Inheritance Tax (IHT) planning


The Chancellor has announced that he is intending to look at all current tax reliefs and review their relevance going forward.


Paul Neate, Rural Partner, Melksham


This is quite a daunting task as there are currently 1,042 reliefs available to be reviewed before the next Budget in March 2011. Many of these reliefs generally assist taxpayers in organising their affairs.


It is often observed that Inheritance Tax (IHT) is an optional tax because if, during your lifetime, you give everything away and on your demise your estate is covered by either the spouse exemption or the nil rate band allowance, currently £325,000, then no IHT will arise. In excess of this allowance you would be contributing 40% to H M Revenue and Customs (HMRC) probably making them the prime beneficiaries of your Will! At Old Mill we are always very keen to be proactive in assisting clients to review their Wills to optimize their Inheritance Tax position.


With IHT planning, we need to be mindful that most clients need a source of income for their long term enjoyment and possibly future care needs and therefore need assets available to provide this income. If they divest themselves too early, then these assets cannot be called upon later . There is also the risk, after passing assets down to the next generation, that the donees personal circumstances may result in that asset being taken away from them and this is more important in situations where you pass down part ownerships of your dwelling house. There you can find that the right of occupation could be removed from you, if a third party is insisting that the property has to be sold as a means of satisfying a matrimonial settlement or if your donee becomes bankrupt.


For IHT purposes, providing you survive seven years after gifting an asset, then it falls outside your estate. In theory if you gave away up to the nil rate band every seven years then potentially you can give substantial value away during your lifetime for the benefit of your descendents.


IHT is not the only tax that is involved by making a gift, as in most cases you will be divesting yourself of an asset, which would be caught under the Capital Gains Tax (CGT) legislation. CGT legislation has many reliefs available which enable gains to be held over to result in no tax being payable on re-organising your estate. These reliefs come in many guises and advice from Old Mill is essential in order to ensure


that the asset you are moving down to the next generation would qualify for the relief. It is possible that some reliefs may disappear following 6 April. If there are issues concerning you please talk to us to see what might be done. The example below illustrates the point:


If you take a private limited company that is owned by family members and let’s say the company in simple terms is worth £1.2 million. Father owns 49% of the shares and mother owns 2% of the shares. The children own the remainder.


For Capital Gains Tax purposes, where there are assets moving between connected individuals, then the value used is what is called market value and interestingly a 2% shareholding would be deemed to have quite a low value, if any at all. However, because a husband and wife’s shareholding is aggregated for valuation purposes, then the value attributable to the 2% shareholding will be based on 2/51 of the value of a 51% shareholding. A Valuer may argue that if a 51% shareholding, after a small discount, was worth say £510,000, then the wife’s shares for CGT purposes would have a value of say £20,000.


For IHT purposes, the value of the gift is the “diminution in the value of the estate”. If you look at the value of a 51% shareholding, this effectively, would be worth £510,000, whereas a 49% shareholding may be worth only £295,000 and therefore just two shares results is a fall in value of £215,000.


It may be therefore be useful for the wife to consider moving her shareholding down to the next generation, rather than the husband, because for IHT purposes he is losing £215,000 worth of value in his estate without making any gift. If the company was a trading company this loss in value would be covered by Business Property Relief (BPR), and would not give rise to an IHT charge. If the wife transfers her shares she is just making a disposal of shares worth £20,000. If the company is trading, she can hold over the gain. If it is not trading, then after deducting the annual CGT exemption of £10,100, she would have a CGT liability at say 28% on £9,900. However, by her divesting herself of her 2% shareholding there is nothing to aggregate with her husbands and so if her husband was to suddenly drop dead, then his shareholding would only be worth £295,000 in his estate, rather than £490,000. If the shares were in a company not qualifying as trading, then potentially £78,000 of IHT has been saved in that exercise. This is just a simple illustration which can demonstrate what Old Mill can do for you.


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