Benjamin Franklin once said “In this world nothing can be certain except Death and Taxes”. While this may be true as we all pay our fair share of tax during our lifetime, we should not have to pay tax on our assets at death. With careful planning, Inheritance Tax (“IHT”) can be mitigated by using available exemptions and reliefs.

These exemptions are in addition to an individual’s Nil Rate Band (£325,000) and Residence Nil Rate Band (currently £150,000 in 2019/20). The Residence Nil Rate Band is not available to everyone as it is restricted in respect of estates over £2,000,000.

Reliefs

Reliefs are available on certain assets providing the necessary conditions are met. If an individual owns any business assets or agricultural assets, it is important to ensure that the necessary conditions are met in order to avail of these generous reliefs.

Business Property Relief

The rate of Business Property Relief (“BPR”) ranges from 50 percent to 100 percent depending on the ownership and type of the asset. There are a number of restrictions in relation to these assets therefore it is important to ensure that the assets are held in the correct vehicle to optimise the relief. It is also important to ensure that all the criteria for BPR are met so that this generous relief is not jeopardised.

Agricultural Property Relief

This may be available in respect of land and farm buildings, and is similar to BPR. However, there have been a number of court cases in respect of this relief, therefore it is essential that a review of assets is carried out every few years to ensure an individual will still qualify for this relief in respect of APR assets.

Regular gifts out of income

Regular gifts out of income is a very generous but seldom used relief as most individuals are unaware of it. If an individual’s income exceeds their expenditure each year then this excess is added to their capital which serves to increase the size of the estate and so in turn increases their IHT liability. However, an individual can gift this excess to other family members or friends and not increase their capital each year.

For example, Anna is a 73-year-old retired teacher, her annual income after tax is £25,000, however Anna’s expenditure totals £15,000 which means £10,000 each year is being added to Anna’s capital. Anna’s other assets total £1,200,000 which means Anna’s estate already has a significant IHT liability. Due to Anna’s excess income, Anna is increasing her etate’s IHT liability by a further £4,000 each year. However, by making regular gifts out of income Anna can ensure that her estate is not added to and the IHT liability is not increasing each year. This is an immediate relief and as soon as the gift is made the asset leaves Anna’s estate.

Exemptions

There are number of exemptions available that everyone should be making use of when possible. These are:

Potentially Exempt Transfers (PET)

A PET is a gift that falls out of an individual’s estate if the individual survives more than seven years from the date of gift. Individuals may consider making a PET of cash or an asset that they no longer have a use for. If gifting an asset, the individual may need to consider if Capital Gains Tax may be due on the gift.

Annual Exemption

An individual can gift £3,000 per annum which will immediately be outside their estate for IHT purposes. If you do not use this exemption in one year it can carry over into the next year, however the maximum Annual Exemption anyone can use in any one year is £6,000.

For example, Jane has not utilised her Annual Exemption in a number of years but gifts her niece £6,000 in the 2018/19 tax year. As Jane did not use her Annual Exemption in the 2017/18 tax year the £3,000 Annual Exemption is brought forward and Jane can use it and her Annual Exemption from the 2018/19 tax year against the gift to her niece in the 2018/19 tax year. If Jane then makes a gift of £6,000 to her nephew in the 2019/20 tax year she can only offset the Annual Exemption from the 2019/20 tax year as she has already utilised her Annual Exemption from the 2018/19 tax year. Therefore £3,000 of the gift to her nephew may fall into Jane’s IHT Estate if Jane does not survive seven years from the date of the gift.

Wedding Gifts

There are a number of exempted gifts that an individual can give on the occasion of marriage or civil partnership. An individual can gift £5,000 to their children as a gift when the child is getting married or entering a civil partnership, £2,500 to a grandchild and £1,000 to anyone else. The gift must be made on or shortly before the ceremony and it is not a valid gift until the ceremony takes place.

Small Gift Exemption

An individual can gift up to £250 per person in any one tax year. The total gifts in a tax year to any one person cannot exceed £250.

Spousal exemption

Any gifts made to an individual’s UK domiciled or deemed domiciled spouse are exempt from IHT. A restriction to £325,000 applies if the spouse is not UK domiciled/deemed domiciled. If this is the case, professional advice should be sought.

Conclusion

Is IHT a voluntary tax after all? It certainly seems so, as with careful planning it can be mitigated. IHT planning is something that has to happen over time and the earlier the planning begins the better.

ASM Chartered Accountants has six offices, Dungannon, Belfast, Dublin, Dundalk, Magherafelt and Newry. The 160 strong team specialises in a range of accountancy disciplines including, corporate finance, Insolvency services, forensic accounting, Audit & accounting, consultancy services, internal audit, tax, hotel, tourism and leisure. They are dealing with family business on a daily basis and can help and advise you on what needs to be done to ensure your family business can be successfully passed to future generations.

For further information, please contact Leanne Hillock, Senior Manager at ASM Chartered Accountants on 028 90249222 or leanne.hillock@asmbelfast.com.

This material has been prepared for information purposes only, and is not intended to provide, and should not be relied on for, tax or accounting advice. You should consult a professional adviser before undertaking any tax planning.