New rules preventing people from reducing their exposure to inheritance tax by setting up multiple trusts for their heirs are being considered.
Under the plans, which could come into force next year, they would have only one £325,000 tax-free allowance.
The Institute of Economic Affairs said it was “just another punitive step” against those who hoped to be able to pass on wealth they have built up to the next generation.
For many people, the family home plus other assets are worth more than the current nil rate band for inheritance tax – £325,000 per individual and £650,000 per couple.
People who fall into this category are often offended at the prospect of their beneficiaries having to pay tax on assets accrued throughout their life at 40% on their death.
Some try to get around this by giving away assets while they are still alive but there are big disadvantages to gifting the family home to avoid the tax.
Such a gift is treated as a “gift with reservation” if it is still enjoyed, or in this case lived in, by the donor.
A consequence of such a gift is that the value will remain part of the donor’s estate and taxed accordingly.
To avoid these tax consequences the donor must pay rent at the full market rate, which is likely to be unpopular with those who have already repaid their mortgage.
Placing assets in trust is a way of reducing inheritance tax without giving beneficiaries control.
Existing rules allow for multiple trusts to be created, with each gift to the trust below £325,000 avoiding a periodic charge of 6% after 10 years.
The proposed changes could reduce the opportunity of creating multiple trusts by applying a single nil-rate band across them all.
There are other steps that those facing an inheritance tax liability can take to reduce the value of their estate.
A thorough cash-flow analysis will give you an early indication of how much money you need to fund your desired lifestyle.
These calculations will also identify surplus money – perhaps you can afford to increase your expenditure on the things you enjoy in life, or gift money to your children or grandchildren.
Gifts from income that form part of normal expenditure are completely exempt from inheritance tax, as are gifts of up to £3,000 per annum. Gifts from capital are considered to be “potentially exempt” and completely exempt if you survive for seven years from making them.
Starting to make plans as you approach retirement, or just after it, leaves plenty of time to take advice and begin gifting if that is appropriate.
Kevin Mackenzie is a financial planner at Acumen Financial Planning in Aberdeen. He can be contacted on 01224 392350.