How to pick the safest path through the inheritance tax minefield

EACH week, The Scotsman gives you a top-ten guide to pertinent financial issues.

The Tories have pledged to increase the inheritance tax threshold to 1 million if they come into power this year. But for the time being, the threshold remains frozen at 325,000, with no increase in the new tax year.

Hazel Bowman, tax partner at the Glasgow office of accountant and business adviser Mazars, shares her top tips on mitigating the impact of inheritance tax.

1PLAN EARLYEarly and effective tax planning is crucial to minimising inheritance tax (IHT) liabilities. IHT is a flat-rate tax of 40 per cent on the value of all assets in a deceased’s estate. This means that an individual whose total assets, including the family home, are worth more than 1million at the date of death will, under current legislation, have a liability of 270,000.

2WELCOME RELIEFSThere is an annual gift exemption available to individuals, currently 3,000 a year. If you have not used the gift exemption in the previous year, you can use it in the current year, although it is important to note that the current year’s allowance must be used first. Gifts on marriage are also exempt. The amount which is exempt depends on the relationship between the donor and donee. Each parent, for example, can give 5,000 to a child on marriage .

3EARLY GIFTSTransfer assets to your heirs and successors early. Gifts made by an individual seven years prior to date of death are outwith their estate for IHT purposes, so assets with high potential growth should be considered for transfer. Even if the donor dies within seven years of the date of the gift, the value of the transfer included in the estate at date of death is the value at the date of transfer, not the value at date of death, so the impact of capital gains tax (currently 18 per cent) will need to be considered.

4 ASSET CONTROLWhere an individual has built up a successful business, it is understandable that they may wish to retain a degree of control when assets are passed to younger members of the family. The judicious use of trusts can achieve this. Although the donor would no longer be able to benefit from the asset, as trustee they would still be able to retain an element of control. There may be IHT to pay, but that would be at the lifetime rate of 20 per cent.

5BUSINESS PROPERTY Relief is available on most unincorporated businesses, although buy-to-let is a notable exception. Business property relief of 100 per cent is available if the property is held for at least two years before date of death or the date on which a gift is made.

6BORROWING AGAINST THE PROPERTYIf you need to borrow, it is better to have any borrowings secured against the property assets rather than assets of the business. This is because secured borrowings reduce the value on which IHT is charged and there is little point in depressing the value of something that is already exempt and much smarter to have it reducing the value of assets that will be charged.

7CASH DEPOSITSIf your estate includes cash, bank or building society deposits and you run a business which qualifies for business property relief, it is well worth considering holding these accounts within the business venture rather than outside the business. If you are able to establish a business reason for retaining the funds, such as earmarking the funds for future development, these assets may qualify for business property relief.

8AGRICULTURAL PROPERTYTo qualify for agricultural property relief, a business normally has to be part of a working farm. If land is leased for agricultural purposes, it will normally qualify for agricultural property relief of 50 per cent. By ensuring that the correct type of lease is in place, the relief could be increased to 100 per cent.

9CHARITABLE GIVINGGifts made to charitable bodies are exempt from IHT. In addition, there may be income tax and capital gains tax relief available.

10NORMAL EXPENDITURE OUT OF INCOMEIf, on an annual basis you have excess income, you can gift this without incurring any liability to IHT. The gifts need to be made on a regular basis and should not affect your normal standard of living. You do not need to make gifts to the same person each year.