Facing serious illness, and a potentially shortened life expectancy, can bring your priorities into focus. For many, providing for loved ones is high on that priority list, as is mitigating the amount of inheritance tax payable when passing on your assets to those you care about. But, without the luxury of time, tax planning opportunities are more limited.
There is no one size fits all solution to inheritance tax planning. Consideration needs to be given to the nature and extent of your assets, your family make up, your succession wishes, and the impact any inheritance tax mitigation options may have on other taxes such as capital gains tax and stamp duty land tax.
A professionally drafted Will is an excellent starting point. Among other things, thought can be given to the following as part of that process: -
1. Making gifts to tax-exempt beneficiaries, such as your spouse or charity.
2. If significant charitable gifting is part of your preferences, utilising the reduced rate of Inheritance Tax of 36% rather than the standard 40%. To do this you would need to leave 10% or more of the net value of your estate to charity.
3. The availability of the residence nil rate band. This tax band tapers off where an estate is worth more than £2m, but, gifts could be made to bring the death estate value within this sum. Further, in the drafting of a Will certain trust provisions would prevent this nil rate band from being claimed, but, a change to the drafting could avoid the creation of such trusts.
4. If you are in a second marriage and your first spouse has died, the possibility of utilising your first spouse's unused nil rate. In this way, you and your second spouse can potentially use three nil rate bands in total against your collective assets.
5. The availability of tax reliefs such as business property relief and agricultural property relief.
Business Property relief is an inheritance tax relief which, if all conditions are met, can reduce the value of an interest in a business or its asset by 50% or 100% for the purpose of the Inheritance Tax Calculation. One of the conditions is a person has owned the business or asset for at least two years before they died. This can be exceptionally useful if you already own qualifying business assets.
There are also some interesting investments which can utilise Business Property Relief at 100%, such as an investment in AIM shares. If an individual expects to live for more than two years, so that their period of ownership meets the two-year qualifying period, and they are able to take on the risk associated with these investments, then this type of planning could be an option. When someone is thinking about such investment, proper independent financial advice would be crucial to examine the financial position in detail and establish which products are best suited.
Getting the right advice, and often a collective approach between your advisors, can result in the best outcome, and this is possible even where time is of the essence.