Making the most of different solutions
Decreasing term assurance
Decreasing term assurance can be arranged to cover a potential Inheritance Tax liability and used as a Gift Inter Vivos policy (a gift given during the life of the grantor who no longer has any rights to the property and can not get it back without the permission of the party it was gifted to). This is a type of decreasing term plan that actually reduces at the same rate as the chargeable Inheritance Tax on an estate as a result of a Potentially Exempt Transfer (PET).
For example, if you gift part of your estate away before death, then that part is classed as a PET, meaning that for a period of seven years there could be tax due on the transfer. This amount of tax reduces by a set amount each year for seven years.
The Gift Inter Vivos plan is designed to follow that reduction to ensure sufficient money is available to meet the bill if the person who gifted the estate dies before the end of the seven-year period.
Such policies should be written in an appropriate trust, so that the proceeds fall outside your estate.
Business and agricultural property
Business and agricultural property are exempt from Inheritance Tax.
Business Property relief: To qualify, the property must be relevant business property and must have been owned by the transferor for the period of two years immediately preceding death. Where death occurred after 10 March 1992, relief is given by reducing the value of the asset by 100 per cent. Prior to 10 March 1992, the relief was 50 per cent.
Agricultural Property relief: Agricultural property is defined as agricultural land or pasture and includes woodland and any buildings used in connection with the intensive rearing of livestock or fish if the woodland or building is occupied with agricultural land or pasture and the occupation is ancillary to that of the agricultural land or pasture; and also includes such cottages, farm buildings and farmhouses, together with the land occupied with them as are of a character appropriate to the property’. Where death occurred after 10 March 1992, relief is given by reducing the value of the property by 100 per cent (certain conditions apply). Prior to that date the relief was 50 per cent.
There is a specific relief for transfers of woodland on death. However, this has become less important since the introduction of 100 per cent relief for businesses that qualify as relevant business property.
Where an estate includes woodlands forming part of a business, business relief may be available if the ordinary conditions for that relief are satisfied.
When a woodland in the United Kingdom is transferred on death, the person who would be liable for the tax can elect to have the value of the timber – that is, the trees and underwood (but not the underlying land) – excluded from the deceased’s estate.
If the timber is later disposed of, its value at the time will be subject to Inheritance Tax. Relief is available if:
an election is made within two years of the death, though the Board of HM Revenue & Customs have discretion to accept late elections, and
the deceased was the beneficial owner of the woodlands for at least five years immediately before death or became beneficially entitled to it by gift or inheritance.
The Pre-Owned Assets Tax
Pre-Owned Assets Tax (POAT), which came into effect on 6 April 2005, clamped down on arrangements whereby parents gifted property to children or other family members while continuing to live in the property without paying a full market rent.
POAT is charged at up to 40 per cent on the benefit to an individual continuing to live in a property that they have gifted but are not paying a full rent, and where the arrangement is not caught by the gift with reservation rules.
So anyone who has implemented such a scheme since March 1986 could fall within the POAT net and be liable to an income tax charge of up to 40 per cent of the annual market rental value of the property.
Alternatively, you can elect by 31 January following the end of the tax year in which the benefit first arises that the property remains in your estate.
Rental valuations of the property must be carried out every five years by an independent valuer.