Most inheritance tax (IHT) planning requires a time window of either 2 or 7 years, for it to become effective. Sometimes, due to health reasons, you do not have this luxury. In these circumstances, sometimes there is still some planning that can be actioned, that will be effective immediately:
- Will. Make sure you have a Will and that it is up to date.
- Get married (or enter into a civil partnership). If you intend to leave your estate to your long term partner, there’ll be a charge to IHT on your death – and, again, on their death when assets are left, say, to your children. If you marry him/her, the whole of your estate, however large, will pass to him/her tax free on your death (the spouse exemption) even if you die within days of the marriage.
- Use your annual exemption. You can give away £3,000 per annum, tax free (£6,000 if you haven’t used last year’s exemption). There’s no required survivorship period.
- Continue pattern of making lifetime gifts out of income. Lifetime gifts to another individual are exempt from the 7 year add-back rule if they form part of a person’s regular expenditure out of their surplus income and a regular pattern of giving has been established (eg to cover grandchildren’s private school fees).
- Invest further in assets already qualifying for IHT relief. Certain business and agricultural assets attract 100% relief from IHT after two years’ ownership. If you are already entitled to this relief it is sometimes possible to invest further (eg using spare cash to take up rights issues entitlement to subscribe for redeemable preference shares in a family trading company).
- Make gifts to take your remaining estate below £2 million. The estates of a married couple, on the second death, may benefit from a total nil rate band of £1 million, provided the estate contains a home (or the proceeds of sale of a home if the couple/survivor had downsized or, perhaps, sold up and moved to a nursing home) – and that home is left to ‘qualifying descendants’ and the estate is worth less than £2 million.
- Share discounts. Consider whether any gifts of shares in the family business will reduce death shareholding to below a critical threshold, whereby minority holding discounts increase to deflate the value.
- Pension Beneficiaries. Review that the named beneficiaries on pension and other life related policies are still in accordance with your wishes and are tax efficient, or whether a trust would be a better solution.
Sometimes IHT planning opportunities may exist for a surviving spouse, who can gift assets ‘pregnant’ with paper capital gains to their spouse before they die, then receive this asset back through a legacy (with an uplifted base cost for CGT purposes).
Even if Wills cannot be amended before death, do not forget that a deed of variation can be made up to 2 years after death, if all the beneficiaries agree, to change the distribution of the estate.