As asset values start to recover, and personal wealth increases, the spectre of inheritance tax (IHT) is once again becoming a problem for an increasing number of people.
During the recession, the amount of IHT collected by HM Revenue & Customs (HMRC) fell significantly but is now once again expected to collect in excess of £3bn per year.
With the number of estates paying IHT each year expected to double in the five years from 2013 to 2017 and the traditional trust-based solution under some legislative threat, the need for new estate planning solutions will form an integral part of many clients’ long-term financial plan.
Alternative planning approaches using the tax advantages of Business Property Relief (BPR) could be part of the solution.
In recent years, for many clients and their advisers, the solution of choice has involved the creation of a trust or trusts. Not only do trusts provide the opportunity to achieve tax savings, they can also be used to shelter assets from other threats such as divorce, bankruptcy and long-term care cost.
Given the benefits that they provide, there are limits on the amount of money that can be transferred into certain types of trust, typically those providing the greatest flexibility, before having to pay tax. These are typically referred to as ‘relevant property trusts’.
Although it is currently possible to transfer amounts up to the available nil rate band for IHT, currently £325,000, into these structures every seven years without an immediate tax charge, this can still inhibit and potentially delay a client’s ability to plan effectively.
In addition, HMRC is currently consulting on a series of proposals which, if implemented, could change the way in which the 10-yearly (periodic) and exit charges are calculated and could result in higher tax charges.
As proposed changes may have a retro-active effect on trusts already created, clients and their advisers need to start planning now to address the possible changes. Many solutions designed to mitigate the affects of IHT take a period of time to become fully effective, any delay could result in tax being paid unnecessarily.
In these circumstances, investing in assets which qualify for BPR, such as unquoted company shares, which can provide 100 per cent relief from IHT after just two years, could provide part of the solution.
Advisers need to consider their clients’ options carefully where a trust has already been established, or trust-based planning is being contemplated ahead of any changes.
In the event of the changes proposed having a retro-active affect, by replacing the assets held in the trust with an investment that qualifies for BPR it should be possible to reduce the impact, both in terms of the periodic and exit charges.
Where BPR qualifying investments are held by trustees, like individuals, they can benefit from 100 per cent relief from IHT after just two years. This provides the benefit of effectively reducing the value of the trust fund for the purposes of the periodic and exit charge as shown in table 1.
