Ever since 1694 the UK government has considered death as a sensible time to put its hand in our pockets by taxing the estate left behind.
By the time the modern system was introduced in 1894, the number of duties and taxes had multiplied to 5: a legacy duty, a succession duty, a probate duty, the accounts duty (an anti-avoidance tax on gifts) and a Temporary Estate duty. Since that time the basic principles of a progressive tax triggered by death have been unchanged, but successive Chancellors have continued to take steps to reduce avoidance by taxing gifts and tinkered with the tax status of various business assets.
One constant feature for well over a hundred years is the activity of tax advisers, and even many of the ways which they recommend to keep your hard-earned wealth away from the Chancellor.
The most obvious way of avoiding the burden is to leave the country and generally tax havens will neither tax your capital nor your income, but the process of leaving is fraught with potential pitfalls and tax authorities have no love of those who try to escape their clutches in this way! The next most obvious way is to give away what you can children and charities are often mentioned in this context (sometimes even by people other than children or those who work for charities) and as long as you stay alive long enough or do it in affordable dollops (out of ordinary income) you can give away everything you own. The problem is that you will then be dependent on children or charities yourself as a result. Past generosity does not guarantee future good treatment. Ask King Lear. The same effect can, of course, be achieved in terms of tax minimisation by spending the money on fast cars, fast living and slow horses and you will still end up dependent on children and charity. If you manage to spend it all you do not need a will, but for most people drawing up a will and considering what their spouse and other dependants will inherit is the first and extremely important step. Even if you plan to leave the country or give it all away you should have a will as the grim reaper may call before you have done this.
A somewhat more pedestrian approach to planning is to establish trusts to own various assets, and again this approach has been employed for generations. Unfortunately the Chancellor now takes a large share regularly and the net effect of much of the tax planning of recent decades has just been to give him a clearly defined pool of assets in which to fish. But trusts may even now have a place in planning, particularly for the care of the mentally or physically disabled. Just remember, the one certainty is that you will pay fees for putting trusts together, for running them and possibly then even more for taking them apart one day.
Today’s real bargains from the Chancellor are to be found in some very generous reliefs for business assets of various descriptions. So, added to the traditional home of farms and forests are various enterprises of which one chancellor or another has approved. Any serious business (but not financial, investment or property) attracts relief if it is in a private company. In addition a portfolio of stocks listed on the Alternative Investment Market (AIM) counts as a business asset with 100% relief. Portfolios of AIM shares can be constructed easily and as long as they are put together 2 years prior to death are 100% exempt.
For as long as it lasts it seems likely that putting substantial assets to work in a company which qualifies for Business Property Relief could be a sensible course and anyone whose estate is likely to be counted in millions should consider whether a trading company would be a good way to conduct their affairs.
With Corporation Tax at 20% the tax filter on profits is no longer as confiscatory as it became when the imputation tax system was abandoned. Anyone with a possibility of channelling assets into an enterprise of this sort should definitely consider how to do so and possibly give away a share of the company to heirs at the same time. The business should carry out a trade but trades such as development of property (not just holding it), insurance (via Lloyd’s) and trading in almost any non-financial goods will qualify. The principals do not themselves have to be active in the trade and quite often there are agents who are expert in a field who will carry out the business on their behalf.
There are lots of schemes designed specifically to avoid IHT, many involving bonds, often offshore, trusts and insurance. The main consideration with these is that they are an obvious target for the Chancellor. A secondary consideration is that whenever tax saving comes into the design of an investment product there are expenses. Clearly, as Chief Executive of a financial services firm, I like to see lots of fees going to advisers but in some cases the certainty of a high level of fees should be given rather more weight and the uncertain future gain rather less weight in the decision process.
My conclusion, after years of considering all sorts of alternatives for all sorts of clients, is that it is wise to consider giving away what you can easily afford at an early stage, and only when you have done this should you think about other ways of minimising taxes. The traditional period for gifts to become wholly exempt is 7 years but among other ideas for taxing gifts the possibility of taxing accumulated lifetime gifts in the hands of the recipient has waxed and waned so even if you knew exactly when you had an appointment with your Maker it is probably better to make any gifts at the earliest possible date. But keep enough for a nursing home in your declining years; you and your heirs will both feel better if you can look after yourself. If you have an income which exceeds your expenditure then giving away the surplus is simple and lies outside the lifetime gifts regime.
As far as elaborate schemes are concerned I observe that many either do not work or come at such an expense that one might question their efficiency. Exile may be effective but having seen many of those who move to sunnier climes return because they did not want to die abroad, missed grandchildren or wanted to have the NHS around them it might be as well to be absolutely certain that you really want to leave permanently before going too far down this route. The outstanding bargains in the tax saving arena are the business property reliefs and it is certainly worth considering how to maximise both the range of different ways you can achieve such classification for your assets and also how you can maximise the amounts in such ventures. Even AIM portfolios today can give a diversification and an asset base which was unavailable when the relief first came in because of the breadth and number of companies now listed on AIM.
Finally there are two very important points which are as true now as they were when the first estate duties were designed (the Romans certainly had them, but they probably go back at least to Hammurabi). The first is that it is a very easy tax to collect because death is difficult for the most avid tax avoider to hide. Secondly, it is the most painless tax to collect because the victims are not in a position to object, or really care too much. So death duties will not go away.
GIVE AWAY TOO MUCH
BUY TOO COMPLEX BONDS & SCHEMES
CREATE ARTIFICAL BUSINESS
OR BUY LEISURE FARMS
OR WALKERS’ WOODS
(ALL MAY BE DISQUALIFIED)
USE PRETEND CHARITIES
TAKE EXCESSIVE AIM POSITIONS
FAIL TO KEEP YOUR WILL UPDATED
IGNORE THE FACT YOU ARE MORTAL
OMIT TO BUY LIFE COVER IF YOU NEED IT
GIVE AWAY ASSETS
(PARTICULARLY FIXED ONES)
MAXIMISE BUSINESS ASSETS
GIVE TO CHARITY
CONSIDER AIM PORTFOLIOS
USE FORESTS OR FARMS
(HOPEFULLY PROFIT MAKING)
MAXIMISE SPOUSE RELIEF
(BUT ONLY IF YOU ARE SURE)
USE TRUSTS ONLY IF ADVISED TO