There are many ways you can lighten the load when it comes to inheritance tax.
As canny Fools will know, the economy runs in cycles, and while values are comparatively low, those savvy individuals who know how to take advantage of the market could utilise the nil rate band for inheritance tax (IHT) to transfer assets now and avoid potential IHT at lifetime rates of 20%. The current nil rate band is £325,000. Future increases in the value of these assets will then accrue outside your IHT chargeable Estate.
However, for those lucky enough to still have IHT issues, there are also a number of valuable reliefs which you may or may not have heard of, that could prove a salve to any budding IHT injuries, and some of these are considered in more detail below.
Business Property Relief (BPR)
BPR is a very valuable inheritance tax relief and can exempt business assets from a charge to inheritance tax by up to 100%. Both quoted and unquoted shares can qualify for relief, but for shares listed on a recognised stock exchange, the maximum relief is limited to 50% and only where the shareholding gives the owner control (normally more than 50% shares/voting rights held).
Shares that qualify for relief may be further limited depending on the business activities, of the company concerned. Companies whose business consists "wholly or mainly of… dealing in land or buildings or making or holding investments" are specifically excluded. Also the amount of relief available is limited with reference to the chargeable business assets of the company, such the proportion of share value attributed to non-business assets is excluded from relief.
Many entrepreneurial enterprises/start up companies will have an exit route that will, at some future point, convert the hard work spent in building a company into cold hard cash. And cash is not a business asset, naturally.
Agricultural Property Relief (APR)
This relief has recently been in the news and important changes were confirmed in the 2009 Budget following a brouhaha in Brussels.
APR offers relief at 50% or 100% from IHT on the value of qualifying agricultural land. Previously, this only applied to UK land, but has now been extended to include land in the European Economic Area (EEA) following two similar tax cases.
APR works in a similar way to BPR and can also be applied to both lifetime gifts and on death. It is important to note that for APR the relief percentage is applied to the agricultural value of the land which is not the same as the market value, and is likely to be far less.
The agricultural value is calculated assuming a perpetual covenant is in place restricting the use of the land to agricultural purposes only. Also, even if farmland has been purchased by a wealthy sportsman as a country retreat for him and his glamorous wife, it may not qualify for APR unless the land is actually farmed, and the owner either offers a farming tenancy to someone else, or takes an active part in the farm business.
Annual and other exemptions
It is a little known fact that, similar to capital gains tax, there is also an annual exemption for IHT. Although far less generous at £3,000 per annum, if unused, the previous year's exemption may be carried forward by one year. Also, a small gifts exemption of £250 per person per year is also available, but not that if any one recipient receives £251, the whole amount, not just the excess £1 becomes liable for IHT, subject to annual exemption and nil rate bands. Therefore, every reader could donate £250 to me as a thank you for my services, and we'll all be happy with no tax liabilities to pay.
Other exemptions that you may, or may not, have heard of include gifts in consideration of marriage, where gifts of between £1,000 and £5,000 are exempted, depending on the relationship of donor and donee.
Practically, this exemption covers parental help for the cost of a wedding (obviously now woefully inadequate) and the £2,500 inter-fiance exemption covers the cost of an engagement ring (would someone tell my husband that it what my engagement ring should have cost please?) The inter-spouse exemption accorded to married couples and those in civil partnerships does not apply until marriage.
Of course, donations to registered charities are exempt from an IHT charge, to encourage altruism and gifts to political parties are similarly exempt, although quite what this encourages is unclear.
Gifts out of Income
Finally, where someone makes regular gifts out of income, there is a specific relief disregarding such gifts for IHT purposes provided a number of conditions are met.
For the relief to apply, gifts must be made by one person to another on a regular basis out of the donor's excess income. Furthermore, the making of such gifts must not mean the donor is reduced to living in a hovel surviving on bread and dripping; the donor's normal standard of living must be maintained.
The frequency of regular gifts is not defined, but it is normally accepted that annually or more frequently would satisfy this condition. It may be possible for longer intervals, such as every other year to suffice, but this is likely to encounter stronger challenge from HM Revenue and Customs. Also, it may be that the donor happens to die having only made one or two such payments, which may not prove a regular commitment. In such cases the onus will be on the deceased's executors and the donee to show evidence of an expectation on the side of both parties that any payments were to be regular and continuing.
You might expect that determining whether or not sums are paid out of income would be simple. In broad terms, it is simple, if your income less your normal expenses leaves an excess amount, this may be given away as described above. However, it is crucial to be aware that income is generated year on year, so any unused income in one year will become capital the next, thereby failing to meet the income condition.
This is a simple and effective IHT planning tool that can easily be used by people with excess income and is often used in life assurance planning. There is also no limit to the amount that can escape IHT in this way, provided the conditions are met. As mentioned above, I am happy to enter into correspondence with any reader wishing to give me vast sums of money on a regular basis just to avoid inheritance tax…
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