With house prices on the increase, the frozen threshold for inheritance tax (IHT), above £325,000, is meaning more people are required to pay than ever before. HM Revenue and Customs has announced that IHT payments increased by 8% in 2017/18 to a total of £5.2 billion. The nil-rate band is also not scheduled to increase until April 2021.
IHT can be something many people put off until a later date, but often simple planning can help you plan for the future whilst enjoying the fruits of your labour.
Case study
Grandparents wish to provide for their minor grandchildren and any others that may come along in the future and have, say, £1.3 million they can afford to gift. To provide for future grandchildren they each set up a discretionary nil-rate band trust and settle £325,000. The beneficiaries include current and future grandchildren. In addition, they set up a bare trust for their two existing grandchildren for £325,000, avoiding any lifetime inheritance or tax charges. To minimise administration, the four trusts subscribe for shares in a company. The company invests the money and all income and growth is in the company. The grandparents can be directors of the company, so they continue to make decisions about how the funds are invested. As the bare trusts hold shares in a family company, the grandchildren do not come into substantial funds on their 18th birthday.
If income is required to fund, say, school fees, the company can pay dividends which can potentially be taxed on grandchildren, utilising their tax bands.
If the grandparents survive seven years from the date of setting up the trusts there is an IHT saving of £520,000. In addition, all growth is outside their estate, increasing the saving.