Inheritance tax (IHT) planning normally involves doing ‘something’ and then waiting 7 years to achieve the maximum relief. ‘Something’ may be gifting cash to children or maybe creating a trust for grandchildren, but in either case, surviving the gift by 7 complete years is required.
Certain types of assets and investments become eligible for inheritance tax relief after 2 years of ownership so these may be relevant for those who do not want to rely on the 7 year rule. Relevant investments include shares in unquoted trading companies and agricultural land (providing the land is farmed by the individual rather than let to a farmer), along with some special types of investments such as Enterprise Investment Schemes (EIS). For those who have already owned shares in an unquoted trading company for two years, it may even be possible to obtain inheritance tax relief on new shares straight away!
In some circumstances, an inheritance tax saving may be achieved after surviving 3 years or more, but this is only where the level of gift is in excess of the available nil rate band allowance (currently £325,000 per individual) so that tax will be payable on the death. In other words, by surviving at least 3 years, the inheritance tax payable is reduced.
Another opportunity to undertake inheritance tax planning without the need to survive 7 years is through the ‘gifts out of income exemption’. The great thing about this exemption is that there is no upper limit; rather it depends completely on the position of the individual making the gifts, known as the donor. This exemption does require 3 conditions to be met on an annual basis, but these may not be as onerous as they sound. The conditions are:
1. Gifts are from surplus income – such as employment income, pensions and investment income. This is what is left after allowing for regular expenditure. But they can’t be paid out of savings
2. The gifts are made on a regular basis – at least annually
3. The gifts do not affect the individual’s standard of living – so there is no cutting corners to produce the surplus income, nor resorting to savings to top up income.
Providing the conditions are met, the exemption could apply after a few gifts but it would rely on your executors making a claim after death. The correct record keeping and evidence during a donor’s lifetime can therefore make the claims process much easier following their death.
Depending on an individual’s circumstances and assets, the 7 year survival strategy may be appropriate, but for those looking for shorter term solutions, the combination of our tax planning and financial services teams may well have the answer.
Contact either Chris Chambers or myself if you would like to discuss this further.
