‘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 HM Revenue & Customs would try to collect death tax in advance of someone’s demise and even HMRC has confirmed that ‘the Government will not be asking taxpayers to make an accelerated payment of inheritance tax (IHT) - which is due on death - during their lifetime.’
You may have read the numerous press articles about ‘accelerated payments’, which means that HMRC can demand tax up front from individual taxpayers once they start to look into a tax avoidance scheme, even before the outcome of the investigation is known. Quite rightly, 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.
Overhauling the system
HMRC has been looking to overhaul the IHT system for quite some time and is proposing to introduce 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).
Under new proposals when a settlor creates a new trust, or adds fund to an existing trust, he must decide what percentage of his SNRB he wants to apply to that trust. If a trust is wound up during his 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 may be viewed by some as a move by HMRC 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. It is these more aggressive schemes that blatantly avoid tax that HMRC is looking to ‘stamp out’ and include within the ‘accelerated payment’ scheme.
The increase in popularity of these type of schemes has no doubt been fuelled by a combination of the rise in property prices and the stagnant IHT NRB, which means that the gap is widening, and more and more ‘ordinary’ families are now facing IHT dilemmas.
Tax planning opportunities
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 your estate for IHT purposes and these are not subject to attack from HMRC if used properly.
For example, if you are married or have a civil partner, you can inherit your other half’s estate without facing any IHT bill. In addition, you can inherit their unused IHT allowance if it has not been utilised, and this would currently be worth up to £650,000 on the second partner’s death.
You do not have to wait until you die to pass on your assets. During your lifetime, you can broadly give ‘what you want to whoever you want’ in the form of a ‘potentially exempt transfer’ (PET) 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 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, say, giving away your house and continuing to live there, as this would be 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. It is possible to do so without 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!