The IHT Tax Free Tax Trap

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Published: 17 Nov 2020


Whenever you see the term 'tax-free', it's advisable to read the small print before getting too excited.

Here's a perfect example.

The IHT 'tax-free' allowance, or what is formally called the 'Nil Rate Band' per person, is £325,000, to which can be added the unutilised Nil Rate Band of a deceased spouse, making a possible total IHT allowance of £650,000 for a married couple.

Sounds interesting.

In the Summer Budget of 2015 the Chancellor increased this allowance over the last 4 years by £175,000 per individual, such that the total amount of IHT allowance for a married couple increased to £1,000,000.

Even better.

However, and this is where scrutiny of the small print comes in:

i) The increase is restricted to the transfer of the main residence or proceeds thereof to a family member of linear descent.

ii) If the total estate of the surviving spouse exceeds £2M, there is a restriction in the allowance of £1 for every £2 of that excess.

So this restriction eliminates the additional IHT allowance of £175,000 as soon as the value of the estate reaches £2,350,000. This may well be relevant where we are considering the combination of a) property values in certain parts of London and the South East and b) the value of a business or shares in a private trading company.

“But the value of a business or shares in a private trading company normally attract 100% Business Relief” I hear you cry.

Agreed, but not for the purpose of calculating the £175,000 allowance, mentioned above. The IHT tax cost of losing this allowance is £70,000.

If you wish to avoid this tax liability on your estate, you can consider transferring part of your investment in your business or company to shares on the Alternative Investment Market or shares in an Enterprise Investment Scheme.

These shares are free of IHT, provided they comply with the tax rules of either type of share.

Sundial Tax and Finance Ltd can help you estimate the company valuation to see if, and by how much, the valuation of your business or trading company and the rest of your estate exceeds the limit of £2,000,000.

Advice should be sought from an independent financial adviser on the suitability of making such an investment in your particular circumstances.

If you wish to discuss this further, please call David Cane on 07749 080 806 or e-mail [email protected].