The human and economic damage being wrought by Covid-19 is terrible and should not be understated. The depressed level of asset values and current tax reliefs do though mean that there are planning opportunities for far-sighted taxpayers.
Gifts to individuals
When a person gives assets away to other individuals and does not survive for 7 years, the value at the date of gift is used to calculate the inheritance tax (IHT) due. At the time the gift is made, any gain in value from when the assets were acquired is potentially subject to capital gains tax (CGT).
If asset values are lower than they were before the pandemic, the possible IHT charge if the donor dies within 7 years of the gift will be less. With the level of gain reduced there will also be a smaller possible CGT charge.
Any future recovery in values will not affect the donor’s tax position.
Gifts with protection
A main reason for estate planning is asset protection and control. The aim is to safeguard the family wealth from future generations using it unwisely or losing it through divorce or insolvency.
Trusts and family investment companies (FICs) are useful for this purpose. The family members may have no right to the assets or the income without the agreement of the trustees/directors. The person passing wealth can maintain control through being one of the trustees/directors.
With a FIC, gifts are made to the family shareholders and the tax rules on gifts to individuals set out above apply.
For trusts, any value above £325,000 of assets which do not qualify for relief transferred in by one person within a 7-year period is subject to lifetime IHT. If the donor does not survive for 7 years, the value of the gift is again used to calculate IHT on death. Any lifetime tax paid can be used to offset the liability on death.
With values currently down, more assets could be transferred to a trust within the £325,000 limit than was the case just a few months ago.
Gains showing on assets transferred to a trust can be ‘held over’. This means CGT is not payable by the donor. Instead the trustees take the assets on as if they had acquired them at the donor’s cost. When the trustees dispose of the assets, the whole gain is chargeable to CGT. The trustees pay any tax due.
Lower gains now may be more palatable for a donor to take. If gains are not held over, the trustees‘ acquisition cost would be the value of the assets when transferred. The trustees could then have less tax to pay when they dispose of the assets.
Using tax reliefs
Taxpayers may think that they should not make gifts of business interests or agricultural assets which qualify for IHT reliefs. If the plan is to hold them until death, as things stand there would be no IHT on them anyway.
However, the cost of Government support will need to be paid for at some point. Two reports published before the pandemic (from the Office of Tax Simplification and an all-party parliamentary group) suggested changes to the relevant tax reliefs. With current spending levels these reliefs could now be more vulnerable.
Some taxpayers want to make use of the IHT reliefs while they still can. We have helped clients in recent weeks to make gifts of company shares in order to ‘bank’ relief now.
Where the plan is to sell the business or asset at some point, it may also be wise to do something now. The owner might want to make use of a trust to protect some of the eventual sale proceeds for the family. Before sale while relief is available more value can be transferred to a trust without IHT.
Owners of assets may not wish to make gifts when they are less wealthy if investments, property and businesses have fallen in value and while the future is still unclear. With a future recovery and current tax reliefs though, now could prove to be a good time to seek advice on tax and estate planning.