Imagine you are the attorney, executor and chief beneficiary of your aunt, who is 89 years old and in failing health. The estate is worth around £1.2 Million and consists almost exclusively of stocks and share ISAs and directly held shares.
Every year, we as advisers have suggested that you look seriously at IHT mitigation as the estate is liable to IHT at 40% on all assets over £650,000. For a few years now, you have ignored our increasingly frantic entreaties, stating that she would be upset by it, you will deal with it as a part of your joint asset rebalancing or simply that you could not be bothered.
Suddenly, the penny has dropped (!) and you have worked out that making no provision so far could cost you £260,000. It will not dramatically change your lifestyle as you will still get around £1Million, but it does seem like a total waste of assets. The Chancellor of Exchequer does not send you a thank you letter if you pay more tax than is necessary!
So, are there any options for tax mitigation at age 89? That depends on how much risk your aunt, who’s money it is and you, as likely beneficiary, are willing to take and how long your aunt will actually live. Unfortunately, the biggest issue is how long will your aunt live; if she dies in the next 24 months, whatever you spend on potential mitigation will be lost and the tax will still be payable.
Most Inheritance Tax planning will take multiples of 7 years to fully work. If your aunt gives you £325,000 of assets as a gift, it will take 7 years for the gift to be fully effective and three years for any reduction to take place, when taper relief comes into the calculation.
Some gifts are immediately chargeable to IHT; if the total of all gifts in the last 7 years is more than the nil rate band, the gift is to a company or a discretionary trust, then lifetime IHT will be payable on the gift at 20% immediately.
Using Business Asset Relief will get the timescale for full effect from IHT down to 2 years, but to do so you would need to invest in certain shares on AIM, (Alternative Investment Market), which represents a massive increase in potential risk, compared to more usual investments.
With your aunt at age 89 and in failing health, the conclusion has to be that you have missed the boat and must make a mental note to have £260,000 in readily realisable form to be handed over to HMRC when the time comes. For that to be gifted to you now would give you absolute control but having to pay some of it to the Exchequer in the event of an early demise is a likely outcome. “You pays your money and takes your choice”.
If an adviser starts suggesting some IHT mitigation work, there is likely to be good reason. IHT is a voluntary tax as the routes to manage or eliminate it are well known and generally accessible. All of the low cost, low risk mitigation strategies take 7 years to work and are limited to £325,000 at a time. To remove IHT from £650,000 will take 14 years, so start early and be clear about the objective.
If you would like to know more about how we can help you plan and realise your financial goals, then contact us at firstname.lastname@example.org or call us on 01223 792 196.
The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly, no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.