Do you want to save 80% tax?

I know, hey if you're here looking for the latest dodgy tax scheme I'm going to have to disappoint you, as all of my clients and contacts know I just don't do them, never have, never will. So, that leaves you asking how on earth I can title a blog like this if I'm not bending the rules somewhere right? Throughout my various businesses over the years I've only ever undertaken tax planning with my clients within the bounds of the legal framework we're given. In almost all cases I've found more than enough scope to make sure that my clients only end up paying the tax that they're due to pay. So the first thing I do is make sure that they're positioning all of their assets in the best possible way to obtain the maximum reliefs.

If there is one area of tax for which this couldn't be more true, its inheritance tax, be that from making sure there are no investment assets in a clients trading business (to make sure they qualify for business property relief) to helping them structure family investment companies, it is all about having the right pieces on the right parts of the board, and like chess, you're always having to plan several moves ahead.

So, this is where I hear everyone screaming:

"What about this 80% tax saving Steve!"

and the answer to that is relatively easy. If you've heard of the Main Residence Nil Rate Band (MRNRB) then great, but if not the long and short of it is that it is an extra inheritance tax allowance that you receive on death up to £175,000 per spouse/civil partner. So for a married couple or civil partners, there's a potential £350,000 worth of extra relief there at 40%. Now, that relief can be lost for any number of reasons, but the most common is that the property doesn't go directly to a lineal descendant due to poor drafting of a Will. So, you'll need to review that and make sure it's right.

"But that's still only 40%, right? 

£350,000 x 40% = £140,000 tax saved"

You'd be right if you'd said this, but the other area where people lose out is where their estate exceeds £2million. For every £2 over £2million you lose a £1 of relief, so by the time you get to an estate of £2.35million, you've lost all your MRNRB. The chess players amongst you might be seeing where this is going, let me give you an example. Mrs Smith has died leaving her estate to her children, her husband died several years ago, but she qualifies for his transferable nil rate band...

Mrs Smith has an estate of £2,350,000.

Her house is left to her two children in her Will.

Due to clawback she loses her MRNRB.

IHT due on her estate is £680,000.

Now, let us say I'd advised Mrs Smith to make a gift of £350,000 to her two children during her lifetime (and of course assume that she'd survived 7 years!). Her estate on death is now £2million, so not only does she get her husband transferrable nil rate band still, but she also gets the MRNRB for both estates. This increases her IHT allowances to £1million, so she's only liable for 40% IHT on £1million, a total of £400,000.

The numerically minded will have spotted that a reduction from £680k to £400k isn't 80%. The 80% saving I'm talking about is on the planning. In order to save 80% total IHT Mrs Smith would have had to make a much larger gift than £350k. The purpose of this planning is to make the smallest possible gift to make the largest marginal gain. Where the 80% comes in is :

Mrs Smith had saved 40% on the gift of £350k = £140k.

As a result she also GOT BACK her MRNRB allowances.

This resulted in another £350k x 40% = £140k. 

So, the planning around a single £350k gift saved £280k of IHT = 80%, voila!

Simple planning, but crucial for estates like Mrs Smith...