Inheritance tax in the UK is reaching record levels, with an expected £900 million increase expected to be collected by the government over the next five years. If you are unsure what inheritance tax is, you can learn more about this and who must pay it via the PDF attachment.
While families who are liable for inheritance tax will undoubtedly have to pay some, there are Fa number of entirely tax loopholes that can help reduce the bill and therefore leave more assets available to pass on to future generations.
Matthew Ledvina has extensive experience of working with clients for tax planning and particularly trust planning. Artwork held by trustees is one of Matthew Ledvina’s particular areas of expertise.
Gifting to Family and Friends
One way in which it is possible to avoid paying the full amount of inheritance tax is to make gifts to family and friends. These gifts must be made at least seven years before death in order for them to be excluded from the final inheritance tax bill, and there are certain limitations on who can be gifted, how much and how often.
Married couples or those in civil partnerships who were both born in the UK are allowed to gift each other anything they own, so it then transfers from one estate to the other. Gifts of cash amounting to no more than £3,000 per year can be given to family and friends and cash gifts can be given to children or grandchildren that are getting married.
These gifts will not be accounted for when calculating inheritance tax liability provided the giver lives for seven years following the gifting. However, Capital Gains Tax may have to be paid on some gifts so expert tax advice is recommended.
The short video attachment gives an overview of what Capital Gains Tax is.
Art and Inheritance Tax
Inheritance tax became the largest source of art for the UK in 2006, with more than £25 million in value of artworks donated to museums, libraries and galleries in lieu of inheritance tax in the 2005 to 2006 financial year. In the infographic attachment you can see some of the most valuable art donations made through the Acceptance in Lieu scheme.
Tax can be indefinitely deferred on artworks that remain on public view, even though they are technically still in the possession of the owner. An art-focused asset strategy can be used for wealth and tax planning, although there are many regulations and obligations to abide by.
Investments in AIM Shares
Some investors choose to build portfolios of inheritance tax-proof shares that are exempt from liability. Shares listed on London’s junior Alternative Investment Market (AIM) are often exempt from inheritance tax liability, although there are conditions attached. AIM shares must be held directly by the individual for at least two years – they cannot be held in a unit trust or any other type of fund. Companies also need to meet certain criteria to qualify for the exemption.
Putting Money Into Trust
For non-domiciled UK settlors establishing a trust, funds or assets that are put into trust becomes exempt from inheritance tax so long as there is no direct benefit for the giver, their spouse or civil partner, or any children they have under 18 years of age. An example of a trust that would be exempt from inheritance tax is one established for an adult child that is there to pay for the education of the grandchildren, or a trust established to provide support for an adult family member who requires care. Trusts may be liable for other forms of tax, however, so again tax advice is a must.