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July 2004
Q:
I have read about the new 'Pre-Owned Assets' Tax that has recently become law, and wondered:
1) what Inheritance Tax planning options are still viable generally; and
2) what can be done specifically for someone who has a valuable family home?
A:
The new Pre-Owned Assets Tax really does mean that everyone has to re-think and review their Inheritance Tax planning to make sure it still works.
The first step for most people is to make sure they have tax-efficient Wills. This involves getting advice from an Inheritance Tax specialist. The benefits can be huge! For example, it is possible for married couples to use 'nil rate band discretionary Wills' to save £105,200 in Inheritance Tax. This is achieved by ensuring that the current nil rate band of £263,000 is left in this special type of Will trust.
This can apply even if the main asset is the family home. In that situation, there are two variations of this type of special Will trust, namely a 'Loan Trust' or 'Debt Charge' scheme. If correctly structured, the Will trust can include a share of the house, which remains out of the surviving spouse's estate.
A further tax-efficient Will option is to leave the surviving spouse the amount over the nil rate band in a flexible trust. This can, (if that spouse survives a further 7 years) ensure that another £105,200 in Inheritance Tax is saved. The effect of this sophisticated Will planning is that assets worth £789,000 can be left tax-free to the next generation! This works for a surviving spouse who continues to occupy the family home, which makes up most of or all the value of the estate.
What else can be done with the family home, assuming that one cannot rely on one spouse surviving another? There are two further ideas to consider. The first is to obtain a mortgage against the home (hopefully one that is interest only, with the interest rolling up). The funds released (up to perhaps 65-70% of the value) can then be invested in assets that qualify for Business or Agricultural Property relief for Inheritance Tax purposes. This could be a portfolio of AIM quoted shares, or farmland let out. After 2 years of ownership, these assets qualify for 100% relief from Inheritance Tax and the estate is reduced by the amount of the loan.
The second is for those who can bear to leave their home. It could be sold and the monetary proceeds gifted to the intended heirs absolutely. They can then use the proceeds to buy a similar house (it could even be the one next door!) or a smaller one. They might consider placing this house in a special 'Revertor to Settlor' Trust. The spouses would have a life interest offering continuing Principal Private Residence exemption for Capital Gains Tax purposes and protected rights of occupancy. However, because the property comes back to the heirs on death, it remains part of their estates, not the spouses! There is of course, the usual 7 year survival required, for the initial gift of the proceeds of the home.
That's just a few of the potential planning opportunities still available. The above is not an exhaustive list. Remember that Inheritance Tax planning after the 'Pre-Owned Assets' Tax requires specialist advice before being implemented, because it is essential to make sure that any proposal works in law and is suitable for an individual's particular circumstances.
About the author
Daniel is a Barrister who heads Strategic Tax Planning, a Tax Law Consultancy that has as one of its specialities UK and International Tax Planning for both high net worth individuals and Corporate clients. Daniel is also involved in drafting Trusts, Share Schemes and helping settle Investigations and Disputes with the Tax Authorities. Daniel has over 18 years experience specialising in tax law since qualifying as a Barrister in July 1983. He has spent time at the Bar, in several leading City law firms and latterly in the International Tax Department of a leading accountancy firm, before establishing his own Tax Consultancy. Daniel has written and lectured extensively and is a regular contributor to several publications on the whole spectrum of tax planning.
Daniel is TaxationWeb's UK & International Tax Law Editor. Click here for contact details.
Daniel M Feingold
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