Lucy Brennan considers the long-term benefits of succession planning

Over the past few years there have been multiple rumours of both complete removal of inheritance tax or an increase in the nil-rate band to £1,000,000. In the current economic climate and under the coalition government this is unlikely to happen.

 

Asset appreciation

Although we are in a time of depressed asset values, the increase in the value of assets in the past ten years, such as on houses, means that assets held can easily still exceed the current nil rate band of £325,000. With the transfer of that band between spouses on death, that leaves a maximum of £650,000 for those married or in civil partnerships.

This band has not increased since 2009 and, from 5 April 2015, the plan is to keep increases in line with CPI.

There are simple and cost-free measures that can be taken to reduce inheritance tax on death. The first is to make full use of exemptions. Under the annual exemption, £3,000 of wealth can be transferred in any one tax year and, if last year’s has not been used, that leaves £6,000 in the current year to transfer. While this does not sound like a lot, ten years of transfers is £12,000 of tax saved, before even considering the uplift in value of those assets transferred over that time. The exemption is per individual, so if a couple each make a £3,000 transfer, that is £24,000 saved over ten years.

In addition to the annual exemption, gifts can be made on marriage of £5,000 per parent and £2,500 per grandparent.

Transfers of wealth can still be made within a life above the values listed above, however, if the transferee dies within seven years of making the gift, IHT will still be payable (albeit at a reduced rate after three years) and the value of the gift forms part of the nil-rate band. On high-value transfers within a lifetime, an individual is therefore gambling on the length of time he has left to live. Although, as with all things, there is of course insurance that can be taken out to cover the tax should the need arise.

Capital gains tax may also be due on lifetime transfers, for example, on the transfer of shares. There is of course the annual exemption for gains of £10,600 in the current tax year and also that, at the moment, assets may be held at depressed market values. Today, a transfer of shares to future generations may be done with minimal tax being paid and ensure that the hope-for future growth is not subject to inheritance tax.

 

Night vision

Crucial to any tax planning is ensuring that an individual has the wealth needed to see out the final years of life in the manner that they expect and that the possibility of future medical or nursing bills are also taken into account.

While the above concentrates on lifetime planning, there are also things that can be done once an individual has passed away. Changes since wills were made may mean that a slight tweak by deed of variation within two years of death will give a more positive outcome.

For those who have unfortunately been recently bereaved, if falling asset prices mean that assets (specifically listed shares, unit trust holdings and land and buildings) have been realised at less than the value on which inheritance tax was paid there could be an opportunity to reclaim some of the IHT paid subject to certain conditions.

Succession planning may not seem like it should be a priority, but planning for the long run pays off.

Lucy Brennan is a partner in the private wealth group at accountancy firm Saffery Champness https://www.saffery.com/