Lifetime planning and gifts
Larger estates exceeding the NRB often require further planning, even after all personal and business tax reliefs have been exploited. As well as making use of other instruments like pensions and life insurance policies (which are beyond the scope of this article), gifting assets during your lifetime can also be beneficial from a tax perspective.
- Everybody has an annual (tax-free) gift allowance of £3,000, so the making of lifetime gifts can be an effective tax planning technique when structured correctly and timed appropriately.
- Gifts to spouses, civil partners and charities are generally exempt from IHT.
- Lifetime gifts (known as ‘Potentially Exempt Transfers’) will not be fully exempt from IHT until 7 years has elapsed, meaning that all gifts made within the 7-year period prior to death will form part of the taxable estate.
- Small gift allowances allow you to give tax-free gifts of up to £250 per person during a tax year. Small gifts can be made to as many people as you want during a single tax year, providing that another tax allowance hasn’t already been used for the same gift recipient.
- Regular gifts made out of your income, without affecting your lifestyle or your savings, can also be exempt from IHT.
- Taper relief (which is itself subject to a complex set of rules and criteria) may apply depending on individual circumstances. Where taper relief does apply, it can work to reduce the IHT payable on a gift over the 7-year period on a sliding scale.
Meticulous estate planning must be carried out from an early stage if you are to take full advantage of all available tax reliefs. The best example of this would be the timing of gifts – an outright gift made over 7 years before death will no longer be in your estate for tax purposes; any gifts made within the 7 years before death will be taken into account when working out your estate’s inheritance tax bill (unless one of the other tax reliefs mentioned applies).
It is important to consult a professional before gifting assets to protect yourself against any unexpected surprises. For example, somebody may wish to gift business assets during their lifetime, without realising that this would be considered a ‘disposal’ and would trigger a Capital Gains Tax (“CGT”) charge on any gain in value.
Tax Planning – “Nothing in life is certain except death and taxes”
Taxes are one of your biggest expenses in life, so strategic tax planning is a must if you are to preserve your wealth for your family.
Note, however, that there is a distinction to be made between tax planning and tax evasion. Tax planning is making the best use of the tax exemptions available to you, whereas tax evasion (seeking to avoid paying tax that is due) is illegal and can lead to criminal prosecution.
Many are entitled to inheritance tax reliefs such as the NRB and the Residence Nil-Rate Band (“RNRB”). RNRB offers further IHT relief where the deceased’s family home is ‘closely inherited’ by a direct lineal descendant. The NRB and RNRB provide individuals with IHT relief of £325k and a further amount up to £175k respectively.
However, another IHT relief that business owners can benefit from is Business Property Relief. BPR can provide significant IHT relief on the gifting or transfer of business assets at either 50% or 100%, and this relief can help to reduce the value of the taxable death estate.
Business Property Relief (BPR)
BPR was designed so that businesses could continue to operate following the owner’s death, without needing to sell the business to settle IHT liabilities. Given that over 99% of UK businesses are SMEs, most business owners should be looking to make use of this tax relief.
BPR will only apply to “relevant business property”, which typically means stocks, shares, securities etc. The amount of IHT relief (or whether BPR will apply at all) will depend on a range of factors, some of which are included in the non-exhaustive list below:
- Whether the shares passing through the estate are unquoted (i.e. not listed on a recognised Stock Exchange);
- Whether the relevant business property has been owned for a continuous two-year period prior to the disposal;
- Whether the person holding the securities has “control” of the company (at least a 50% shareholding);
- Whether the business is “wholly or mainly trading” (meaning that activity relating to investments or property cannot exceed 50% of the business’s activity).
- If your company engages in both trading and investing activity, it may be worth separating the two businesses so that the ‘trading’ company can qualify for BPR.
- Whether there is already a binding agreement in place for the transfer of your business assets on death or incapacity. Arrangements such as these are often contained in documents such as a shareholders agreement / partnership agreement.
- It would be prudent to have your shareholders agreement / partnership agreement reviewed by a professional to ensure that there are no provisions conflicting with your personal estate planning.
- If you do not have a shareholders agreement / partnership agreement already in place, it would be advisable to have one drawn up to reduce the likelihood of issues or disputes later down the line.
It is worth noting that there is a distinction between a company acquiring land to rent it out for an income (which is considered investment activity and is not eligible for BPR) and a company acquiring land to develop property (which is eligible for BPR as it is considered a trading activity).
It should also be pointed out that assets held in the name of a business that are not being used for business purposes (e.g. putting large sums of cash into a company to try and claim BPR on that cash) will not be eligible for BPR.
These are just a few examples of the complexities faced when assessing BPR eligibility. If you are uncertain whether your business assets will qualify for BPR, you should seek professional advice to discuss your circumstances.
Capital Gains Tax
Proper professional advice can assist you in exploiting all available CGT reliefs through careful tax and estate planning, such as:
- Business Asset Disposal Relief where CGT is reduced from 20% to 10% on the disposal of qualifying assets.
- Gift Holdover Relief where the CGT liability is deferred and the person receiving the assets pays any CGT due when they dispose of the business assets at a later date.
- Annual CGT allowances which (at the time of the writing) allow individuals to make £6,000 worth of annual gains on their assets without any CGT liability. This allowance is being reduced to £3,000 annually from April 2024, accentuating the need for proper tax planning.
- Private Residence Relief where no CGT is payable on the sale of the residential home providing it has been the individual’s only / main residence.
In Part 3 of our series on tax, estate and lifetime planning for business owners, we will look at estate planning considerations for business owners and how they can ensure that their business continues to thrive while their beneficiaries reap the rewards. Click here to read part 3 of our blog series.
If you would like advice concerning your tax or estate planning, or in connection with your existing estate planning documents, speak to one of our Private Client solicitors today and find out how we can help. Please contact us by telephone on 03456 465 465 or email enquiries@rotherabray.co.uk.
Disclaimer: This blog is for information only and does not constitute legal advice. If you need legal advice please contact us on 03456 465 465 or email enquiries@rotherabray.co.uk to get tailored advice specific to your circumstances from our qualified lawyers.
