I was looking at the best methods of mitigating Inheritance tax immediately. My father is elderly but although he is in reasonable health I have just found out that his wealth will disappear as we will pay 40% tax (£212,000 to be exact) on everything he has over £325,000.
There are a number of options to consider but you should take advice from an Inheritance tax specialist as soon as you can.
Here are a number of potentials to peruse: the law changed which now allows you to use whatever percentage of a nil rate band for your spouse that wasn't used on their death. A nil rate band is the amount each of us is allowed to hand over to beneficiaries on death without any liability for inheritance tax.
If your mother didn't use any of her nil rate band you will be able to use 100% of the current nil rate band of £325,000 for her and for your Dad. That means your father can pass over £650,000 worth of estate with no liability to tax.
He could also begin by setting up a regular payment to you. As long as the gift is regular and out of normal income i.e. it can be afforded out of normal income, he will be able to give you large amounts of cash! There are a range of smaller gifts that can be made, but this is one that is often overlooked.
For instance, a number of clients we know actually pay the mortgages for their children. It's a regular gift, and its out of income, is affordable, and navigates round the age old issue every parent has of giving away control of their assets.
Your father could also make a large one off gift now, but for it to be effective he would have to live seven years.
Another option if he is in good health is for him to invest into a purchase life annuity backed with a life policy. It's more simple than it sounds: Your father would buy an investment into an annuity. This now has no capital value so his estate is immediately reduced by this amount. He then insures himself for the value of the contribution to the annuity which is paid for by the income that the purchase life annuity provides. The death benefit is put into trust for the beneficiary - you, which comes to you outside of the estate and free of tax.
The income from the purchase life annuity is also virtually tax free as most of the income is classed as a return of capital.
And so we could have a reasonably neutral situation where the capital is immediately taken out of the estate, the purchase life annuity's tax efficient income pays for the life cover, which then provides a lump sum on death, which passes free of tax to the beneficiary.
Much will depend on the level of income the purchase life annuity provides and the cost of the life cover, but both of these can be assessed by your Independent Financial Adviser before committing to action.
Another option is to use one of the many plans that exist to benefit you from the business property relief for Inheritance tax. Business property relief is a relief for inheritance tax at a rate of 50% or 100%. A holding of shares in a quoted company for example (where you have more than 50% of voting rights), would give you 50% business property relief, whereas a holding in an unquoted company would be at 100%, as would be an interest in a business.
Some financial products allow you to invest into a range of assets within their product that qualify for business property relief. You would have to hold them for two years but after that you would have 100% relief on inheritance tax on those assets.
Care should be taken here however, as some of the assets carry quite a risk, and some of these products charge an arm and a leg to insure against it.
If you have an Inheritance tax question call Peter on 0845 230 9876, e-mail info@wwfp.net
Comments: Our rules
We want our comments to be a lively and valuable part of our community - a place where readers can debate and engage with the most important local issues. The ability to comment on our stories is a privilege, not a right, however, and that privilege may be withdrawn if it is abused or misused.
Please report any comments that break our rules.
Read the rules here