Increasing the odds of beating the tax man in old age

Gary Wright | 28 August 2017

Most of us reach a stage in life when we realise that the years we have left are fewer than those behind us and that we need to plan how to dispose of any wealth we may have.

The first step is making a will to make sure that the people we want to inherit our money, property and cherished possessions are those that we want to benefit.

Another integral part of the jigsaw is planning to minimise the inheritance tax (IHT) our estates will pay when we pass on.

Doing one without the other just doesn’t work because the risk is some will die before any tax benefits from estate planning take effect.

But the variables can get in the way.

 

How long will you live?

None of us know how long we live, what care and support we will need as we age or how much our retirement will really cost.

That’s why tax planning in retirement is difficult. If someone divests assets, they lose control of money they may need to fund their care in old age.

At the same time, tax planning is not a task to leave until the last minute because by the time window for minimising IHT gets smaller as the years go on.

Common strategies such as lifetime giving as potentially exempt transfers (PETS) dictate that the donor must live for seven years after making the gift in order to gain IHT savings.

But there is another way that is often overlooked which cuts that timescale down to just two years to shelter from IHT.

 

Lengthening the odds

Business property relief (BPR) increases the odds of ageing investors surviving the IHT time limit on gifting.

The underlying premise is simple. More people are likely to survive two years than seven years, even if they are well into their 70s or 80s.

For instance, government actuaries have worked out that an 80-year-old man has an 88% chance of living two years, but a 64% chance of surviving seven years.

Another benefit is that switching investments into assets that attract BPR is owners retain control of their money. Importantly the dividends or returns that they generate stay with the owner as do any cash from disposals.

Lastly, a BPR-based strategy beats taking out expensive life insurance to cover an IHT bill as no medical underwriting is needed in old age.

 

Fast and effective tax shelter

Estate planners call this strategy acting FAST –

Flexible - BPR allows investors to react to changes in circumstances, so investments can be held or sold

Available – Investors can allocate gifts in their wills without losing control of the assets if they need to call on them in later life

Simple – No need for lawyers to draw up trusts or medical underwriting for life insurance

Time – No IHT after holding an asset attracting BPR for two years

 

Business Property Relief explained

This makes switching to BPR investments a good choice for those approaching or just entering retirement as well as older investors.

HM Revenue and Customs (HMRC) rules clearly state that anyone owning a business or a share of a business can claim BPR at 50% or 100% which can be passed to beneficiaries while the owner held the asset for not less than two years.

Qualifying assets are property and buildings, unlisted shares and machinery.

The first two categories of assets tend to be favoured for IHT planning.

BPR at 100% is available on a business, interest in a business or shares in an unlisted company.

Relief at 50% is claimed against business land, buildings or shares controlling more than 50% of the voting rights in a listed company.

 

When BPR can’t be claimed

BPR is not available if shares are held in an investment company, a not-for-profit organisation or a business that is going through a sale or winding up.

Other exemptions include assets that already qualify for agricultural relief, those not used for the two-year qualifying period or are not needed in the business.

HMRC gives an example of a building with one room operated as a shop and the rest as the owner’s home. The shop gets BPR, but the rest of the property does not.

 

IHT investments

IHT tax shelters following the BPR route are often tagged as ‘IHT investments’ or ‘estate planning services’.

These services invest in companies that own business assets, such as care homes or renewable energy projects.

They work by transferring cash and investments in equities or funds into shares that attract BPR.

Others take shares in companies under the Seed Enterprise Investment Scheme (SEIS), Enterprise Investment Scheme (EIS) or businesses listed on the London Alternative Investment Market (AIM).

These investments tend to carry more risk than FTSE 100 shares because the companies are start-ups or businesses seeking fast growth.

 

Chances of survival

Around three-quarters of AIM companies are considered unlisted and eligible for BPR.

For investors with the appetite for IHT investments, the next step is working out the probability of survival.

Luckily, the staff at the Office of National Statistics and the Government Actuaries Department have already completed the heavy lifting with a table indicating the probability for men and women of different retirement ages.

The table shows that a woman aged 85% with worries about IHT has a 44% chance of surviving for seven years if they gift money or assets.

If those assets come with BPR, survival odds of two years almost dramatically double to 84%.

 

Probability of survival table

Age

Years expected to live

Probability of surviving 2 years

Probability of surviving 7 years

Men

65

18

97%

89%

70

14

96%

82%

75

11

93%

71%

80

8

88%

55%

85

5

80%

34%

90

4

68%

17%

95

2

53%

0%

Women

65

20

98%

92%

70

16

97%

88%

75

12

95%

79%

80

9

91%

64%

85

6

84%

44%

90

4

73%

23%

95

3

58%

0%

 

Click here more information on UK tax advice for expats or email tax@globaleye.com 

Tags: tax estate planning IHT

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