The former Labour chancellor, Roy Jenkins, once described IHT as “a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue”. In the previous article we looked at various IHT planning options. However, these all require either a change of asset ownership, liquidity to either gift to others or acquire tax advantaged assets. So, what can be achieved if none of these are immediately possible, perhaps it’s because your asset base is tied into your property or because the gifting of assets would crystallise a liability to capital gains tax.
Here we use a client case study to demonstrate how a tailored lending solution can help to mitigate IHT.
From the view point of a responsible lender, the first question I ask of clients is “how would this strategy make you feel?” For many of our clients, Inheritance Tax planning is an emotive subject often addressed in the later years of their life. If the idea of borrowing at this stage of life makes you feel uncomfortable, this strategy may not be for you.
A careful assessment of the ongoing affordability of the loan itself has to be undertaken. A loan contract obliges the mortgagor to meet future repayments of loan interest or capital – and if you’re borrowing later in life, this may mean a reliance on retirement income. How sustainable is the income over the lifetime of the loan contract? What if interest rates and therefore the cost of borrowing were to increase in the future?
A credible repayment strategy is needed. In the scenario quoted, by gifting the money now, Mr and Mrs Smith are able to start the clock ticking from an IHT perspective reducing the value of their estate by the value of the loan plus any interest paid. Consideration needs to be given to what their means are to repay the loan capital in the future and what if this repayment strategy were to fail. The loan becomes repayable at the end of the term and there is no guarantee the lender will refinance the loan upon expiry.
Finally, death. What happens if the borrowers were to die within seven years of making the gift? Any gifts start to use up the NRB. Where IHT does become payable, the full amount becomes due on death within three years of the gift and reduces thereafter subject to a taper relief. So, have provisions been made for this eventuality and can the estate ensure that it meets both the repayment of any outstanding bank borrowing as well as any IHT payable by it?
Only 4-5% of estates in the UK pay IHT. The Brexit Party has pledged to scrap IHT altogether; the Labour Party would consider slashing the NRB threshold and introducing a £125,000 lifetime gift allowance upon which Income Tax rates would apply; and the Office of Tax Simplification has recommended that the seven year gifting period be shortened to five years. The outlook remains increasingly uncertain and we can only work within the current rules, but plans made today may be adapted in the future through ongoing and well informed advice.
IHT planning is a complex area and we would encourage you to contact your usual Brown Shipley Adviser to discuss your plans further
Paul Spann // Client Director
Think carefully before securing debt against your home, or your investments.
Your home may be repossessed if you do not keep up repayments on a mortgage. Lombard Lending used for investment purposes increases investment risk and exacerbates losses.
Our normal loan terms range from one to five years, although we will consider bespoke loan arrangements up to fifteen years. All lending is subject to qualifying criteria and assessed in line with Brown Shipley’s Credit Policy. Brown Shipley reserves the right to decline any loan application at its sole discretion.
The tax treatment of all investments depends upon individual circumstance and the levels and basis of taxation may change in the future. No information from this article should be taken as tax advice. Tax information is based on our understanding of current tax legislation as of September 2019. Please seek independent tax advice from your own accountant or tax adviser. Inheritance Tax planning is not regulated by the Prudential Regulation Authority or the Financial Conduct Authority. This is based on the IHT rules of England & Wales which are subject to change. Your situation can be more complicated if you have ties to other countries.