Falls in asset prices mean it's easier to pass on your wealth in a tax-efficient manner.
The effects of the recession and turmoil in stock markets here and abroad has wiped out a large proportion of the value of a number of listed companies, banks and investment houses in particular. Many homeowners are also watching the value of their home slide, (no, not a climbing frame in the garden) with growing numbers facing the dim prospect of negative equity.
As a result, inheritance tax (IHT) planning may be far from people's minds, replaced by the more pressing concern of weathering the current financial storm as best they can.
However, despite the economic downturn, many people are still holding considerable wealth, albeit at a slightly lower value than could have been achieved 12 or 18 months ago. Given the whole "Every cloud has a silver lining" mentality, this means that there is now greater scope for protecting current and future wealth without incurring an immediate charge to IHT.
The easiest way to avoid inheritance tax is to give it all away before you die or make use of some of the various exemptions or reliefs.
The nil rate band is, essentially, exactly what it says on the tin -- it is not a relief or exemption that requires the fulfilment of certain conditions, it is simply a tax rate levied against value, albeit at 0%. The current level of the nil rate band is £325,000 and is now not only transferable to surviving spouses on the second death (although I suppose technically they are no longer the 'surviving' spouse) but can also be recycled every seven years.
This means that, if you are wealthy enough and start early enough (come on Dad, you are 60 next year), you can legitimately remove hundreds of thousands of pounds of value from your IHT chargeable Estate.
Using nil rate band trusts
Let me explain. Cher Holder is a canny Fool, and has invested wisely thanks to the excellent advice from certain Motley experts. Her portfolio is valued, even today, at £2.5m. Her husband Biggie Ears is wealthy in his own right, so she wants to pass her wealth to their six children.
She could just give each of them a share portfolio, but having been brought up in a rock n roll lifestyle, she thinks they are unlikely to manage it wisely and will just sell up for some quick cash to spend on fast cars, loose women and quickie divorces. She decides to set up a trust and transfers shares worth, coincidentally, £325,000 exactly.
Transfers into most trusts, including this one, are now Chargeable Lifetime Transfers (CLTs), and immediately chargeable to IHT, although as the value falls within the nil rate band, the rate of tax is 0%.
Now, I know you are all thinking, "What about the Capital Gains Tax (CGT)?", and you would be right to do so. As explained in my earlier article, transfers of assets other than cash are likely to have a CGT impact, and getting round an IHT problem is not much use if you then create a CGT one. However, there is a specific CGT deferral relief available where transfers create an immediate charge to IHT, meaning any CGT liability is effectively deferred until the eventual disposal of the shares by the donee.
Note that this relief does not require IHT to be charged at any particular rate, meaning a transfer charged at 0% IHT will still qualify, as above. Note that if Cher had decided to gift the shares to her children absolutely, there would still have been no immediate IHT issue, as the transfer would have been exempt if she survived seven years, but the CGT relief would not have been available.
So, Cher has transferred £325,000 out of her Estate, and as the market picks up, the value will rise, meaning the trust for her children will contain even more worth, and she has, effectively, removed that greater worth from her Estate (if she hadn't made the transfer, the inflated value would still be in her Estate). As with most things IHT, after seven years the slate is wiped clean, so Cher, should she be so inclined, could transfer another £325,000 into trust. And another seven years later do the same. And so on.
Transfers to spouses
The transferable nil rate band was introduced to answer criticism levied at the comparatively low value of the nil rate band when compared with soaring house prices (it was a couple of years ago now) and to counter the Conservatives' pledge to raise the nil rate band to £1m should they gain power.
In simple terms, any unused nil rate band on the death of the first party to a marriage or civil partnership may be transferred to their spouse for use on the second death. Note that transfers to spouses on death would be an exempt transfer, so if all or most of the Estate is left to the spouse, the nil rate band would be partly or wholly unused.
The amount available on second death is calculated on a percentage basis so that if the first spouse only used 50% of the nil rate band on their death, on subsequent death, the second spouse would have 150% of the prevailing nil rate band at that later date available.
However, the transferable band does not mean that IHT advice becomes unnecessary. The maximum nil rate band available after transfers is 200% (equivalent of two full bands) regardless of the amount of spouses despatched along the way, meaning further planning may be necessary to ensure assets pass to whom they are intended, and with the desired tax consequences. Or at least as near to no tax as can be managed.
More on tax from Sam Thewlis:
