As the system currently stands, an individual looking to limit exposure to the UK’s inheritance tax (IHT) may undertake tax planning to reduce their estate.
Britons are urged to consider replacing assets in the value of their estate with others which are tax-favourable from an inheritance tax perspective.
By using these ‘tax favourable’ assets, Britons could save themselves thousands, and limit their liability.
Daniel Tomassen, senior manager at HW Fisher chartered accountants explained that the UK tax system is one of the most complex in the world with various indirect and direct taxes and never-ending pages of legislation.
For those looking to slash their bill, one option to consider is replacing assets.
He said: “You can undertake tax planning to reduce your estate. You could decide to replace assets in the value of your estate with others which are tax-favourable from an Inheritance Tax perspective.
“Woodlands, for example, are exempt from Inheritance Tax. If a person purchased a commercial woodland at least two years prior to their death, the value would not be included in their estate therefore, it would not be subject to Inheritance Tax.”
Woodlands relief will be due at 100 percent if the person who owned the land farmed it themselves, the land was used by someone else on a short-term grazing licence or it was let on a tenancy that began on or after September 1, 1995.
Those liable for IHT may elect to exclude the value of the trees or underwood (but not the land itself) from an individual’s estate, provided that, if they had purchased it, the individual had owned the woodlands for five years.
Woodlands relief is a relief from IHT available on the transfer of woodlands on death. It is only available if all the conditions for the relief are satisfied.
Woodland is any land on which trees or underwood are growing so may include wooded parkland, strips of land with trees lining roads, or tree belts.
Where the timber is subsequently sold, IHT will be due on the proceeds received on the sale of the timber.
Although replacing assets in the value of one’s estate with others which are tax-favourable can help reduce one’s inheritance tax bill, Mr Tomassen explained there could be a more efficient use of one’s capital.
He said: “Whilst there is a tax saving from acquiring Inheritance Tax favoured assets, this may not be the most efficient use of capital.
“This is especially true when considering the long-term creation of wealth for the UK economy. In fact, minimising a tax liability is a very short-term strategy, especially because the money could have been used more efficiently elsewhere or by the next generation of the family.
“The abolishment of Inheritance Tax would ensure that this sort of re-allocation of assets is no longer advantageous. This would allow individuals to use their wealth to create further growth, benefitting future generations over the long-term rather than fretting over a tax on death.”
One of the most controversial taxes within this system is Inheritance Tax. However, there is talk of it being scrapped in the near future.
Many other countries, including Israel and Australia, have abolished Inheritance Tax in recent years to simplify their tax systems and to avoid penalising individuals who have built wealth and wish to pass it on to future generations, without having to deal with complicated tax planning.