A Welcome Relief

George and Mildred are comfortably off with a large house in a nice area and a cash rich engineering business.

George ran the business but was beginning to take a back seat as he was entering his late sixties and had employed a good manager in the shape of their son, William.

They were concerned about Inheritance Tax (IHT). George had started the business forty years ago and built it up from nothing. They were not keen that HMRC would take 40% in tax on their deaths so they decided to take advice.

The chap from Rutherford Hughes Limited (RHL) sat down with them and asked them about what their fears and concerns were and what they wanted to achieve. The RHL adviser explained more about IHT, the thresholds, reliefs and potential solutions.

George stated, “We would be keen for William to take over the business when I die as he has worked in it with me for some time. Should I give it to him now and hope to last seven years?”

Our man from RHL came back with more questions. “The first question, do you need the income from the business? If ‘yes’ then you have just cut yourself off from it.” He continued, “Do you realise that gifting the business creates a disposal for CGT purposes and therefore a potential tax liability?”

“Further, your business may qualify for Business Relief for IHT.”

George replied, “We could draw on our pensions to replace the salary and dividends we receive but I don’t like the idea of paying tax at all when William gets the business. You better tell us more about Business Relief.”

Our man explained that the business had to be “qualifying” and had to be owned for a period of two years. Under the current rules it would then be 100% exempt from IHT.

Mildred became excited. “So, we can just leave the shares in the business to William and that’s it; he gets it IHT free? What about Capital Gains Tax?”

“Let’s deal with the easy one first,” said our man. “Capital Gains are wiped out on death so there is no tax to worry about there. However, IHT is still an issue as your company is cash rich. In fact, it is carrying too much cash and therefore, as we speak, has lost its qualifying status for Business Relief.”

George and Mildred looked at each other.

Mildred asked, “How can we sort this out?”

“Well you could pay yourselves a dividend which would suffer income tax and would have the money in your estate for IHT purposes. What might be better is to top up your pensions via a company contribution as this would be immediately outside your estate but that would not reduce the cash sufficiently.”

“As a business, it can invest in its own qualifying Business Relief scheme and the money is immediately outside your estates and brings the engineering business back into qualifying status itself.”

“Brilliant!” shouts George. “But what if I need the money back in the business?”

“No problem. We can surrender all or part of the investment as needed. It would take a few weeks to get the money back into the business account.”

Our chap continued, “Whilst Business Relief investments do try and reduce risks they are still investments and as such their values can go up or down and you might not get all your money back. That said, it will save you a lot of IHT.”

The above example is intended to illustrate general principals and must not be construed as advice.  

Peter Rutherford is a director at Rutherford Hughes Ltd. He can be contacted on 0191 229 9600 This email address is being protected from spambots. You need JavaScript enabled to view it.

Immediately Effective IHT Planning

Here at Rutherford Hughes, we like to think we know a thing or two about Inheritance Tax Planning. However, it is an area which causes some confusion with the public.

Firstly, there is the common misconception that you must live seven years if you give away money, or assets, before they are out of your estate. Sometimes that is true but not always. It depends upon who is receiving the gift and the value of it.

Secondly, there is the belief that you have to give assets away to avoid or reduce IHT. You do not. There are specific investments (Business Relief Schemes) which are outside the estate after two years. In fact, it is possible to invest and to have the money outside of your estate immediately. Yes, now. No waiting.

This is true if someone, for example, owned a business that qualified for business relief (BR), sold it and invested in a BR scheme within three years of sale. The investment is immediately outside of the estate.

To be fair, this is likely to be a fairly small group of individuals. However, it is possible for anyone under the age of 90 to achieve the same result.

You may be wondering “how could this be possible?” 

There are a very small number of BR providers which offer an option for life insurance covering the potential IHT liability for the first two years of the investment, until it fully qualifies for Business Relief and is free of IHT. So, the investment is made, the life insurance is in place, and if death occurs within two years, the IHT liability on the value of the investment is covered by the insurance. The full value of the investment is available to the beneficiaries.

This immediately raises two questions; is it going to cost a fortune, and will it involve lots of health questions and medical examinations.

To answer the first question, yes, there is a cost which varies with age, but even for an 89-year-old, it is nowhere near the potential tax liability.

As for the medical issues, the good news is, that as long as you can confirm that you have not been diagnosed with a terminal illness, then you qualify for the life insurance.

Clearly, many people in their 70’s and 80’s are likely to have been diagnosed with something that will ultimately lead to their deaths. So, you may imagine that they will not be able to answer that they do not have a terminal illness. In fact, as long as they have not been told that their condition gives them a life expectancy of less than 12 months, they can get the cover.

Another, cheaper option, is to insure against accidental death. Particularly for a younger life, health may be good, but you never know when fate may take over and that number 49 bus appears from around the corner.

One of the advantages of BR schemes is, apart from being effective from two years, or immediately if you are prepared to pay, you also retain use of the money. Unlike a gift, you can receive the income from the investment and have access to the capital. These are major considerations for the individual who need their money or believe that the beneficiary of a gift will not be mature enough to receive it.

If you or would like more information, or would like to discuss this, then please do not hesitate to contact me or one of my colleagues, David Hughes and Paul McAtominey. 

Peter Rutherford is a director at Rutherford Hughes Ltd. He can be contacted on 0191 229 9600 This email address is being protected from spambots. You need JavaScript enabled to view it.