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Inheritance Tax Planning (Part 1) - Published in June 2016

Estate planning is often conceived hand-in-hand with inheritance tax planning involving the creation of structures such as trusts, wills and powers of attorney. The former demands tools and logic to “tidy up” your affairs before dying. For the latter, the awareness of any potential liability does not usually register until later in life.

As people grow older they become more aware of the potential IHT liability on their estate. However, the earlier IHT planning starts, the easier it is to reduce the eventual tax bill. Forewarned is forearmed.
One of an adviser’s key tasks is to help clients understand the potential impact of IHT and consider taking action whilst effective planning is still feasible. As part of a general approach to IHT planning, it is important to:
• develop a long-term strategy for IHT planning, using all the reliefs and exemptions that are suitable; and
• take into account the effects of other taxes, notably CGT – although CGT is chargeable on taxable gains rather than the total value of assets, and is not payable on death.
The first priority for most, if not all, before they embark on estate planning and IHT mitigation is to ensure optimum levels of income and capital for their personal provision for the rest of their lives. Only once this has been established should they consider the possibility of bestowing large gifts. Basic planning for financial security should include the certainty that their pension provisions are adequate. For people who have retired or are on the cusp of retirement planning, it might include the reorganising of their investments in order to generate more income.
Previously, standard advice was that spouses (and registered civil partners) should consider sharing their assets, in order that both could bequeath gifts that would utilise their exemptions and nil rate bands. This strategy could possibly also have advantages regarding income tax and CGT. In general, there is no CGT or IHT on transfers of assets between spouses or between civil partners living together.
However, the introduction of the facility to transfer any unused percentage of the nil rate band of the first to die has removed the need to ensure that each party has sufficient assets to use their nil rate band should they die first. This is because the percentage of any unused nil rate band is not wasted as it can be passed on to the survivor.
Transferrable Nil Rate Band (NRB)
The transferable nil rate band was introduced on 9 October 2007. It is available to married couples and civil partners who have not used all of their nil rate band on first death (although I note that the rules are different if the spouse died before 1975) and it applies when the second person dies. The first death could have occurred at any time. It is extremely valuable to clients who failed to plan during lifetime and in many cases now allows planning to be far more straightforward. Where there have been second marriages after one partner has been widowed, divorced or separated, planning becomes more important should the clients want to maximise their estate and the value passed on to future generations.
To illustrate the facts, here is a simple case:
Jenny died in June 2002 when the nil rate band was £250,000. She left her entire estate of £500,000 to her husband Simon. Jenny doesn’t use any part of her nil rate band because the gift to Simon is exempt. When Simon dies his personal representatives can make a claim to increase the nil rate band available by 100%.  This is the percentage unused on first death. This would give a nil rate band of £650,000 if Simon died in 2010/11.
Simon’s estate is worth £800,000 and he leaves it to his children. Without the transferable nil rate band the inheritance tax liability would have been £190,000. Taking it into account, the liability is just £60,000. His children are £130,000 better off.
Now a slightly more complex case may help confirm the concept, as follows:
Brian died in January 1992 when the nil rate band was £140,000. He left £28,000 to his daughter Florence (using 20% of his nil rate band) and the rest of his estate worth £70,000 to his wife Rose. Rose dies in May 2010. Her nil rate band is £585,000. This is her own nil rate band of £325,000 increased by 80% – the percentage not used by Brian.
Rose’s estate is worth £550,000. The inheritance tax liability is £0. Without the transferable nil rate band it would have been £90,000.
It is the percentage of unused nil rate band that can be transferred. This means even if the first to die has no assets their spouse’s estate can still benefit.
In Part 2 I shall expand on a broadly misunderstood but very useful tool for inheritance tax planning in the form of Potentially Exempt Transfers (PETs).

This article is intended to provide a general review of certain topics and its purpose is to inform but NOT to recommend or support any specific investments or course of action.  Taxation depends on individual circumstances as well as tax law and tax authority practice which can change.  Not all IHT planning is regulated by the FCA.

Raoul Ruiz Martinez is a resident and independent consultant for Finesco Financial Services Ltd., Glasgow and advises clients on private financial matters in both the UK and throughout Europe under the MiFID regulation. Finesco Financial Services Ltd is authorised and regulated by the Financial Conduct Authority (FCA). Some of the services provided are not regulated by the FCA because they are not included within the Financial Services and Markets Act 2000.

Raoul has a weekly radio feature (Raoul’s Rant) on the Owen Gee Solid Gold Sunday morning show on KissFM Algarve.

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