10th July 2020
The current circumstances that we are living through are having a devastating effect on financial markets and our investments are likely to be sitting at low valuations compared to the last few years. As the picture becomes clearer these will hopefully start to recover but is there an opportunity in the meantime to act whilst values are low?
Inheritance Tax planning falls largely into three camps: reducing your estate through gifts, investing in non-taxable assets, and insuring against liabilities. These planning options can be relevant to all at different stages of life so Inheritance Tax planning should be seen as a continuing project rather than a one-off event.
Giving assets away to reduce your estate is an uncontroversial way to plan to reduce the Inheritance Tax payable on your estate when you die. It tends to be relevant to individuals somewhere between the ages of 50 and 80, though personal circumstances will dictate the best time to think about making some gifts.
If you live for seven years following a gift, it is exempt from Inheritance Tax. If you don’t survive for the full seven years, the value of the gift will be taken into account when assessing the Inheritance Tax due on your estate. The value taken into account is the value at the date of the gift even if the recipient kept the asset and it subsequently rose in value. If the recipient does not have an immediate need for cash, it is worth considering gifting an asset that might increase in value again rather than cash.
One barrier to making gifts can be Capital Gains Tax. If you want to give an asset rather than cash to someone, you are taxed in the same way as if you had sold the asset to them at market value. It is therefore beneficial to gift an asset which has not increased too much in value since you bought it. Now is a good time to think about giving away an investment which currently sits at a low valuation in hopes that the value will recover in the future making the gift more valuable to the recipient. Transferring at a low value now minimises any Capital Gains Tax payable on the gift.
If you are thinking about doing this you should take into account how any losses may be restricted. If you give away an asset which is currently sitting at a loss to someone who is connected with you, you cannot offset the loss against another capital gain unless the other gain arose on another gift or sale to the same person. You should therefore carefully consider what you give to whom if you have different assets at both a gain and a loss.
Now is also a good time to consider setting up a trust. A trust is useful if you want to give value away but don’t want to give it to someone just yet. This might be because they are too young or perhaps going through a divorce. It can also help if you want to benefit different family members at different times.
You are restricted on the amount you can put into a trust without incurring an Inheritance Tax liability. This is generally £325,000 for an individual or £650,000 for a married couple or civil partners. As values are currently low, a transfer of £325,000 worth of assets at today’s values will hopefully be worth a lot more when values start to recover in the future.