Inheritance Tax Loopholes – The Legal Alternatives To Loopholes

Inheritance Tax Loopholes

Let’s start with good news – Inheritance Tax planning is entirely legal in the UK

You do not need ‘loopholes’!

Contrary to popular belief, Inheritance Tax is payable on the transfer of wealth, which typically happens upon death, but it can be during your lifetime too

Armed with the knowledge that what triggers Inheritance Tax is not only death, but the transfer of value, it necessarily follows that you can legally plan to minimise, or even eliminate, the impact of Inheritance Tax on your estate or, as we prefer to call it, your family legacy passing to your children and loved ones

Why you should avoid Inheritance Tax Loopholes

Be in no doubt, HMRC has wide powers and a great deal of targeted anti-avoidance legislation at its disposal and, quite properly, uses all of them to the fullest extent

The words ‘loophole’ suggests something dodgy and temporary and, in the world of Inheritance Tax planning, likely it’s both

There’s no shortage of ‘off-grid’ tax planning, provided by perfectly legal outlaws, who choose to thumb their noses at the tax authority. Some very good people seem to have some very bad ideas. You can find HMRC’s latest list of ‘rogues’ here.

You need to ask ‘why pay a fee for a short term fix, that will only work, until it doesn’t.?’ Worse, you won’t be alive to know if the planning, for which you paid a hefty fee, actually worked!

It is a fact that UK Inheritance Tax is voluntary, as it is completely legal to plan ahead to minimise, or even eliminate, death duties on your family legacy

So, to repeat, you do not need ‘loopholes’!

When is Inheritance Tax payable?

On death you’re forced to transfer your wealth to others so, unless you have properly planned well in advance, your executors will have to pay Inheritance Tax, on behalf of your beneficiaries, who are your family and loved ones

You could give some, or all, of your assets to other individuals, and those gifts are known as ‘lifetime transfers’

Most lifetime transfers are exempt, or only become chargeable to tax in the event you die within 7 years of making the gift

Usually, the real issues are the conflict caused by the natural inclination to want to retain control and ownership during your lifetime and, perhaps, your need or desire to retain income

Well, control and ownership are very different things, as we’ll see later. For now, just know that you likely can legally achieve whatever goals and outcomes you require, using proven, mainstream, strategy and structuring. You need a specialist Inheritance Tax advisor, who knows how

What are the Inheritance Tax exemptions?

To help with planning, there are a number of Inheritance Tax exemptions available. Exemptions apply immediately and do not require you to survive 7 years

Make full use of exemptions and allowances and review them, and take action, regularly.

Here’s some of the main ones:

The first £3,000 of any transfers of value made in each tax year are exempt and, if not used, can be carried forward one year. Married couples each have an annual exemption of £3,000 which means that married couples may be able to make a gift of up to £12,000 which is exempt

There’s a general exemption of up to £250 on gifts made to any one person each tax year. There’s no limit to the number of gifts that can be made. Married couples can each do this

Gifts can be made in consideration of marriage up to:

Type Of GiftAmount Allowed
Parents£5,000
Grandparents/Great Grandparents£2,500
Bride to Bride/Groom or Groom to Bride/Groom£2,500
Other donors£1,000

Which Inheritance Tax exemption is most useful?

Let’s take a look at a, potentially, very useful exemption called ‘Normal Expenditure out of Income’

Broadly, lifetime transfers are exempt to the extent that they are part of the normal, habitual or typical expenditure of the transferor, who must be left with sufficient net income to maintain their usual standard of living

Here’s HMRC’s own guidance: ‘There’s no limit to how much you can give tax free, as long as you can afford the payments after meeting your usual living costs’

This is an extremely useful exemption since there is no financial limit, provided that the transferor can afford it

Inheritance tax planning using gifts out of normal expenditure can be highly effective. It should be undertaken only as part of a long-term structured planning strategy, and working with a qualified specialist Inheritance Tax advisor

The planning must be genuine, and properly documented, and will require discipline in execution. There are lots of rules, regulations and requirements to be aware of

In Inheritance Tax planning, deep conversations with the right experts are priceless

How useful is Business Property Relief in Inheritance Tax planning?

There is absolutely no limit to the amount of Business Property Relief any taxpayer can claim where the qualifying conditions are met. It could be many £millions..

Obviously, you should aim to maximise those of your assets that qualify for Business Property Relief

There are two types; Business Property Relief and Agricultural Property Relief

Which means that, where the conditions are met, you may be able to pass on your family trading business entirely free of Inheritance Tax. Beware, however, there are plenty of rules and regulations to meet. Property investment and lettings businesses, are unlikely to qualify but Furnished Holiday Lets might

Business Property Relief is not just for those with existing businesses as there are some types of investment which may also qualify

The best bit is, it takes just 2 years to achieve Inheritance Tax exemption through Business Property Relief, which is much better than waiting 7 years for Potentially Exempt Transfers

How to use a Relevant Property Trust in Inheritance Tax planning?

Trusts have existed in the UK for nearly a thousand years. A trust is an arrangement whereby someone is given legal title to an asset, and trusted to hold it, on behalf of one or more beneficiaries

A Relevant Property Trust is a special type of trust that is treated as a separate person, in its own right, for Inheritance Tax purposes, which means that it can be used to shelter assets outside of your estate

There is the opportunity to transfer assets up to the ‘nil rate band’ (currently, £325,000 per person, £650,000 for married couples and civil partners) into Relevant Property Trusts, every seven years

Consider setting up a new Relevant Property Trust every 7 years to continually increase the number of nil-rate-bands available

There are anniversary and exit charges to consider but, those are small compared to the likely overall Inheritance Tax saving, and likely can be easily, and legally, mitigated anyway

How to avoid Inheritance Tax on Investment Properties

If you own investment properties then get your head around this

A transfer to a properly constructed Relevant Property Trust is a chargeable transfer for Inheritance Tax purposes

However, on transfers up to the nil-rate-band of £325,000 (£650,000 for married couples and civil partners), the transferor has the ability to ‘hold-over’ any capital gains arising on assets transferred

Which means that no Capital Gains Tax is payable on the transfer, as the Relevant Property Trust is deemed to acquire the asset at the original purchase price

Then, when assets are distributed to the beneficiaries following death, there’s no Inheritance Tax

How to use Investment Property Trusts in Inheritance Tax planning

If you own an investment property business then HMRC likely will confiscate 40% of it in Inheritance Tax when you die, unless you plan ahead

Fail to plan for Inheritance Tax and that’s the default position, but you could use a Relevant Property Trust to pass investment properties to your beneficiaries free of Capital Gains Tax and Inheritance Tax

Where two settlors (husband and wife, or civil partners) jointly transfer properties into a Relevant Property Trust then two nil-rate-bands will be available

Which means you may transfer up to £650,000 of rental properties to your adult children without Capital Gains Tax or Inheritance Tax

Then, you need to stay alive for the next 7 years

After 7 years, you get a new nil-rate-band and you can transfer another £650,000, assuming the rules don’t change

Oh, and after 14 years, you can transfer another £650,000 and so on

Insuring Inheritance Tax liabilities

Much Inheritance Tax planning involves you surviving the transfer, or gift, for a number of years

Typically, you need to live for another 7 years, but it might be just 2, and in some cases planning is effective immediately

When death happens before the end of the ‘critical period’ it likely will create unexpected tax bills

It is sensible to consider some form of simple term life insurance policy on the life of the person(s) making the gift or transfer. That way, your family have the money to pay the Inheritance Tax to HMRC

The sum-assured will reduce over the fixed, say, 7 year term of the policy in line with the reducing Inheritance Tax liability

Control vs ownership in Inheritance Tax planning

In Inheritance planning we can solve most any problem, except one – your inaction. You need to get your arse into gear, and take action, or nothing can result

Plan for what will happen when you die, and how the Inheritance Tax will be mitigated, or paid

The most common problem is the desire to retain control over family wealth until you draw your last breath

It’s very common to confuse ownership with control

Be aware that you can control things that you do not own, provided legal and beneficial ownership is properly structured

Your Inheritance Tax planning needs to be focussed on family succession. It’s about you passing your assets, tax-efficiently, to the next generation of your family and loved ones

Pretty much whatever legal requirements you have for your family wealth can be achieved, legally and tax-efficiently, if you plan well in advance, and with a specialist Inheritance Tax expert

How to keep your Inheritance Tax planning up to date

The UK has one of the most complex tax structures in the world, with around 18,000 pages of tax laws, and nearly 1,000 tax reliefs and allowances. You can’t know them all. That’s a job for our team of Chartered Tax Advisors (CTA’s)

At outset, we ask you to visualise the future you want for your family legacy then, with our help, work back to today, using informed choices. Our CTA’s provide you with your legacy planning strategy, and all the tools you need to realise your vision

Once your Inheritance Tax planning is finalised, and paid for, you may be invited to become a full member of our Resource Optimisation Program (ROP) where our CTA’s will continue to work with you to aim to maintain everything for you while you’re alive, and they’ll even handle probate for your beneficiaries when you die, if that’s what you want..

ROP provides you with 3 options: our CTA’s will implement, maintain and manage everything, or our CTA’s will work with your existing advisors, or you can do it all yourself. That’s ‘Done for you’, ‘Done with you’ or ‘Done by you’

Contact us HERE to talk to an expert, for FREE!

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