Inheritance Tax (IHT) was formerly known as Capital Transfer Tax. It is worth knowing that the capital gains tax (CGT) liability on an asset is usually extinguished on death and the beneficiary inheriting the asset is deemed to acquire the asset at probate value.
This can lead to a dilemma where assets with substantial capital gains (second property, share portfolios etc) would incur capital gains tax on the gifting or sale of the asset whilst alive but then also be subject to inheritance tax if the total value of the Estate is above the inheritance tax threshold.
In the past, this may have led to a “let sleeping dogs lie” approach as there is a risk of triggering the capital gains liability on the profit and also suffering inheritance tax on the full capital value of the proceeds by then not surviving seven years from making the gift.
For instance, a parent gifting a £500,000 share portfolio with paper capital gains of £200,000 would have incurred capital gains tax of £80,000 (if charged at the 2007/8 CGT rate of 40%) and if death had occurred within seven years, up to £200,000 of inheritance tax would also have been payable.
However, as of 6 April 2016, the difference between the highest rate of capital gains tax (now 20% on shares, but still 28% on residential property) and inheritance tax (still at 40%) is almost as wide as it has ever been, reducing the cost of this potential double tax hit and perhaps offering more incentive to undertake lifetime planning to legitimately avoid inheritance tax using outright Gifts, Gifts to Trusts or considering investments which qualify for business relief, the latter only having a two year qualification window.
Alternatively, where total family assets will lie within the expanded IHT allowance brought about by the residence nil rate band – this effectively increases the assets a married couple/those in a civil partnership can leave to their direct descendants to £850,000 from 6th April (gradually increasing to £1m by 2020/21 although the allowance is tapered away where estates are worth above £2m) – it may still be appropriate to plan to plan for the capital gain to be washed away via the probate process.
Autonomy Wealth View: as always, it is important to take an approach to inheritance tax issues that takes full account of individual circumstances and priorities and if possible to involve the whole family in discussions.