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The Inheritance Tax downside

Everyone wants to pass on as much of their estate to their loved ones as they possibly can.

With appropriate planning you may be able to mitigate the inheritance tax (IHT) due on your estate.

We provides specialist, tailored advice on all aspects of UK and US personal tax legislation.

We can guide you through the complex  IHT legislation and regulations, giving you expert advice in a way that’s simple to understand and help to remove the stress from your personal tax affairs.

LKA Senior Tax Advisor and resident UK/ US Tax Specialist, Nicola Dunn, outlines the steps you should consider when passing on your assets to your family and beneficiaries.

Case study – Charles

Charles owns a property in Cobham which is worth £3.5m. He has other liquid assets of about £500,000. He is 46 years old and is running his own company worth about £1m. Charles is thinking of retiring early and passing on his company to his children.

He would like any gift of shares or transfers to be done in an IHT efficient way.

Calculation of potential IHT

Absent any planning or exempt transfers, the IHT on his estate as it stands is more than £1.8m. The first £325,000 is tax-free and the rest of the estate would be liable to tax at 40%.

What can Charles do about this tax?

There are some planning options available to Charles. The first step is that on his death, all his assets can pass to his wife tax-free (or vice versa), assuming she is UK domiciled. However, this merely postpones the IHT until her death.

There are additional exemptions available when you pass on your main residence to your children; however, these are phased out when the total estate is worth more than £2m.

Gifts to charity

If you gift at least 10% of your estate to charity in your will, the tax rate applying to the rest of the estate reduces to 36% instead of 40%. In Charles’s case this could save tax of £367,000 and the charity would benefit from a gift worth £500,000. It is also possible to gift the whole estate to charity and there would be no IHT to pay.

Other tax planning opportunities

As Charles is still active in the business, passing on the shares in his company during his lifetime or in his will might qualify for Business IHT relief. This area is complex, and we can assist you in in reviewing your assets to determine what might qualify.

Charles could also start regular gifting, maximising the various exemptions available. If he survives 7 years, these will drop out of his estate entirely. Even if he does not live for a further 7 years, a reduced rate of tax would apply.

Setting up trusts

Trusts have fallen out of favour more recently, following a raft of anti-avoidance legislation introduced in 2006. It is still possible to use trusts as an IHT planning tool, with the understanding that there could be charges to IHT every ten years, depending on the value of the assets in the trust and the type of trust arrangement.

How we can help

At LK & Associates we have experience in assisting clients with the various options available to mitigate their IHT position. Winners of the 2022 Tolley’s Tax Awards for Best Single Office Tax Practice, our highly qualified and experienced advisors cover the breadth of personal tax areas, including UK and US tax.

Based in Thames Ditton, we pride ourselves on the personal, cost-effective service we can offer you as a small, local firm.

To find out more call us on 020 3915 8585 to discuss how we can help you.