Tax Tip of the Month
April 2009
Cut your inheritance tax in half
A lot of people, including, we have to admit, ourselves, have rather got into the habit of acting as though trusts are dead as an inheritance tax (IHT) planning device.
The basic problem is: how do you give away assets, to save IHT, without risking your beneficiaries blowing the whole value, by being spendthrift, getting involved in unsuccessful businesses or getting divorced? The ideal answer used to be: set up a trust. That way you and others could control the propensity of your loved ones to lose money by keeping a tight grip on the capital, but you were still able to get the value outside your estate for IHT purposes.
On 22nd March 2006, this all changed. Any gift over £312,000 (or whatever the nil rate band for IHT currently is) is now chargeable to IHT at 20%, the lifetime rate.
What all those pronouncing trusts clinically dead are forgetting, though, is that 20% is a lot better than 40%!
If you simply clam up and keep the money in your own bank account, it’s 40% that the taxman will ultimately be receiving, on your death or on the death of your surviving spouse or civil partner. Gifts into trust, on the other hand, at least only end up with 20%, and by doing this you shelter any future increase in value outside your estate.
Trusts pay a ten-year charge of a maximum of 6%, but first this may be much less than 6% in practice (because of the availability of the nil band within the trust itself) and, second, a transfer onward out of the trust before the first ten-year anniversary actually avoids any IHT at all. True, you are then in the situation of having effectively gifted the property absolutely if you break up the trust at this point; however, a lot can happen in ten years.
Consider, then, making a staged series of gifts every seven years or so and suffering the immediate 20% charge, as a way of saving twice this ultimately. It’s not always going to be the right answer, but we can imagine lots of situations where it could turn out to be a pretty smart move.
