Tax planning is never straightforward, and currently complicated further thanks to an election looming, and potential tax reform on the horizon. The Conservatives are toying with abolishing Inheritance Tax (IHT), while Labour contemplate introducing a tax on all gifts – two opposite ends of the spectrum. What to do in the meantime?
You may have an estate over the IHT threshold, yet struggle to make any lifetime gifts without triggering Capital Gains Tax (CGT). For example, you may have investments or property you’d like to pass on to the next generation; to do so would crystallise the gain and trigger tax between 10% and 28% -- but by making a gift, you have no sale proceeds to pay the tax with! With IHT being considerably higher- 40% of the entire value of the asset, not just the gain - if you keep the asset in your estate until death, you will suffer 40% IHT instead. Given the choice, I’d pay the CGT; if I could defer it, even better.
Creating family trust
A technical answer to the conundrum is to use CGT holdover relief combined with the creation of a family trust. In certain circumstances, this planning can allow you to transfer assets up to £325,000 without triggering any CGT – the CGT being deferred until the asset is actually sold. Such a transfer will start the seven year clock for IHT, and can significantly reduce your IHT exposure overall.
This option will not necessarily be available in years to come if the rules on IHT, gifting and deferring CGT are reviewed; any changes to IHT will likely have knock-on effects for the CGT regime too.
None of us has a crystal ball, but it is worth considering the use of CGT holdover relief while it still exists. It is just one of the tools we can use in the mitigation of IHT generally; if you need specialist IHT and CGT advice, please get in touch.