Not so long ago Tory promises of an increased nil rate band prompted the then Chancellor, Alistair Darling, to introduce new legislation to effectively double the nil rate band for married couples and those in civil partnerships. Inheritance Tax was an important battleground but, as house price growth went into reverse and stock markets fell, it became less of a vote winner.
With a coalition government, compromise is necessary from the outset and inevitably both sides have to sacrifice manifesto pledges. The good news is that the Liberal Democrat Mansion Tax has not survived; the bad news is that neither has the promised £1million nil rate band. In fact, the nil rate band remains frozen for the next 4 years at £325,000. This means more and more estates will fall back into the Inheritance Tax trap. A £650,000 estate increasing in value by 3% per year (probably less than the rate of inflation) will mean the tax bill faced by beneficiaries will increase by approximatley £150 per week over the next 4 years.
So what can be done?
A few years ago including a trust provision within the Wills of married couples was standard practice since it allowed both spouses to utilise their nil rate bands without jeopardizing the security of the survivor. The introduction of the transferable nil rate band effectively rendered such tax planning redundant but, with a static nil rate band, such planning again has appeal. If assets are hived off to a trust on the first death, any future growth falls outside of the estate of the surviving spouse. By contrast, assets passed directly to the surviving spouse effectively means the survivor inherits an extra Nil Rate Band. If the value of the estate increases by 3% a year and the nil rate band stays static, the trust saves £22,000 in tax over 4 years. Of course, the Inheritance Tax position needs to be balanced against possible increases in income and capital gains tax but these taxes too can be mitigated with good advice.
Having reviewed your Wills to ensure maximum tax efficiency, it is then time to look at further planning which can be undertaken now.
Lifetime planning falls neatly into three strategies: reduce; convert; insure.
Gifts can reduce the value of an estate but of course, tax savings should not be made at the expense of your financial security. Although there are exemptions, large gifts need to be survived by 7 years.
By contrast buying assets which qualify for Business Property Relief or Agricultural Property Relief delivers tax savings after just 2 years but the tax advantages need to be weighed against the investment risks.
If neither of these strategies is practical, the final option is to insure against the liability. This is not a solution but it does at least mean that your beneficiaries have the means to pay the tax bill.
Inheritance Tax is a complex area and one size certainly does not fit all, please take professional advice.