OVER the past few years, as the economy has slowly recovered, the government’s Inheritance Tax (IHT) receipts have steadily increased from £2.3 billion in 2009-2010 to £3.3 billion in 2013-2014 (source: ONS). This trend is likely to continue for the next few years if house prices continue to rise, given that the Nil Rate Band (the allowance we each have before tax becomes payable) is frozen at £325,000 until 5 April 2018. Whilst much is written about the use of annual exemptions and various trust arrangements (usually marketed by insurance companies).
OVER the past few years, as the economy has slowly recovered, the government’s Inheritance Tax (IHT) receipts have steadily increased from £2.3 billion in 2009-2010 to £3.3 billion in 2013-2014 (source: ONS). This trend is likely to continue for the next few years if house prices continue to rise, given that the Nil Rate Band (the allowance we each have before tax becomes payable) is frozen at £325,000 until 5 April 2018. Whilst much is written about the use of annual exemptions and various trust arrangements (usually marketed by insurance companies). There are two areas that receive less coverage. Firstly, there is the ‘gifts out of normal expenditure’ exemption (section 21 IHTA 1984) which allows those with excess income to make gifts of any amount which, as long as they meet the relevant criteria, are exempt from day one. HMRC rather unhelpfully does not define exactly what it means by ‘normal’ so there is a strong subjective element to any decision. As a guide, the payments should form part of a regular pattern of payments, or where it can be shown that the donor made a firm commitment regarding future expenditure. In addition, the gift must be out of surplus income and not impact on the donor’s lifestyle. Care should also be taken if the donor is in receipt of withdrawals from Life Assurance bonds, as these are treated as a return of capital and not classed as income. Given the above, the impending pension changes (as announced in the last Budget) which offer individuals greater flexibility over the level of income they can withdraw from their pension arrangements may offer planning opportunities for those who have accumulated excess funds and thus enabling them to drip feed these down the family line. Secondly, for those who wish to potentially reduce their IHT liability, but are unwilling or unable to gift assets or may not potentially survive seven years, there are a number of investment arrangements which take advantage of Business Property Relief (BPR), under which qualifying investments fall outside of the IHT calculations after two years. To qualify, the investments are usually in shares in unquoted private companies or those quoted on the Alternative Investment Market (AIM). However, these companies can be volatile and an investor could lose more than the actual tax saved. As a consequence, various investment managers offer to manage a portfolio of qualifying shares to reduce the risk, at least to a certain degree. For those who are still uncomfortable with the volatile nature of this sector, a number of providers offer BPR qualifying investments designed to generate a steady return targeting capital security. These schemes consist of qualifying companies which specialise in factoring or financing agreements. The factoring/ finance agreements usually have some form of security over the assets and target a yield of around three per cent per annum, the aim being to preserve capital and save tax rather than make significant profits. Should you wish to discuss any aspect of your inheritance tax situation, please contact Gregg Taffs on 01604 621421 or at , or speak with your usual Caves contact. Cave & Sons Ltd is authorised and regulated by the Financial Conduct Authority. Financial Services Register number 143715
