If you wish to obtain relief against Inheritance Tax when you pass on your wealth, then there are three timeframes you need to consider; immediate relief, relief after two years and relief after 7 years.
3 Essential Factors
1. Putting money immediately outside your estate
Actions that you can take where the asset is deemed immediately outside your estate include: –
Your annual exemption of £3,000. Unused annual exemptions can be carried forward but only one year. Each tax year, you can also give away wedding or civil ceremony gifts of up to £1,000 per person (£2,500 for a grandchild or great grandchild, £5,000 for a child)
Any number of Gifts of less than £250 are considered exempt unless they are to someone to whom you have given your entire £3,000 annual exemption that year.
ʻGifts out of surplus incomeʼ. This is often overlooked but can be the most valuable of exemptions, especially for higher earners. It allows you to give regular gifts from surplus income provided it doesnʼt affect your standard of living. The rules can be complex but broadly speaking the gifts must be of a regular nature and come from income and not capital.
Gifts to Charity, Museums, Universities or community amateur sports clubs are immediately exempt and if you give a sufficient proportion of your estate this way (10% or more of your taxable estate) you can get a reduction in the Rate of Inheritance Tax you pay on the remainder of your estate.
2. IHT efficiency after 2 Years
Certain reliefs are available for assets owned for two years or more including certain Business Interests (Business Property Relief) and Agricultural Interests (Agricultural Property Relief). Further details can be found on the Gov.uk website.
Some investments seek to take advantage of such reliefs, especially Business Property Relief.
AIM ISAʼs allow you to transfer your existing ISA portfolios into a portfolio that invests into Alternative Investment Market (AIM) shares.
The benefits of this are: –
•No Income or Capital GainsTaxon transfer.
•ISA status remains unchanged.
•Income can continue to be generated, tax efficiently.
•No loss of control, you retain the investment in your name.
•No need to gift.
•Business Property Relief can place the ISA outside of your estate after two years* •Annual Contributions of £15,240 are still allowed.
*Assuming the companies within the portfolio continues to qualify for Business Property Relief.
Business Property Relief Portfolios (Non-ISA)
It is possible to invest non-ISA money into AIM portfolios or other Business Property Relief based portfolios with the purpose of allowing the investor to retain ownership of the assets, whilst potentially putting them beyond Inheritance Tax after two years.
Additional benefits to doing can include: –
•Access to capital and income.
•No upper limit on the amount invested.
•Growth shield – where the investment managerʼs fees are dependent upon them delivering an expected rate of return.
*Please note that the underlying investments in all AIM or BPR related portfolios are smaller companies which come with a higher degree of investment risk. However, it is important to understand that the FSCS does not protect against, or compensate for losses from poor performance, such as when shares in a company have reduced in value.
3. Gifting and the 7 year clock
Unless the gifts you make are immediately exempt, as in ʻgifts out of ordinary expenditureʼ mentioned in 1, or you own an asset that qualifies for relief after two years, as in 2, then almost everything else you do isʻpotentially exemptʼ, requiring you to live for seven years before the asset is removed from your estate.
Taper Relief Table
Years between Gift and Death 0–3
3–4 4–5 5–6 6–7 7+
Reduction in the Tax Payable 0%
20% 40% 60% 80% 100%
Unlike in 2 with this type of planning, you are required to give the asset away, absolutely and irreversibly.
Planning in this area includes making outright gifts as well as gifts into various forms of Trust. The latter allows you to exert some control over the asset and, if necessary, can give you the flexibility to change beneficiaries in the future.