With annual Inheritance Tax (IHT) receipts now at their highest share of UK national income since the early 1980s, HMRC recently announced that receipts have exceeded £5bn for the first time (£5.1bn in the 12 months up to May 2017).
According to the latest figures provided by HMRC, the amount of money paid in IHT by families in the UK has dramatically increased by close to 70% over the last five years (2012-2017). The Office for Budget Responsibility expects receipts to continue to rise to an eye-watering £6bn by 2020-21. This prediction came after the introduction of the new Residence Nil Rate Band in April 2017.
Changes to pensions and the recent house price boom in the UK have been well documented and the latter seems to be one of the main culprits for this dramatic rise.
There are many options for those seeking to mitigate potential IHT liabilities outside of their main residence. Gifting or Trusts may be the way forward for some and it is very important that each client is assessed and advised according to their own individual situation. However, we believe that Business Property Relief is not only flexible but, most importantly, allows the individual to retain control and access over their liquid funds, all in a timely manner.
Over the last few years providers have continued to evolve their range of BPR qualifying portfolios to meet the demands of a growing number of clients with an ever-growing number of scenarios.
Sandra is a widow in her mid-80s. Although she still lives independently, she appreciates it may not be too many years until she will require care. When her husband died, she inherited assets valued at just over £1.5 million including their home, valued at £600,000, and an investment portfolio.
Sandra would like to do the best for her family and in particular her grandchildren. She is concerned that if she gifted them a proportion of her estate, she might leave herself financially vulnerable should her health deteriorate, and she require the money for care home fees. She explains that she and her husband had looked at downsizing but the recent increase in stamp duty coupled with the lack of bungalows in their area had made this less attractive.
After a conversation outlining the various options and understanding Sandra’s personal risk profile, we explain that she could re-structure some of her investments into portfolios that qualify for BR rather than giving a proportion of her wealth away during her lifetime. Unlike a Trust or Gifting which would require Sandra to live for an additional 7 years to be effective for IHT planning, investments using BPR only need to be held for a two-year period (prior to death) before they qualify for IHT relief.
By restructuring £500,000 of her existing share portfolio and reinvesting the proceeds into a suitable BPR portfolio she could save £200,000 in inheritance tax. The portfolio is held in Sandra’s name so, should the worst occur, and she needs the money for care home fees, she can still access her capital. Once invested, the two-year qualification period begins, but once the investment has been held for at least two years, the portfolio will be IHT exempt and the assets can be left, free from IHT, to her grandchildren when she passes away.
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For further information and advice on inheritance tax planning, contact our Chartered Financial Planners and Pension Specialists on 01772 729742 or fill out our online enquiry form.