12/31/2014

SixscenariosthatrevealyourinheritancetaxbillTelegraph

Sixscenariosthatrevealyourinheritancetaxbill
Aninheritancetaxtimebombistickingashousepricessurge.Wedetailsixcommonscenariosandexplainhowto
avoidBritain'smosthatedtax

ByKyleCaldwell
7:22AMBST21Jun2014

OfficialfiguresunearthedthisweekbytheTelegraphfoundthatthenumberoffamilieshitwithaninheritancetaxbillwould
risebyathirdthisyear.
Thetrendisdrivenbythefactthat,whilepropertypricescontinuetorise,theinheritancetaxthreshold,at325,000perperson,
remainsstatic,unchangedsince2009andexpectednottoriseanytimesoon.Estatesworthlessthanthethresholdpaynotax.
Butabovethethresholdtaxisappliedat40pc.
Thegrowingimpactofthishatedtaxisresultinginfloodsofinquiriestoaccountantsandtaxplannersandmanyqueriestoour
offices.Inthearticleontheoppositepageweexplainthemajorfactorsthatdeterminehoweasyitislikelytobeforfamiliesto
mitigatetheirinheritancetaxliability.Buthere,intheexamplesthatfollow,weasktaxexpertstoaddressdifferenttaxplanning
scenariossuggestedbyreaderqueries.Namesandotherdetailshavebeenchanged.
Themarriedcouplewitha400,000homeandmodestotherinvestments
AlanBrown,75,andSarahBrown,73,havemostoftheirwealthtiedupintheirfamilyhomeinWinchester,whichisworth
400,000.ButtheBrownsalsohave120,000inothersavings.
Thecouplefaceadilemma,asthevalueoftheirestatewillbreachthejointtransferableallowanceof650,000by2018.
MrandMrsBrownwanttoleaveasmuchoftheirassetsaspossibletotheirtwochildrenandgrandchildren.
Oneoptionistosellthefamilyhomeanddownsize.Thiswillfreeupcashthatcanbegivenasagifttotheirchildrenor
grandchildren.
RonnieLudwig,ofaccountancyfirmSafferyChampness,said:Oneoptionistosellupandgifttheproceedsofsaletotheir
children,andrentcheaperaccommodation,perhapsretainingsufficientoftheproceedsofsaletogenerateenoughnetincometo
meettheannualrentfortheirnewhome.
Thesaleofthefamilyhomewillnotbesubjecttocapitalgainstax.Providedthattheysurvivesevenyearsaftergivingthemoney
totheirchildren,therewillnotbeaninheritancetaxbill.
http://www.telegraph.co.uk/finance/personalfinance/tax/10913909/Sixscenariosthatrevealyourinheritancetaxbill.html

1/6

12/31/2014

SixscenariosthatrevealyourinheritancetaxbillTelegraph

Ingoingdownthisroutethecouplewillneedtokeepholdoftheir120,000savingsforfinancialsecurityandpossiblyto
generatefurtherincome
AlternativelyMrandMrsBrowncouldavoidthestrainofmovinghouseandtaketheinheritancetaxhit.Onlyasmallamountof
theirestatewillbreachthethresholdby2018,sosittingbackandenjoyingretirementintheirfamilyhomeisasensibleoption.
MarkGiddens,ofUHYHackerYoung,anotheraccountancyfirm,said:Itislikelythathousepricegrowthalonewillpushthis
coupleintotheinheritancetaxnet.Inthiscase,theexposureisunlikelytobesubstantialandtheywouldbebestadvisednotto
doanythingdrastic.
Itwouldmakesenseforthemtomakeregulargiftsofanysurplusincomesothattheydontaccumulatefurthersavings.These
giftsareexemptfrominheritancetax.
Theelderlycouplewitha2mhomeandnootherassets
CharlesRossiter,85,andhiswife,Janet,80,liveinaVictorianfamilyhomeinnorthLondonworth2m.Theyhaveagenerous
finalsalarypension,sodonotneedextraincome.Buttheywanttosparetheirchildrenasmuchdeathtaxaspossible.
Thecouplehaveleftitabitlate,butcanstillshieldtheirassetsfromthetaxman.Clearly,itdependsontheirhealth,owingtothe
sevenyearrule,whetherdownsizingtheirpropertyandgivingawaytheproceedsisworthit.Iftheyareingoodhealth,itisstill
probablyworthdoing.Ifthecouplesurviveforanotherthreeyears,theinheritancetaxliabilitywillstarttoreduce.
Theproblemforacoupleintheir80sissurvivingthesevenyears,butthereliefistaperedoverthesevenyears,sothatafter
threeyearsthereisalreadya20pcreduction,buildingupto80pcaftersixyears,saidMrLudwig.
Anotheroptionistoconsiderequityrelease,wherebyaloanisraisedagainsttheproperty,toberepaidatthecouplesdeathorif
theysellsooner.ThiswouldlettheRossitersliveouttherestoftheirdaysinthecomfortoftheirhomewhilealsobeingableto
accessfundstogivetotheirtwochildrenbeforetheirdeath.
Thewelloffelderlycouplewithsubstantialassetsinadditiontotheirhome
HenryandSophieJones,bothintheirearly80s,liveina1mhomeinSouthportinthenorthwestofEngland.Theyownfive
rentalpropertiesworthatotalof1mandhaveinvestments,savingsandashareofafamilybusinessworthanother2m.Their
healthisnotgood.
Tradingbusinessesqualifyfor100pcrelieffrominheritancetaxunderasystemcalledbusinesspropertyrelief,sotheirstakein
thefamilybusinesscanbepassedonwithouttaxapplying.Toqualify,thebusinessmustbeanunlistedcompany,oronelisted
onthejuniorAlternativeInvestmentMarket,andmusthavebeentradingforatleasttwoyears.Thisexemptionmighthelpthem
reducetheirpotentialliabilityelsewhere.
DavidMott,managingpartnerofOxfordCapital,whichspecialisesinalternativeinvestments,said:Duetotheirageandpoor
health,theyareunlikelytobenefitfromgiftingtheirassets,astheywillneedtosurviveforsevenyearsfortheassetstobecome
freeofinheritancetax.Equallyitisunlikelythattheywillbeabletobuyawholeoflifeinsurancepolicy,duetounderwriting
restrictions.Soonepossibleoptionwouldbetoinvestaproportionoftheirremainingcapitalinassetswhichbenefitfrom
businesspropertyrelief,suchasanenterpriseinvestmentscheme.Thesewillbecomefreeofinheritancetaxliabilityafterthey
havebeenheldfortwoyears.
Theunmarriedcoupleintheir60swithonepropertyeach,andeachwiththeirownchild
JohnSmithandEmilyWhite,bothintheir60s,areunmarriedpartners.Theyeachownahouse,worth320,000and300,000
respectively.Theyareplanningtomoveintogetherandletoutoneoftheirhomes,butareconcernedthatitisonlyamatterof
timebeforethevalueofeachhouseexceedsthesinglepersons325,000inheritancetaxthreshold.Theybothhaveonechild
frompreviouspartners.
Giventhattheinheritancetax'spouseexemptiondoesnotapplytounmarriedcouplesandtherearenoproposalstoextendit
inthiswaythebestadvicemaywellbetogetmarried.Ifthatisnotforthem,theyfacetheprobabilityofaninheritancetax
http://www.telegraph.co.uk/finance/personalfinance/tax/10913909/Sixscenariosthatrevealyourinheritancetaxbill.html

2/6

12/31/2014

SixscenariosthatrevealyourinheritancetaxbillTelegraph

chargewhenoneofthemdies,saidMrGiddens.
Thenextthingthecoupleshouldprobablydoisselltheirexistinghousesandclubtheirmoneytogethertoinvestinanew
property.
MrLudwigsaidasmartmovewouldbetoinvestinabuytoletpropertyandthensplitthevaluefourwaysbetweenthemand
theirtwochildren.
Thecouplecouldthenbuyanewhomeforthemselvestoliveinfor300,000,andbuyasecondbuytoletpropertyjointlywith
theirchildren,suchthatJohnandEmilyownhalfofthatpropertyandtheirchildrenowntheotherhalfequallybetweenthem,
saidMrLudwig.
ThegiftstochildrenwouldbeexemptprovidedthatMrSmithandMsWhiteeachsurvivesevenyearsfromthedateofmaking
thegift.
Amarriedcouplewithalargebuytoletportfoliowhichtheydependonforincome
ColinHunter,63,andhiswifeMargaret,62,havebuiltupabuytoletportfolioofeightproperties.Worthatotalof2.5m,these
aretheirmainsourceofincome.Thecouplehavelittleelseinpensionsorsavings.Theirownhomeisworth300,000.
Asthingsstand840,000wouldbeswallowedupbyinheritancetaxaloneiftheyweretodie.
MrMottsaidallwouldnotbelostifthecoupleactedswiftly.Theycouldsellsomeorevenalloftheirbuytoletproperties.
Theywouldfaceacapitalgainstaxbillandwouldneedtomakeplanstosheltertheresultingcapitalfrominheritancetax.
Byinvestinganamountequaltothegainonthebuytoletpropertiesintoanenterpriseinvestmentscheme,notonlycouldthis
gainbedeferredforthelifeoftheinvestmentbuttheywouldbenefitfrom30pcincometaxrelief.Theseinvestmentswouldbe
freeofinheritancetaxaftertwoyearsastheywouldbenefitfrombusinesspropertyrelief.
MrGiddenssaidthatsincethepropertyportfoliowasprobablyproducinganincomeinexcessofthecouplesneeds,theycould
giveawaysurplusincometotheirchild.
Subjecttoareviewoftheportfolio,theycouldalsoconsidergivingawaypropertiesthatshowalowcapitalgain,hesaid.
Awidowerwhopreviouslysetuptrustsforinheritancetaxpurposesandnowneedstorevisitthem
MichaelWoods,70,isawidower.Hewasadvised10yearsagotosetupthreetrusts,worth300,000each,toreducehis
inheritancetaxliabilities.Truststhatarevaluedatmorethan325,000thenilratebandarehitwitha6pctaxchargeevery
10years.Inordertogetaroundthis,thousandsoffamiliesandindividualssuchasMrWoodshavesetupmultipletruststoavoid
anysingletrustgoingoverthetaxthreshold.ButtheTreasuryisclampingdownonthesearrangements.
Rulesarebeingpushedthroughthatwillinsteadlevythe6pcchargeonthetotalamountofassetsheldacrossalltrusts.
Fortunately,undertheproposedchangesonlynewtrustssetupafterJune62014willbeaffected.ButMrWoodsdoesneedto
stopaddingmoneyintotheexistingtrustsandtoensuretheinvestmentsaremanagedtokeepthembelowthethreshold.
Ifyoucanseeaninheritancetaxbilllooming,startplanningnowtoreduceit
Eventhoughmorefamiliesarefallingwithinthenet,aninheritancetaxbillissomethingthatwithplanningcanbeavoidedor
atleastreduced.
Planasyouage
Ageiscrucialbecauseoneoftheeasiestwaystoavoidthetaxistogiveassetsaway.Butforthesegiftstofallentirelyoutside
yourestateyouneedtosurviveforafurthersevenyears.Soincreasingageorfrailtymakesthisoptionlessviable.Givingassets
awaycanalsotriggerothertaxliabilities.Abuytoletproperty,forexample,giftedtoachild,willcountasadisposalfortax
purposes,meaningcapitalgainstaxmaybedue.

http://www.telegraph.co.uk/finance/personalfinance/tax/10913909/Sixscenariosthatrevealyourinheritancetaxbill.html

3/6

12/31/2014

SixscenariosthatrevealyourinheritancetaxbillTelegraph

Takeextracarewhereyouderiveanincomeorotherusefromyourassets
Givingassetsawayworkswellwhereyounolongerneedorusethem.Butitbecomescomplexwhere,forinstance,theassetin
questionisyourhomeorinvestmentsyoudependonforincome.Hereyouronlyoptionmightbetoreducethevalueofyour
asset(bydownsizing,forexample)orinextremecasesbyborrowingagainstyourproperty.
Weighuptherisksofanyinheritancetaxmitigationmeasures
Somestrategiestoavoidinheritancetaxinvolveinvestmentrisk,butifthealternativeisthecertaintyofa40pctaxbill,thenthe
riskbecomesmorepalatable.InheritancetaxexpertStephenWomackofDavidWilliams,afirmofcharteredfinancialplanners,
said:Whenyouaredealingwitholderclientsyousometimeshavetobemoreaggressivebecausethereislikelytobelesstime
inwhichmoreordinaryinheritancetaxplanningstrategiescanbesettowork.
Forexample,youmightwellconsideraninvestmentintoaninheritancetaxportfolioschemethatusesbusinesspropertyrelief
because,althoughamoreriskyunderlyinginvestment,thiswilldeliveraninheritancetaxsavingafteronlytwoyears.
Theseportfoliosareconstructedspeciallyandinvestinassetsthatareexemptfrominheritancetaxifheldforasetperiod.Most
ofthequalifyinginvestmentsareinsmallercompaniesandsoposehigherriskstocapital.
TheyaregrantedtheirtaxexemptstatusbytheGovernmenttoencouragepeopletoinvest.
MrWomacksaid:Eveniftheinvestmentloses10pcor20pcofitsfacevalue,ifthelossviaaninheritancetaxbillasaresultof
doingnothingis40pc,thentheinvestorsfamilyisstillsubstantiallybetteroff.
Borrowingcanreduceyourinheritancetaxliability,butbewareofcostsandotherdrawbacks
Awellestablishedoptionisanequityreleaseloan.Youborrowthemoney,giveittoyourchildren,thensitbackandletthe
interestrollup.
Thedebtissettledfromthesaleoftheproperty,whichcouldbeatyourdeathorearlierif,say,youmoveintoacarehome.
MrWomackwarned:Themountinginteresttakesabigsliceoutofthevalueoftheloanand,effectively,yourchildrenorother
beneficiariesarebearingtheinterestcostbutasacapitalisedlumpsumonthesaleofproperty.
Thereisavariationontheborrowingstrategy,whichistotakeoutaninterestonlymortgageofthesortthatusedtobewidely
availabletohomeownersofanyage.
MrWomacksaid:Youwillhavetoconvincealenderyoucanaffordtomaketherepayments,butthereareafewfirmsoutthere
stillofferinginterestonlyloanstopeopleinretirement.Oneoptionwouldbetogivethemoneyraisedtoyourchildren,and
havethempaytheinterest.
Effectively,theinterestcostsfortheloanarewhatyourestatelosesinsteadofthetax.Withinterestat2.5pcperyear,for
instance,thechildrenpay25pcofthegiftvalueover10yearsininterest,versuslosing40pcofthegiftvalueintax.Butthere
areseveralrisks,notablythatinterestrateswillrise,potentiallyjeopardisingthepropertyitself.
RequestyourfreecopyoftheTelegraphMoneyGuidetoInheritanceTax
kyle.caldwell@telegraph.co.uk
CalculateyourinheritancetaxbillwiththeTelegraphInheritanceTaxcalculator
Howwemoderate
CopyrightofTelegraphMediaGroupLimited2014

http://www.telegraph.co.uk/finance/personalfinance/tax/10913909/Sixscenariosthatrevealyourinheritancetaxbill.html

4/6

12/31/2014

SixscenariosthatrevealyourinheritancetaxbillTelegraph

http://www.telegraph.co.uk/finance/personalfinance/tax/10913909/Sixscenariosthatrevealyourinheritancetaxbill.html

5/6

12/31/2014

SixscenariosthatrevealyourinheritancetaxbillTelegraph

http://www.telegraph.co.uk/finance/personalfinance/tax/10913909/Sixscenariosthatrevealyourinheritancetaxbill.html

6/6