Approaching retirement? Act now to reduce your Inheritance Tax (IHT) bill

Gifts out of excess income

In addition to the above, but potentially the most valuable exemption, is the relief for gifts out of excess income. You may have heard of the seven-year rule (see below), where gifts are subject to IHT at a rate of up to 40% if the transferor dies within seven years. If you make gifts out of excess income and the gifts meet certain conditions, they’ll be exempt from IHT, irrespective of how long you (the donor) survive. One of the key conditions of this exemption is the ability to demonstrate the gifts for each year are covered by the surplus income, after tax, for that year and so it's important to think about this before retirement, when your income levels may drop. 

Click here for more information on gifts out of excess income.

Lifetime gifts

Subject to the above, outright gifts made during your lifetime, rather than upon death, may only escape IHT fully if you survive the gift by seven years. Until then, they’re considered a Potentially Exempt Transfer (PET). If you don’t survive the seven-year period, the PET becomes chargeable, meaning it’s added to the value of your estate for IHT purposes. PETs aren’t included on the Inheritance Tax return after seven years so if you’re planning on making lifetime gifts, it’s better to think about this sooner rather than later. 

Click here for more information on lifetime gifts.

Gifts With Reservation of Benefit (GWROB)

HMRC considers some gifts to be a GWROB. This would be the case where the legal ownership is changed, but you continue to use the asset as if it were still in your name. A typical example would be if you made the transfer of your family home but continued to occupy the property without paying a market rent – you have made the gift, but you retain the benefits of ownership of the property. 

Thankfully, there are some ways to overcome this. One option would be to pay a market rent for your occupation. Another, if you intend on occupying the property alongside the new owner, would be to only transfer half of the property but ensure that you continue to pay at least your share of any ongoing property costs. If HMRC decides that you have retained a benefit, the value of the asset at the date of death will be added to your estate for IHT purposes, regardless of when you made the gift.

Pre-Owned Assets Tax (POAT)

Another issue to be aware of when giving assets away during lifetime is the potential for the POAT to be applied. This can apply if you give away an asset but subsequently benefit from the asset that you gave away, although it will not apply if the asset remained in your estate because you had retained a benefit from that asset. An example of this is if you were to gift funds to someone to purchase a property that you later reside in. The POAT rules would impose an annual Income Tax charge, based on the value of the benefit you receive. So for a property, the charge would be based on the annual rental value.

Looking to retain some of your assets?

There are planning options available that don’t require assets to be given up fully during your lifetime.

Business Relief (BR)

Investing in assets that qualify for BR (formerly Business Property Relief), provides relief from IHT on the transfer of relevant business assets at a rate of 50% or 100%. The 50% rate applies to land, buildings or machinery used in a business owned by you, if you control or are a partner of the business. It also applies to shares giving more than 50% voting control in a listed company. The 100% rate applies to an interest in a qualifying business and shares in an unlisted trading company. Relief is only given if you owned the business or asset for at least two years before death.

Click here for more information on BR.

Discounted Gift Trust (DGT)

Using a DGT allows you to put a lump sum into a trust for your beneficiaries, while retaining the right to regular payments. A DGT may therefore be useful if you require the ability to still benefit from the income but want to exclude assets from your estate. You’d need to survive for seven years after the transfer to prevent an IHT charge, and unless structured as an absolute/bare trust, the discounted value transferred will also need to be under your available Nil Rate Band to avoid a lifetime IHT charge at a rate of 20%.

How to ensure you plan effectively for your circumstances

It’s important to ensure you don’t allow your own standard of living to be compromised in retirement. Our tax and financial planning experts work together to arrive at solutions that not only provide options to minimise the IHT payable on death, but also consider your future financial needs. We use sophisticated cashflow forecasting software to assess the impact of any actions on your future income, and will advise on the most tax efficient way for you to prepare for your beneficiaries’ inheritance. As experienced financial planners and personal tax advisers, we provide advice and guidance tailored to specific circumstances.

IHT is one area that is under constant review and consultation with HMRC. Although there have not been many changes to the rules in recent years, it’s important to keep any pre-existing advice under regular review.

Speak to an expert

If you’re considering any of the above, or if you have any other queries about personal tax or financial planning considerations at your stage of life, fill out the form below and one of our experts will be in touch to help. As experienced advisers, we can provide joined up advice and guidance tailored to your specific circumstances. 

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