Mitigating Inheritance Tax - A Case Study
15th Jan 2008
Like many people with property, the Burnett family are what is known as ‘asset rich but cash poor’. With the homes and land they own – much of it inherited from previous generations – now worth many thousands, how do they protect their children from the Inheritance Tax trap?
Timothy and Jean Burnett have a problem, but it is a problem many people might say they would be happy to suffer.
The couple divide their time between their family estate and farm in the North of England and their house in Highbury, north London.
Undoubtedly they are wealthy, but much of their wealth is tied up in property. And it’s not even property that can be sold.
Jean explains: “Like many people with property we are short of money. A lot of our friends are in the same boat. With the estate in particular we consider ourselves custodians of the land and see our role as one of preserving it for the next generation.”
As devoted parents to son James, a solicitor in Durham, and their artist daughter Henny, they wish to provide for their children without passing on enormous tax liabilities in the future.
“We want to make sure we secure the property for the children but without them having to pay huge taxes. When my husband inherited we paid out £10,000 a year for ten years. As parents we want to do what is right for the children and that means taking care of what we can now to help them later,” Jean adds.
The main family property, Dunsa Manor near Dalton in North Yorkshire, dates back to 1840. Timothy’s ancestors were its second owners. Over the generations the 600-acre estate was extended with the construction of three farms run by three generations of tenants, so it is not just for the Burnetts that the estate has to be secured.
Timothy, a fine arts advisor, and Jean, who worked in conservation, also co-own with a partner the £4m, 20-room house in London, which has been partly divided into flats providing an income for the Burnetts and a potential home for Henny.
Jean says: “It seems like an obvious split for James to have the estate in the north and for Henny to inherit the London house, but with property values in the south and the potential for development in North Yorkshire, it’s not that simple.”
Which is where Val Hutchinson comes. An expert in Inheritance Tax (IHT) over the last 25 years, Val has helped many of the region’s wealthiest individuals to the point where her reputation has grown outside the North East. She now regularly travels the country from her office at Blackett Hart & Pratt in Newcastle to meet clients at home and even abroad.
Val explains: “In Mr and Mrs Burnett’s case, they accept that property that is constantly increasing in value cannot be passed from one generation to the next without some tax being paid but, as most people would, their aim is to minimise the burden on their children.
“They also need to arrange their affairs to be fair to both their son and their daughter to ensure an equal split and to make sure the different assets go to the most appropriate person. They also have three grandchildren to consider in their plans.”
Val says the Burnetts are being prudent in acting now.
She adds: “I can suggest instant solutions but most tax planning is done over a period of time, which is why everyone should start acting sooner rather than later. The Burnetts have been very sensible in taking this action now, and we will continually review it to achieve the best results.”
Val’s first task on meeting a new client is to discuss in depth what they want and to review what their assets are worth.
“I let them talk about the family and how they would like the assets to pass and to whom. Once that’s established I can inform them of how much tax could be involved in following their wishes and suggest ways of getting to the same conclusion but reducing the tax as much as possible or, if not reducing it, then delaying it for a generation or two.”
Transferring assets before death can often mitigate tax liabilities.
“However, we have to make sure that assets that generate an income parents might rely on are not given away, for example an income-generating farm, a trading company or land that is let,” Val explains.
“It’s a case of carving out the bits that can be given away and keeping the parts that may still be needed.”
In any case, some farm and business assets may qualify for 100 per cent relief on IHT.
Strict rules govern what does and does not qualify and in some cases only 50 per cent relief may be available, but with specialist advice owners can arrange assets so they do qualify.
Val explains: “It is relatively common now for farms to be sold to people who are not farmers or are so-called ‘lifestyle farmers’ who want a large, isolated property and land but don’t actually farm it.
“The Inland Revenue is looking very closely at this. In order to qualify for 100 per cent relief, the nature of the farm, the size of the farmhouse and whether or not it’s in keeping with the size of the farm and associated land have to be right. Farm cottages, for example, will only qualify as being part of farm property if they are let to farm workers.”
In business, the relief only applies to assets used in a trading company. For example, buying a building then letting it constitutes an investment, not a trading asset, and so would not qualify for IHT relief when passed on.
Val advises moving investment assets to another company to preserve trading company assets.
“We know the case law and we can arrange people’s affairs in such a way that we tick all the boxes,” she adds. “However, people should be warned that this is a new relief and governments are prone to changing things at any time. The current relief is the most generous it’s ever been but you can’t rely on it always being there.
“If you plan to wait until you die to give assets away then you have to be confident that the current situation will stay, and I don’t think anyone can say that.”
A way of offloading assets, in particular cash, to avoid IHT is to give it away before death, as long as you live for seven years or more after making any gifts.
“IHT when you are alive is purely voluntary,” says Val. “You only pay it if you choose to. However, when you die, your family may have no choice but to pay it.”
Other gifts can be made from family heirlooms, which potentially may qualify as exempt transfers.
“In this case you have to be sure you are ready to give things away,” warns Val. “If it’s items from a box in the attic that give you no pleasure then it’s probably a good idea. But for things you are still attached to you have to bear in mind that giving really means giving; they must leave your hands and never come back.”
Val advises taking photographs, having valuations done and documenting any gifting in a schedule.
Compared with other parts of Europe, even though it may not always feel like it in the UK we have less of a tax burden on wealth. A ‘wealth tax’ paid during one’s lifetime is common in other countries.
Val says: “Income tax here is relatively low, capital gains tax (CGT) is going to be relatively low and there is no CGT on death. The percentage of income we give in tax has gone down for the wealthy so, relatively, we get to enjoy our wealth without it costing us too much.”
Her solution for minimising IHT as much as possible is simple.
“If you’re an older person and you’ve got cash, spend it or give it away. If you don’t, remember that for every £1 you save now, 40p will go in tax.”
* For more information on Inheritance Tax, Val Hutchinson can be contacted on 0191-221 0898.
Author: Val Hutchinson, Inheritance Tax Consultant (ValH@bhplaw.co.uk)
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