COVID-19: Are you Reassessing your Inheritance Tax Position?

The pandemic has gifted the Chancellor, Rishi Sunak, a once in a lifetime opportunity to shake up the UK tax system, resulting in an understandable fear of tax rises from business owners and wealthy families.

More people are now reassessing their estate planning strategy and looking at how they can pass on their wealth tax efficiently, sooner rather than later.

We look here at the tax reliefs available to protect your wealth in your lifetime and how to practically position yourself now and beyond the current global health crisis.

Early Inheritance considerations

It is not only parents, but also grandparents, who are reviewing how the can pass down their wealth in their lifetime to help “lock in” the value of their estates for the donees to enjoy in full. The younger generations stand to be hit the hardest by the current health crisis and are more likely to call on the ‘bank of Mum and Dad’ to help them through the other side of the pandemic.

The urgency of looking at early inheritance planning is now upon us.

Under the current inheritance tax (IHT) rules you can give away your assets tax free if you survive seven years from the date of the gift (gifting can be given to anyone you choose). The benefit of gifting means that if you survive the seven year IHT rule, the gift falls out of your estate completely and at the time of your death the 40% IHT charge will not apply.

Many parents and grandparents may plan to leave their estate to the same individuals anyway at their death, but by following the seven year IHT gifting rule the recipient of the gift will enjoy it’s full worth rather than paying the taxman almost half of its worth.

Furthermore, there is a tapering of the seven year IHT rule from year three, which means that if you die between three and seven years from the date of the gift, the amount of IHT reduces year on year.

Gifting your assets to loved ones now by taking advantage of the seven year rule may not be a tax relief that will be around for long, at least in its current form. There is an expectation that the chancellor will look to reform IHT rules, whether it is at the Autumn Budget or beyond, so the time to plan is now.

Contact us today to review your current estate planning strategy.

Transfer of cash and shares

The impact of COVID-19 on the devaluation of shares means that this could be the perfect time to consider gifting cash and shares to loved ones as it will attract a lower capital gains tax (CGT) bill than in normal times.

It is therefore a very good time for a detailed review of your share portfolio to help identify stocks and shares that could be handed on as gift to loved ones or business partners.

Assets passed between spouses does not trigger a CGT bill, but this is not the case if you are considering gifting to children or grandchildren. However, every individual has an annual capital gains allowance currently set at £12,300 per person, which could be utilised when considering gifting for IHT purposes.

The CGT rate is currently set at 20% for all assets except property, so much lower than the IHT rate of 40%. However, the CGT rate has been in the sights of previous government’s and in the current environment we could see the CGT rate rise in a future Budget.

Regular gifting - the gift that keeps on giving

The best way to actively reduce your IHT liability is to gift to your loved ones regularly. IHT is not actually charged on an individual’s “excess income”, meaning any income you have over and above maintaining your normal standard of living which you would like to gift will not attract an IHT charge at the time of your death.

One example of this type of gifting is grandparents helping with the school fees of their grandchildren. This could be ongoing support or an ongoing measure during the pandemic when parents may be suffering the most financially and need that specific financial support to get through the crisis.

If the gifts are not from excessive income, then the seven year IHT rule applies and the donor must survive for seven years from the date of cash gifts for them to be IHT exempt payments.

Although this vehicle of gifting is tax efficient if the rules above are applied, the motivation for these types of gifts usually arise from the need to help children and grandchildren in times of need, rather than mitigating IHT bills sometime in the future.

What about one-off gifts?

An individual is able to give cash or assets gifts of up to £3,000 in a given tax year tax free which will help reduce the value of your estate for IHT purposes. Cash gifts above £3,000 will be subject to IHT if the donor dies within the seven years of the gifting date, and again, there is tapering from year three on the amount of IHT due on the gift.

This option is a good idea if parents or grandparents want to pay off their children or grandchildren’s debts, for example. This could be hugely beneficial for the donee who would otherwise be paying high interest fees on the debt, whilst also allowing the donor to help their loved ones during their lifetime, now, and reducing the amount of IHT due on their estate when they die. This option is also good for helping with lump sum payments on mortgages or helping a business avoid going into bankruptcy.

You can also give smaller gifts of £250 or less to as any people as you like and to whoever you wish, tax free. Parents are able to gift £5,000 tax free to children as a wedding gift and grandparents can gift £2,500.

Family Trusts

If you are keen to gift or pass down your wealth now to family members for tax efficiency reasons but would like to ring fence the funds or assets for a later date, perhaps children or grandchildren are young and they cannot use the funds just now or you would prefer to gift at a later stage of their lives to support them when they most need it, you have the option to set up a family trust.

You are able to set aside £325,000 per individual in a family trust in a given tax year, or double that amount as a couple, without incurring an inheritance tax charge.

In the current environment of low share value, any investments that currently sit in the trust will likely be valued less than they did six months ago pre-pandemic, so a further injection of capital could be added to the trust in the current tax year without a tax penalty to make use of the £325,000 tax free threshold.

Family trusts is another tax area where the treasury and the government have been in discussions to review the existing rules, so potentially this tax efficient vehicle may not be around for much longer, at least in its current form.

Investments in a limited company structure

An alternative to family trusts is the family investment company, where a family could place their assets such as property, cash and investments, within a limited company structure to work the assets and the income it generates in a tax efficient manner.

This is a great tool for families to keep a close eye and grow their wealth within a structured vehicle.

Many families use this vehicle to help with succession planning and for wealth management.

As with any limited company structure, you can set up different share classes so that you can dictate who has control of the assets within the limited company, in other words who makes the final decisions. Invariably parents and grandparents are the decision makers and the children are beneficiaries of the wealth, which is given them to them under the conditions that the decision makers decide. You can also vary the amount of dividends different share classes pay out, although generally family investment companies reinvest any income back into the company to avoid paying tax on their increasing wealth.

Final thoughts

We are also in an environment where pension pots are under strain and living in a world of uncertainty, which will have an impact on how much wealth you can pass on in your lifetime.

The main rule of IHT estate planning is that you only give away what you can afford and can live without forever. We suggest you think carefully before giving away too much of your estate in the current climate if you think you may require the funds in the future, perhaps due to dwindling pension pots.

In the same breath, the pandemic has brought families together, focusing people’s minds on their priories, namely loved ones, so this could well be the time for that deep and meaningful discussion on IHT planning.

Mirandus Accountants is a chartered tax advisory and accountancy practice supporting individuals, businesses and families in London and Edinburgh.

Contact us to discuss if you would like to work and live tax efficiently during and beyond the current health crisis.