The two main methods of IHT mitigation are:
Potentially Exempt Transfer (PETs)
These are transfers of assets (including property) to:
- an individual
- into an Interest in Possession Trust
- into an Accumulation and Maintenance Trust
Any amount of money you give away outright will not be counted for tax if you survive for seven years after making the gift. If you die within this period, taper relief on the amount will apply. These gifts are called potentially exempt transfers and are useful for tax planning. Money put into some types of trust counts as a potentially exempt transfer, so you can give money away into trust to stop your grandchildren, for example, getting their hands on the money until they are older.
If such transfers are survived by less than seven years, but more than three years, taper relief will apply, which means that the percentage tax charge is reduced.
The charge on lifetime gifts is on the value at the date of the gift, but using the tax scale in force at the date of death. PETs utilise the nil rate band before any assets passing on through a donor’s death, and accordingly taper relief only applies to the IHT liability calculated on gifts exceeding the current nil rate band.
Joint Life, Second Death Whole of Life Insurance Policy
Alternatively, a Whole of Life policy can be effected in trust to pay a tax exempt sum to the children upon the second death. The main advantage of mitigating the liability in this way is that you retain complete control of your assets, there having been no prior transfer of assets or property whatsoever.
The regular monthly premiums are treated as a gift by HM Revenue & Customs but as long as the amounts add up to no more than £3,000 per annum, they will fall within your annual gift exemption.
The availability and cost of such an arrangement depends upon your age and state of health.
We can help you in assessing your Inheritance Tax position and to recommend methods of planning to reduce or nullify the liability on your estate in the event of your death.