Inheritance Tax Planning - The nil rate band freeze

In 2007, when Gordon Brown was Chancellor, a proposal was made to increase the nil rate band (NRB) threshold to £350,000 in April 2010. However, in the recent PBR, the Chancellor confirmed that the NRB has been frozen at £325,000 until April 2011.

The frozen NRB may affect many existing discretionary trusts, which are subject to the 10 year periodic tax charge. The trustees may be required to take action where the value of trust assets are edging towards £350,000 so that the value of the trust remains within the zero-rate threshold for the next review period.

The transferable NRB between married couples/civil partners was not affected by the PBR and ‘doubling up’ on second death is still possible.

Draft legislation, which is effective immediately, was also introduced to close certain complex schemes that had been used to avoid inheritance tax (IHT). Furthermore, the Government announced that they are examining the way in which IHT charges are avoided.

Whilst it seems inevitable that further attention will be paid to IHT planning, we should not lose sight of the basic reliefs and exemptions that are available to us all.

For 2009/10 we each have an annual gifts exemption of £3,000. If the exemption from the previous year has not been used, then it may be carried forward one year. However, if it is not used in the following year, then it is lost.

It is possible to make gifts totalling up to £250 to individuals and there is no limit on the number of individuals you can gift to.

Wedding/civil partnership ceremony gifts are exempt, up to certain limits and the limit depends on your relationship with either party to the couple. Gifts of up to £5,000 can be made by parents and Grandparents, or parties to the marriage/civil partnership can make gifts of up to £2,500. Any other person can make gifts up to £1,000 and benefit from the IHT exemption.

You can make regular gifts out of your surplus income without any IHT implications provided that they form part of your normal expenditure; they are made out of income (rather than capital) and leave you with sufficient income to maintain your usual standard of living. It is advisable to document such gifts to show that they are of a habitual nature.

Although there was speculation that the availability of business property relief (BPR) and agricultural property relief (APR) would be reduced by the PBR, this was not the case and these reliefs still continue to be available. To get up to 100% IHT relief, there are detailed rules which need to be considered, but the opportunities for gifting such assets, or ensuring that assets which may attract the reliefs follow the rules as closely as possible, can be discussed with a Coutts estate planning adviser.

IHT planning around CGT rates

Due to the mounting speculation that CGT may be raised in a pre or post election Budget, many individuals may be tempted to act quickly and realise capital gains at the current 18% rate. For those who wish to co-ordinate their CGT and IHT planning the timing could be ideal to make gifts of assets pregnant with gain, to children for example, either outright or through the use of trusts (see below).

The gifts may be subject to the usual 7 year survivorship period for IHT purposes under the Potentially Exempt Transfer (PET) rules before the assets fall out of the estate of the donor.

 

For more cautious individuals, who perhaps prefer to retain a degree of control over the assets, a lifetime NRB Discretionary Trust could be a more attractive option. The trust option can also offer potential protections to the beneficiaries. Sale proceeds from investments could be used to settle a family discretionary trust whereby the settlor could act as trustee and ‘guardian’ of the funds. However, they and their spouse should not be able to benefit from the funds.