How to reduce your exposure to Inheritance Tax

It’s a common misconception that Inheritance Tax is payable on death. That’s probably because the name of the tax falsely implies that the tax is related to death when the value of the deceased’s estate transfers through the generations.

The word transfers is in bold for a reason. Inheritance Tax is triggered by the transfer of value and a transfer of value occurs whenever you dispose of something and as a result your total net worth is reduced. Whether hard cash or an asset that has value the disposal of it will reduce your net wealth and this create a “transfer of value” which may get HMRC excited. Incidentally I transfer wealth to my landlord most Friday nights but as this is at arms length to an unconnected person it will not be classed as “a transfer of value”.

For most households the largest asset likely to trip the Inheritance Radar will be the main home, usually on death. Equally though holiday homes, investment properties, paintings, memorabilia, collections of coins, stamps, you’ve seen the antiques road show so you catch my drift as to where value could be and it all adds to your net wealth.

It might therefore be prudent to gift some of these possessions so that they no longer form part of your estate or current total worth. Sound idea but for this to work you need to completely remove any enjoyment or benefit from it.

If you retain the remotest interest then unfortunately it will still form part of your estate. You may have a superb railway nameplate from the City of Newcastle (2442 double bogey) worth a small fortune. If you give it to your son but keep it in your study, there has been no transfer of value.

Equally you may be a little reluctant to sign over the holiday cottage to your grand children because you still want to visit the Northumberland coast when you can on your terms. How about granting a long lease on the family home and then gifting it to the children?

All these will fail because of what we tax boffins call “reservation of title”

Well that’s it then, might as well roll over and die and let HMRC trouser 40% of my wealth.

Well it’s not all bad news

There are ways that married couples or those in a civil partnership can substantially reduce their exposure to inheritance tax, and therefore increase the amount inherited by the family, without adversely affecting current standards of living and without having to “give all of the family assets away now”!

This simple strategy is suitable for couples who own any class of investment assets including property, shares, and cash, which are exposed to inheritance tax, currently at 40%.

It enables an individual to transfer the value of an asset out of their estate to the next generation thus reducing the family’s IHT liability without triggering a capital gains tax charge.

Importantly control of the asset and access to any income generated by it will be retained by the couple.

Even better the planning does not require a trust structure and therefore there are no ongoing trustee costs or restrictions.

 How Does it Work?

 Well as that annoying rodent selling insurance says “Simples”

• One individual transfers the asset at full market value to their spouse.
• The consideration given by the spouse to the individual for the asset is a specially drafted debt instrument which is effectively an IOU.
• The IOU is gifted to the next generation.

If having read this, you  think that the best way to take this matter forward would be to arrange a (no obligation) meeting with myself or one of my colleagues either at my offices or at your home, to outline the options available to you, please feel free to contact me to arrange a meeting at  Iain@Iainwallis.com