Business or farm assets often (but not always) qualify for 50% or 100% relief from Inheritance Tax under current rules. Even some publicly traded investments will qualify.
This relief can be extremely valuable, but naturally there are rules and traps, so it is essential for the owners of these assets to take advice on how the Inheritance Tax rules would apply to their assets and situation.
For those clients who hold assets which benefit from 100% relief, the question often arises of whether to take advantage of these generous tax reliefs now and transfer the assets down a generation during lifetime, rather than holding the assets until death and relying on the Will.
Are there any risks in making a gift now?
Before considering tax issues, you should always first consider your own financial security. You should not assume that you will be able to retrieve the asset from your children in the future if you change your mind. Do you depend on the income from these assets? Are you content to let the new owners control these business assets? What would happen to the assets if your children suffered bankruptcy or divorce? Some of these issues may be overcome by using a family trust but, for some clients, giving away the assets simply isn’t viable.
What about the Inheritance Tax issues?
Unfortunately, just because an asset currently qualifies for relief doesn’t mean there is no possibility of Inheritance Tax when the asset is given away. This is because, in some circumstances, the tax relief may be ‘clawed back’ if you die within seven years of making the gift, and both your estate and the recipient may be liable
to pay additional tax. In other circumstances, the tax relief may not shelter the full value.
What if the government changes the tax reliefs after I make the gift?
If you die within seven years of making the gift, it is possible that any change in the tax reliefs may affect the gift. This is because it is the rules at the date of death which apply, not necessarily e.g. the rates of relief at the date of the gift. One would hope that the government would ensure that any change to the tax rules would only apply for gifts made after the change, but this may simply be wishful thinking. Insurance may be the only option for those wishing to avoid any risk for the recipient.
Is there anything else I can do?
Whilst this is not a strategy for claiming tax relief during lifetime, married couples (or civil partners) should take advice on the merits of including flexible trust provisions in their Wills to take effect on the first death. This would give the executors the opportunity to lock-in for tax relief at that time of the first death without the risk of claw-back. Even greater benefits can be achieved by the trustees of the will trust manipulating the ownership of the assets.
These Will Trusts, and any planning using business or farm assets, are very useful but only when done correctly. Always look for a STEP qualified solicitor. At Hewitsons all our solicitors are STEP qualified or STEP students.
For more information on anything mentioned in this article please contact Tobias Gleed-Owen on 01223 532718 or click here
to email Tobias.