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Plan now to spare family paying inheritance tax

A massive crackdown on inheritance tax evasion has been launched by HM Revenue & Customs as fears grow that the Coalition wants to squeeze more cash from ordinary families. Experts say early action by families to minimise IHT is vital and warn the later they leave it, the fewer options there are.

The taxman is increasingly investigating people’s tax affairs after death to make sure they have kept strictly to the IHT rules. The tough line follows last month’s announcement by the Chancellor that the £325,000 IHT threshold – above which estates are taxed at 40 per cent – will be frozen for six more years to 2019.

George Osborne, who in 2007 promised that he would ‘take the family home out of inheritance tax’ by increasing the IHT threshold to £1 million, was accused of ‘betraying ordinary families’.

Legacy: Patricia Gliddon, 90, with her youngest great-grandchild Ella Gliddon, ten months, has limited her IHT liability

Opponents of IHT, one of the most controversial and hated of all taxes, point out that the average home in Greater London – today worth £487,000 – would already result in taxes on death of £65,000.

By 2019, if house prices rise at just two per cent a year, the average home in the wider South East would also fall within the net, followed by average properties in the next most expensive regions: East Anglia, the South West and the West Midlands.

Chas Roy-Chowdhury of the Association of Chartered Certified Accountants says: ‘We are seeing a ramping up by the Revenue in its investigations of estates. At the same time we are seeing both sides of the Coalition indicating more revenue will be raised this way.’

He believes the IHT take could be actively increased – perhaps even by reducing the threshold or stripping away some of the few allowances – but not before the next election.

James Gladstone, financial planner at upmarket wealth manager Cazenove, whose clients are worth an average £3million, says: ‘Freezing the allowance when house prices are rising is like shrinking it. More people are dragged into the net.’

But the wealthy have more tools at their disposal to limit IHT. Families with multiple properties, for instance, can give all but their own home away to their beneficiaries and, provided they survive seven years, escape any tax.

Ordinary families, whose total wealth is represented by their single home, have fewer options. Roy-Chowdhury says: ‘To effect the same thing, they would have to sell their house, downsize, and give their heirs the  leftover.’

Early planning is vital. The later families leave it, the fewer options remain. Gladstone says: ‘Some people refuse to talk about death to their children. We try to extract the emotion, acknowledge we are dealing with a grim subject – and then be practical.’

  More... Don't get caught out if your child clubs together with friends to get a foot on the ladder I have left my wife everything in my will. Should I add her to the house deeds too? Inheritance tax calculator: work out your liabilities Find a financial adviser Could equity release be a good option for you? Find out using our free guide

Patricia Gliddon is among the growing number of older people who has talked frankly to her family about her death and tax. Aged 90, she has five grandchildren and four great-grandchildren.

She has been a widow for many years and lives near Yeovil, Somerset, where she owned and ran a leather goods business with her late husband. One of her grandsons, Nigel Gliddon, 37, is an accountant and has helped her to arrange her affairs to limit tax due.

She says: ‘I have friends who don’t like talking about these matters, but there comes a time in life when it suddenly strikes you the end is in sight. I want to make the most of what I’ve got – it’s a only a modest estate – for the sake of my grandchildren and their children.’

As part of her planning Patricia has put money into one of the few investments that qualify for IHT relief. She needs to own in the qualifying firm – in this case Time Advance, overseen by specialist asset manager Time, based in London’s West End – for just two years before they fall outside her estate for tax purposes. In the meantime the investments, which lend money to property developers and are thus comparatively low risk, earn a target 3.5 per cent a year.

Such investments can only be recommended by advisers and in the Gliddons’ case this was Neil Shillito of SG Wealth Management in Norwich, who worked with both Patricia and Nigel. Shillito says: ‘The benefit of the relief on this type of investment is that you only have to survive two years. You can also get the money back if you need it again, for instance to pay for nursing care.’

THE LOOPHOLES THAT CAN LIMIT THOSE INHERITANCE TAX BILLS

GIFTS: Up to £3,000 can be given annually either as a single gift or as several, without counting toward the donor’s estate for inheritance tax purposes. Useful for those with spare cash, but it would not mitigate a large tax liability.

TRANSFERS OF ASSETS: Any amount can be given away free of tax provided the donor survives for seven years.  Until then gifts are known as ‘potentially exempt transfers’ and remain taxable. The donor cannot retain any interest in the assets given, so this perk tends to be of most use to wealthy families who perhaps own several properties or have  a range of assets.

DISCRETIONARY TRUSTS: Here the family parks money or assets inside a trust that they continue to control, determining how it is invested and who will ultimately benefit. The downside is that the donors give the money away for good – they cannot use it for themselves in future. Useful for families with substantial non-property wealth.

GIFTS OUT OF INCOME: This increasingly popular loophole helps those with excess income to give away money above the annual gift allowance. But you must show to the Revenue you have ‘spare’ income above your needs, so this tends to help only affluent households.

LARGE DONATIONS TO CHARITY: From last April, estates bequeathing ten per cent or more of their total assets to charity pay a reduced 36 per cent rate on the remainder above the threshold.

ENTERPRISE INVESTMENT SCHEMES and BUSINESS PROPERTY RELIEF SCHEMES: To encourage investment in certain types of business, the Government grants inheritance and other tax breaks. Shares in qualifying schemes become exempt  from IHT after they have been owned for just two years. Advice is essential with these investments as the underlying businesses vary greatly in risk. There is also the risk that the Government might remove the perk in future.


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