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IHT avoidance – new rules

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As if your tax affairs were not tricky enough, HM Revenue and Customs have probably made them more complicated still.

Inheritance Tax (IHT) avoidance rules have just seen the introduction from the 1st of April 2018 of new requirements that mean you must inform HM Revenue and Customs (HMRC) about any such schemes.

Planning for future Inheritance Tax liabilities and ways of avoiding such liability is a long-established practice to help people manage their financial affairs. IHT avoidance schemes are entirely legal, but the list of those schemes which need to be reported to HMRC – under its Disclosure of Tax Avoidance Schemes (DOTAS) rules – has become more involved.

In a discussion published on the 29th of March 2018, information website Step explained that you must report any IHT tax avoidance scheme designed to provide a specific kind of advantage. Two specific conditions (which HMRC calls the “hallmarks” of your scheme) need to be met in your reporting:

  • the tax advantage you gain must be related to “relevant property” that has been placed in trust; and 
  • the tax avoidance scheme represents “contrived or abnormal steps” designed to achieve the specific advantage.

Although these hallmarks are one intended to be recognised by no more than “an informed observer”, it has become clearer than ever that IHT tax avoidance schemes are probably best devised only upon the advice of an independent financial adviser.

How does Inheritance Tax avoidance work?

Under current rules, Inheritance Tax is payable (at a flat rate of 40%) on any amount above £325,000 in the value of your estate when you die – that is, the value of all your assets and possessions, including any home you own. The threshold is increased to £425,000 if you give away your home to your children or grandchildren.

If some of those assets – your home, for example – are placed in trust, however, you have effectively transferred ownership from your estate into the trust. Under that new ownership, with the property now entirely in the hands of the trust, it is no longer part of your estate and, therefore, exempt from Inheritance Tax.

In this way, many people have successfully avoided Inheritance Tax liabilities on a major part of their estate – and the new rules on disclosure of the scheme you set up seem unlikely to have a significant impact on the ability to continue to benefit from such avoidance schemes.

Insurance for your property in trust 

As a posting to our Knowledge Base dated the 2nd of August 2017 explains, placing your home in trust is one of the most common ways of avoiding a major part of your Inheritance Tax liabilities.

Because it involves a transfer of ownership, however, it is important that insurance for the home reflects that change. This is achieved through specialist property in trust insurance, which recognises that the insurable interest has passed to new owners – the trust.

Even though you may have been the settlor of the trust, and your estate remains its main beneficiary, all matters relating to the insurance of the property passes into the name of the trust, which is responsible for paying the premiums and provides the postal address to which the insurer sends all correspondence.

Please note that this is our understanding of IHT rules – you should seek professional advice when looking to manage your IHT liabilities.