21st September 2018

Prudential: That’s a relief… or is it?

Clients wishing to mitigate a potential Inheritance Tax (IHT) liability have a dilemma. Should they reduce the value of the estate through the tried and tested method of gifting, or invest in assets potentially qualifying for IHT Business Relief? Graeme Robb, Senior Technical Manager at Prudential explores further. 

Here’s the dilemma for clients wishing to mitigate a potential Inheritance Tax (IHT) liability – reduce the value of the estate through gifting or invest in assets which provide relief from IHT.

Let’s understand firstly how both these approaches fit into the IHT regime.

The IHT regime - condensed

IHT is charged where there is a value transferred by an individual (i.e. the value of their estate goes down) and that gift isn’t exempt. So, for example an outright gift (a ‘potentially exempt transfer’) made more than 7 years before death is ignored because it will have become exempt. Likewise, exempt gifts can be ignored such as those within the annual £3,000 exemptionor those that qualify for the normal expenditure out of income exemption.

If a client makes a gift which isn’t exempt or potentially exempt (e.g. a gift into a discretionary trust) then it will be immediately chargeable to IHT albeit that zero tax will immediately arise for cumulative gifts within nil rate band limits.

So, the paragraphs above outline how exempt and other gifts can mitigate IHT. Where do reliefs fit in?

Firstly, note that IHT legislation tells us that death isn’t an actual transfer of value but nevertheless is deemed to be one.

Whether the transfer is actual or deemed, business relief (i.e. ‘Business Property Relief’ (BPR)) will reduce the value transferred. For example when there is a deemed transfer on death then it is necessary to value the estate immediately before death and BPR will reduce that value. A reduced value will give rise to reduced IHT for those transfers within the IHT net.

Clients looking to mitigate a potential IHT liability need to weigh up the pros and cons of gifting away versus investing in potentially relievable assets. For the avoidance of doubt, agricultural relief (APR) will also reduce the value transferred. This article will however focus on BPR.

Read the full article here. 

Tax, Trust & ISA