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.