Inheritance tax planning in the current climate

How falling stock markets can help preserve more of your wealth

With the recent stock market falls and global pandemic sweeping the world, we all find ourselves now acutely aware of our own financial position, security and sadly, mortality.

But you may not realise that falling markets can actually be a golden opportunity for Inheritance Tax purposes.

In these exceptional times, now could be the perfect opportunity for you or your family to consider passing on wealth tax-efficiently to the next generation and reduce the inheritance tax liability in the process.

And in addition, for those among you who have paid an inheritance tax bill within the last 12 months there may be a chance for you to get a rebate due to a little-known tax rule.

Gifting investments 

When considering passing down wealth to your loved ones there are several options available, which vary in complexity. The simplest of course, is to make gifts to your family and/or friends during your lifetime.

These gifts immediately reduce the value of your estate for inheritance tax purposes and so benefit your loved ones now as well as later down the line.

You can choose to gift any asset but typical examples include cash, property or most importantly in the current climate, investments

Gifting your investments

The good news is that inheritances tax is calculated based on the value of the asset as at the date the gift was made, which means some assets gifted now may be substantially cheaper than they were earlier in the year, before the pandemic took hold and stock markets were substantially higher.

By gifting now while markets are down and assets are cheaper, it means that your beneficiaries may hopefully benefit from any market recovery if they hold onto the investments for the longer term. 

In each tax year, you have an annual gift allowance of £3,000 and can give away assets or cash up to this value without it being added to the value of your estate for inheritance tax purposes on death.

You are also able to carry forward any unused allowance from the previous tax year, to enable you to make a larger gift. This may be particularly attractive for couples who have not previously used their allowances, as they could make a joint gift of up to £12,000 which will be immediately outside of your estate for inheritance tax purposes.

Gifts in excess of the annual allowance will potentially be subject to inheritance tax should you die within seven years of making the gift.

This type of gift is known as potentially exempt transfer (PET). There is no limit on how much you can gift under these rules however the catch remains that you must survive the seven-year rule for such a gift to be wholly exempt from inheritance tax. 
 
It is important to remember that we all have an inheritance tax nil rate band, currently set at £325,000. The value of your estate up to this limit will not be liable to pay inheritance tax and those gifts made up to this figure but falling within seven years of death would not find themselves liable to pay tax.

However, tax will be due on anything above the nil rate band amount at forty per cent. 

There could be a capital gains tax too 

Typically, gifting investment holdings to anyone other than a spouse or civil partner is considered to be a disposal for capital gains tax purposes.

This means you would need to pay tax on any gains you made since you bought shares that were in excess of your capital gains tax allowance of £12,300.

Given the fall in investment markets, this capital gain on your investments will likely be much lower and you could pass on more of your wealth tax efficiently and potentially limit any capital gains tax liability.

You may also realise capital losses which can be set against any future capital gains.

Inheritance tax rebate

Families who have inherited an investment portfolio may be entitled to a refund on previously paid inheritance tax, due to the recent stock market falls. 
 
Inheritance tax is calculated on the value of the assets as at the date of death, with any tax due to be paid within six months.

If the assets are sold for less than their value at death within twelve months, executors can claim loss relief and apply for a refund of any excess inheritance tax paid. This is because the loss has effectively reduced the estate’s value for inheritance tax purposes, and it is deemed that the executors have paid too much inheritance tax.
 
To put this into context, on an inherited £1million portfolio, the £675,000 in excess of the inheritance tax nil rate band would be subject to inheritance tax at 40%.1

The tax of £270,000 would need to be paid by the executors within six months of death. If the portfolio of shares halved in value within a year due to a market crash and were then subsequently sold at £500,000 the executors could claim loss relief.

This is because it is assumed that the inheritance tax due at the point of sale would only have been £70,000, so a refund of the additional £200,000 inheritance tax paid could be claimed.

If you’d like to learn more about Inheritance Tax planning and how you can protect more of your wealth for your loved ones, contact us and speak to an adviser.

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  1. The IHT rate on death is 40% unless 10% of the net estate is left to a registered charity, in which case the rate for the residual estate is 36%.

Please note: The Financial Conduct Authority does not regulate Tax and Estate Planning.