Two things have become apparent in the current economic climate. Firstly, land, shares and other assets have generally dropped in value. Secondly, taxes are going to have to go up. Because taxes are on the increase, the likelihood of an early reduction or even abolition of Inheritance Tax is remote to say the least. Inheritance Tax is therefore right back on the tax planning agenda.
By making gifts when values are depressed you can freeze the value of the gifted asset for Inheritance Tax purposes. Any subsequent increase in value takes place outside your estate. Should the you die within 7 years of making the gift any Inheritance Tax due would be based on the value of the asset at the date of gift, not the date of death. So, for example, if you were to make a gift today of a property worth £400,000 and the property increases in value to £600,000, the potential saving in Inheritance Tax if you survive for 7 years is £240,000. If you do not survive for 7 years only £400,000 would fall back into your estate so, depending on tapering relief, you still have a potential Inheritance saving of up to £80,000.
When making gifts, the capital gains tax position needs to be borne in mind, but with asset values falling, the CGT burden will often be lower. If you do not wish to make outright gifts to individuals, a trust is a very effective vehicle in which to “park” assets so that they grow in value outside your estate. While the beneficiaries can receive the income, the capital is preserved. As long as the value of assets put into a trust does not exceed the available nil rate band, there will be no Inheritance tax lifetime charge. Changes to the tax regulations for trusts made in March 2006 made them much simpler. As a result of that simplification, trusts are now a much more popular tax planning option. Where assets are transferred into a trust, any capital gains can almost always be held over so that the settlor pays no tax.
If a gifted asset continues to lose value (whether given to an individual or a trust) and at the date of the donor’s death is actually worth less than it was when the gift was made, the executors can claim “fall in value relief” which will result in the estate only suffering Inheritance Tax on its value at the date of death. So although making a gift ring-fences an asset against further Inheritance Tax due to future growth in value, relief can still be claimed if it loses value. Heads you win, tails the Chancellor loses.