
Inheritance tax planning example #1
Let us look at an example of a middle-class citizen dealing with an IHT challenge that should only be targeting the super-rich. Citizen A was the only person that would be inheriting from their mother. They felt that sufficient tax had been applied to the money, e.g. it was taxed when it was earned originally, the interest on it is taxed, the parts of the investment that were sold were taxed again. Now, at the time of death, the money was going to be taxed again. A strategy was discussed with an experienced financial advisor, and a deed of variation (DOV) was nominated as the solution. A DOV allowed alterations to the will of Citizen A’s mother (only within two years of the mother’s death). The changes, of course, need to be proved to be aligned to the wishes of and be in the best interests of the deceased. The DOV change allowed Citizen A to access money held within a trust, retain financial control, and appoint new beneficiaries, viz, children, and grandchildren.What are the DOV rules?
The document must be:- preferably drawn up with a legal professional,
- prepared before or after obtaining the Grant of Probate, within two years of the benefactor’s death,
- be signed by all executors and beneficiaries of the estate in order to be valid,
- sent (copy) to HMRC within six months of making it if it changes the Inheritance Tax amount to be paid.
Family home allowance
An additional tool is utilised, viz. the family home allowance/main residence nil rate band. Families can use this to exempt an additional £150, 000 from taxation if the main home is willed to direct descendants. The changes in the upcoming tax year will increase that figure to £175, 000. Spouses and civil partners can combine their allowances. Unmarried, childless individuals only get the standard allowance benefit, not changed since 2009. If the exempt amount above was correctly increased in line with inflation, it would currently be about £425, 000!Inheritance tax planning example #2
Citizen B is an astute property investor with12 properties purchased over 40 years, and all are rented out. The first acquisition, over 40 years ago, cost £3, 000. Today, the total property portfolio value is estimated to be £4m. This portfolio was built from zero, with risky derelict terraced houses, at great personal risk and benefited the community with a regenerated suburb. Upon his death, HMRC will get £1m by taxing money that has been taxed many times already. Enter the Enterprise Investment Scheme (EIS), a venture capital project, and forestry investments.Enterprise Investment Scheme (EIS)
To avoid the arguably unfair, IHT Citizen B has been moving the property investments to riskier investments that promote the growth of Britain’s fledgeling firms. These are, crucially, IHT exempt. This will benefit his beneficiaries: four grandchildren and three great-grandchildren, The EIS promotes start-ups and innovative smaller companies and, to encourage investors, there are generous tax breaks, such as:- 30 per cent income tax relief,
- exemption from IHT, and
- deferral relief (any CGT from the sale of previous investments is postponed until the EIS is sold at a later date).