stocks in a diversified portfolio, with wide spread of different investments, can help reduce the risk.

Also, the company’s status at the investor’s time of death dictates whether the relief will be given. So there is the risk that as these are early stage companies, they could be listed on a larger stock exchange in the future once they become developed and as such no longer qualify at the crucial time.

Looking at the technicalities, as long as an investor holds qualifying AIM shares in an ISA for at least two years, the investments should be exempt from IHT (currently 40% of assets above the £325,000 nil rate band threshold).

Bearing in the mind the risks and advantages of investing in AIM shares, our general advice as a Independent Financial Adviser with decades of experience is we caution against the tax tail wagging the dog. Thus, tax advantages should be considered alongside the investment or action itself, rather than in precedence to it.

The same logic applies to taking a whole view of all your tax-wrappers, rather than viewing each in isolation. This is especially important as since April 6, millions of savers have been able for the first time to pass their pension pot, potentially tax-free, to anybody they want when they die, and this creates the opportunity for a pension to be an increasingly important inheritance tax planning tool.

Therefore, for some retirees, it could now be more tax efficient to live off assets such as savings accounts and ISAs that would be liable for inheritance tax, before tapping into a pension. It is important to consult the services of an Independent Financial Adviser, such as Lowes Financial Management, when tax planning, especially as often mitigating one tax liability can result in leaving you susceptible to another.

This was posted in Bdaily's Members' News section by Lowes Financial Management .