When looking at inheritance tax solutions the topic of “seven years” all too often comes into the discussion.  But the truth is that many, for whatever reason, may not be confident of seeing out seven years.  It’s an issue the CGA deal with regularly and, thankfully, there are several actions and solutions available.

It’s better to give than to receive…

One method of reducing Inheritance Tax is to make gifts, either directly or by the use of trusts. Advice should always be sought regarding the ways in which gifts are made and the timing of those gifts in relation to each other as the correct order and structure is essential in order to maximise the potential benefits.

The following are exempt from Inheritance Tax even if a death follows within seven years:

• Gifts up to £3,000 in any one tax year, plus any unused balance of £3,000 from the previous tax year
• Small gifts exemption of £250 per recipient per year
• Wedding gifts up to £5,000 to each of your children (including step-children and adopted children)
• Wedding gifts up to £2,500 to each grandchild
• Wedding gifts up to £1,000 to anyone else.

Feeling Charitable…

Gifts to charities can be made without any implications to Inheritance Tax thereby reducing the liability on the estate. Furthermore, would you believe it, the same is so if you give gifts to recognised political parties!

Ensure gifts made to charity are tax deductible through the Gift Aid Scheme. Instead of selling a taxable asset to make a gift, you should make a gift of the asset itself. Charities can sell this tax-free and you can claim a higher rate income tax deduction.

Should you be short of ideas the CGA Charitable Foundation, which helps causes of a smaller nature throughout the country, would be delighted to oblige.

School Fees…

Regular contributions out of taxable income can be made free of Inheritance Tax implications providing it can be shown that they do not adversely affect your life style.

For example if your income is £100,000 per annum and you can contribute, say, £30,000 per annum without it affecting your ability to continue to live in comfort.  Many grandparents use this to pay for school fees. It is highly recommended that these sums are paid direct to the schools in question.

An enterprising scheme…

The Protected Enterprise Investment Scheme can be used as an alternative to cash deposits to provide you with a good return and capital security whilst being Inheritance Tax (IHT) friendly.

The return you will make is dependent upon the income tax relief that you may be able to reclaim.  For example, if you invest £100,000 into the investment, you may claim back Income Tax of up to 20% of this amount.  Therefore, in this example the Income Tax relief would be £20,000 as long as you have paid or will pay this amount in the tax year.  This is the equivalent gross return for a higher rate tax payer of 12.9%p.a. over 3 years, 10.3% equivalent gross return for a basic rate taxpayer.

In addition, this investment can be very useful for IHT purposes as it becomes IHT exempt after the money has been fully invested into the plan, is held for at least 2 years and also at the time of death.  The investment can be rolled on for another 3 yrs at the end of the first 3 yrs at which point you will receive another 20% income tax relief on the investment and it will remain IHT exempt.  Should you find yourself at the glorious gates being welcomed by St Peter within the 3 years, the Income Tax relief received does not need to be repaid.

The investment is designed to invest in companies which have a predictable and steady return and if there is a business risk within the investment then this is insured out to give you financial security.  The managers of the scheme are so confident in the companies they invest in that they undertake to return your money at the end of the 3 year period or they won't take their management fees.

Double Whammy…

It is possible to pay, from taxable income, premiums on life policies in trust. This amounts to transferring assets to a different asset class in order to both reduce the inheritance tax liability and provide a secure means of providing capital to eventually meet the tax.

Aiming for 2 years…

A special portfolio management service for investment in companies quoted on the Alternative Investment Market, with the benefit of major tax advantages introduced by the Chancellor of the Exchequer, in his budget of March 2000. The Close Inheritance Tax Service is designed to provide Inheritance Tax freedom after just two years.

Your capital remains accessible at all times. The plan is simple to administer and there are no trusts or complications. Provided in association with Close Brothers the service is aimed predominantly at capital preservation, with capital growth as a secondary objective. While there is no guarantee, AIM companies offer good investment value, particularly the profitable dividend paying ones.

Where companies cease for any reason (e.g. progression to the Official List) in order to comply with IHT requirements, they are sold and the proceeds reinvested. Investments are monitored to ensure continued compliance with IHT requirements.

As the AIM market is made up primarily of smaller companies it often has higher volatility than the major stock markets.  In recent months the AIM market has particularly suffered due to a lack of liquidity, making it difficult to sell buy and sell stock.  It is likely that this situation will continue until lending improves. Therefore this solution needs careful examination and when considering investing into an AIM portfolio you should maintain a degree of caution.

These are just some of the possible causes of action. Always seek professional advice. The CGA’s specialist Inheritance Tax advisors can discus appropriate and tailored solutions.  For further details on these strategies or any other specialist plans to mitigate Inheritance Tax please call Jason Hansford at the CGA on FREEPHONE 0800 028 1001 or email jasonh@thecga.co.uk