Estate planning opportunities?
As COVID-19 spread, the stock market fell significantly, and quickly. The FTSE-100 fell by nearly a third in a month, from 7,403 on 21 February 2020 to a low of 4,993 on 23 March 2020. The housing market also ground to a halt, which will inevitably result in depressed property prices.
While these falls have hurt people’s finances, they do provide opportunities for estate planning if circumstances allow.
For someone who can afford to make gifts, and wishes to reduce their inheritance tax liability, or simply pass assets down to the next generation, gifting while values are low can be very tax efficient.
If an individual dies within seven years of making a gift, the value of the gift is brought back into account to calculate the potential inheritance tax liability on death, but it is the value at the date of the gift, not at the date of death, that is relevant.
Thus, if assets, such as listed investments, a business, or a property, have fallen in value but are likely to recover once the current crisis has passed, any gift made now will have a much lower potential inheritance tax liability if the donor were to die within seven years. Any recovery in value will take place in the recipient’s estate. Equally, lower asset values will reduce any potential capital gains tax liability that might arise on a gift.
For those considering creating trusts, the advantage is twofold. In addition to the simple benefit set out above, lower values may allow more assets to be put into trust.
An individual is ordinarily limited to putting assets worth £325,000 into trust, without triggering an immediate inheritance tax charge. A married couple can jointly put £650,000 of assets into trust. If assets which before recent events were worth more than this figure have now fallen in value, they can now be put into trust free of tax. If values recover in due course, the trust will end up with assets worth more than £325,000 which could not otherwise have been settled.
Clearly the benefits of action now are long term, and dependant on values recovering, but if you can take a long term view, and can afford, in the present uncertain financial climate, to make gifts, this is an excellent opportunity.
If you would like to know more, please get in touch with your usual BDB Pitmans contact, or Hugo Smith.