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Inheritance Tax Planning and the Dukes of Westminster

 

Following the death of the Duke of Westminster last week, the headlines have tended to focus not so much upon the late Gerald Cavendish Grosvenor, but his estate. It is reported that an estate worth more than £9 billion will pass to his son, Hugh Grosvenor, apparently free of Inheritance Tax and through the use of Trusts.

 As you may be aware, Inheritance Tax (IHT) is charged at a rate of 40% upon your death, over and above the available Inheritance Tax nil-rate-band. This currently stands at £325,000 for each individual.  On this basis, the Duke’s estate should have a tax liability of over £3.5 billion. Through the use of Inheritance Tax allowances, but most importantly in this case, appropriate planning it appears that this has been significantly reduced.

 Many of the planning techniques undertaken by the Duke are available to everyone, though perhaps on a more modest scale. We have therefore set out below a brief precis of the main exemptions and points to consider.

 Lifetime Gifts

You may make unlimited gifts to individuals throughout your lifetime. These are known as Potentially Exempt Transfers (PETs). Provided you survive a period of 7 years from the date of the gift the transfer will be exempt and fall outside your estate for Inheritance Tax purposes. 

 If you should die within the 7 year period, the failed PET will eat into your Inheritance Tax nil-rate-band. Once the nil-rate-band has been exhausted, the balance will be taxed at 40%, and there will be no nil-rate-band available for your remaining estate. Therefore, timing is crucial.

 Trusts

Trusts are often viewed as the dark-arts of estate planning. However, in truth they have been in existence for over a thousand years.

 You can transfer assets out of your estate onto a protective Trust, such as a Discretionary Trust, for the benefit of named beneficiaries. You can ensure you still retain control of your property, investments, farm or business, though the ownership is in the hands of others – the Trustees. The Trustees may include members of your family and, or, your professional advisors.

 Settling assets onto a Trust is effectively done on the same basis as Lifetime Gifts. If you survive 7 years, the value of the assets will fall out of your estate for Inheritance Tax purposes, provided specific criteria are met.

 Agricultural and Business Property Relief

Inheritance Tax reliefs are available for business owners and farmers, on their property, premises and assets.

 However, these reliefs are not only available to those with farms or businesses. Certain shareholdings can qualify for Business Property Relief (BPR), provided that you hold the shares for at least two years. These will typically be investments in companies that are not listed on any stock exchange, or shares in qualifying companies listed on the Alternative Investment Market.

 It should be noted that not every interest in a business will have the benefit of BPR. A business which only generates investment income will not attract BPR. This will therefore exclude residential or commercial property letting businesses.

  Heritage Property

Some buildings, land, works of art and other objects can be exempt from Inheritance Tax, particularly if they are of historical interest. The condition is that they are properly looked after, and made available for the general public to view throughout certain times of the year.

  Annual Allowance

Every individual is entitled to gift up to £3,000 each tax year, free of Inheritance Tax. You may utilise any unused annual allowance from the previous tax year, up to a combined allowance of £6,000. In addition to the annual allowance, gifts of up to £250 may be made to any number of persons. If the gift exceeds £250 in value, then it will form part of the £3,000 allowance.  In addition in some circumstances, for example marriage, gifts up to a certain value are exempt from Inheritance Tax.

  Gifts out of Income

It is possible to make gifts free of Inheritance Tax if they are made out of income surplus to your normal expenditure. It is important that the gifts adhere to the strict guidelines laid out by HM Revenue & Customs. Amongst other requirements, these gifts must be made on a periodic basis, and we would strongly advise detailed records are kept of these payments.

Exempt Beneficiaries

Gifts between spouses are exempt from Inheritance Tax. Furthermore, the second deceased spouse will be entitled to utilise the unused nil-rate-band of the first deceased spouse. This is known as the transferable nil-rate-band.  

 Gifts to registered charities, sports clubs and the main political parties are exempt from Inheritance Tax. If you leave 10% of your ‘net’ estate to charity upon your death, a reduced rate of Inheritance Tax at 36% will apply to taxable estate.

  The above examples are of course subject to quite particular conditions. Therefore it is imperative you seek professional advice before undertaking any tax planning.

 

  Will Vine, Associate. 

 Disclaimer: This article is not intended to constitute legal advice.  For legal advice in connection with the above, please contact us directly.

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