Leave inheritance tax out in the cold!

Inheritance Tax (IHT) is tax which is payable on someone’s estate after they have died. Estates are only liable for IHT when they have a value of £325,000 or more and the current rate of IHT is 40%.  Whilst this is only payable on the part of the estate which is over the IHT threshold, it still has the potential to create large tax bills for many estates.  So how can you manage your tax liability?

The Options

There are four options to help manage your IHT exposure. These are:

1. Spend your wealth so that its value falls below any IHT reliefs/ exemptions that you may be entitled to claim;
2. Insure against any potential IHT liability although this should always be considered as a short term solution;
3. Restructure your investments so that they qualify for reliefs such as business property relief (BPR) and/or agricultural property relief so that the value of these investments will be exempt from IHT; and
4. Gift assets away directly to family members or through a trust created for their benefit.

The Problems

Many individuals tax planning programme will include an element of each option with lifetime gifting being the most popular.  The problems with lifetime gifting are:

• a charge to Capital Gains Tax (CGT) may arise when you give an asset away;
• a charge to IHT may also arise if you do not survive the gift by seven years; and
• you may need access to the assets you have given away in the future. 

The Solution

The solution would be to retain access to the current value of your assets and give away the right to future growth in them. This ensures that you retain access to your current wealth levels without your IHT exposure increasing over time as the value of your assets increase. Unfortunately, this solution is only available in relation to certain types of assets, namely shares in companies.  This type of planning is particularly beneficial for non-trading companies which do not qualify for BPR such as those which own commercial or residential properties. 

The idea here is that you would create two different classes of shares in the company (i.e., “A” and “B” shares).  You would continue to own the A shares which would represent the current value of the company whilst the “B” shares would represent future growth in the company.  The B shares would be gifted directly to other family members or into a trust created for their benefit.  This could be achieved with minimal tax consequences and may assist in managing your exposure to IHT. 

For more information on freezer shares or any other tax planning matters please contact Malcolm Emery.

These notes have been prepared for the purpose of articles only. They should not be regarded as a substitute for taking legal advice.