Hold Don’t Sell Is The New Estate Planning Mantra

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The new £1 million inheritance threshold that allows couples to pass a family home to children opens a new horizon for tax planning, say experts.

From 2017, a new £175,000 nil rate band for inheritance tax (IHT) will start phasing in from 2017 to take full effect from 2020.

Many couples previously worried about IHT are now rubbing their hands with glee as the new relief will wipe out the death tax for many couples.

But, say accountants at Ernst & Young, the tax advantages of the new IHT relief stretch even further.

Previously, many couples would have sold assets and paid capital gains tax (CGT).

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How to save IHT and CGT

For instance, if the couple had investments worth £425,000 which included a £275,000 gain, CGT would be added to their other income and paid at 18% at the basic rate and 28% at the higher rate.

After taking away the current £11,000 annual exempt amount for CGT, the couple would pay £70,800 in CGT.

Now, if they have a home worth up to £500,000, instead of selling off the portfolio and gifting the amount net of tax to children , they can hold on to the investments and the CGT bill dies with the couple – and providing the £1 million IHT threshold is not breached, there is no tax to pay on the estate.

Next, the beneficiaries can sell the house and investments straight away and pay no CGT as their acquisition cost for CGT is their value on the date of death.

Complicated strategy

“I do not think the government envisaged this as the result of raising the IHT threshold for married couples, but it’s a huge tax saving for some couples with around £400,000 of investments as well as a family home that they wish to pass on,” said an Ernst & Young spokesman.

“The tax changes are complicated but in our example, a couple can write off more than £70,000 in CGT that would otherwise have gone to The Treasury.”

He explained rather than divesting assets while still alive, the aim is to die while still owning them.

“There are drawbacks,” said the spokesman. “The strategy doesn’t work if the estate is worth more than £2 million as the IHT relief tapers away and the extra IHT relief only applies to a home you have lived in.

“That rules out buy to lets for landlords looking for a tax break.”

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