Following the sad death of the Duke of Westminster it has been asserted in the popular press that, through the use of trusts, his son and heir Hugh has inherited £9bn inheritance tax-free.
However, helpful as trusts undoubtedly are, they are not the “get out of jail free” card which they are sometimes represented to be by the tabloid newspapers. As a general proposition, the capital value in a trust is either included in someone’s estate for IHT purposes (and so is charged on death in the usual way); or it is subject to a 6% IHT charge every ten years, designed to approximate to a full 40% charge over a lifetime.
So if it’s not all down to “clever use of trusts” what is it all about and – more important – can you do the same?
The general planning imperatives for IHT are simple. Die owning as little as possible, by making lifetime gifts where appropriate. Try to secure that that little qualifies for zero or reduced rates of IHT. If possible, leave your estate to an exempt beneficiary. And consider life cover (written outside your estate) to provide funds in the event of unexpectedly early demise. These fundamentals are the same for any estate, whether measured in hundreds of thousands of pounds or billions.
Thus, while we have no knowledge of the late Duke’s tax planning it’s likely that any inheritance tax mitigation is likely to have centred on the use of agricultural property relief and business property relief which at best reduce the taxable value of qualifying assets to nil. The Duke left a widow: assets passing to her either outright or on life interest trusts would benefit from the normally-unlimited spouse exemption. It has also been reported that the Duke gave £50m to Stanford Hall, the Defence and National Rehabilitation Centre, shortly before his death. Gifts to a recognised charity are exempt from IHT regardless of whether made during lifetime or on death. Incidentally, nowadays if a minimum 10% of the net estate is left to charity the rate of IHT on the remainder is reduced from the normal 40% to 36%.
There are, admittedly, a couple of reliefs which are rather less likely to be relevant to most of us. It is, for example, likely that a number of valuable items in the family will have been conditionally exempted from Estate Duty, Capital Transfer Tax and IHT in the past (on the grounds, broadly, of having been of pre-eminent quality and national significance) and it may be possible to renew the necessary undertakings so that no liability arises now. And, to the extent that an IHT liability has arisen, the Duke’s representatives might take advantage of the “acceptance in lieu” scheme – it has separately been reported that the Howard family of Castle Howard in Yorkshire has donated a 1769 Joshua Reynolds portrait to Tate Britain to settle a £4.7m inheritance tax liability.
But as we say – big or small, the four key rules are the same. The emphasis may vary from estate to estate but the fundamentals remain the same. For more, contact Terry Jordan or use our enquiry form.