The recession hasn’t brought much favourable comment, but falling asset values do present opportunities for savings on Inheritance Tax (IHT). Here are some ways that you can save IHT when asset prices are depressed.
In general, the value for IHT purposes of an asset transferred is its value at the date of transfer. Giving away assets as lifetime gifts when prices are low means that a subsequent increase in value will belong to the new owner. Consideration should be given to transferring assets when values are low and the ‘best’ assets to transfer are those which are most likely to show gains.
Falling Property Prices
The IHT on the value of a property can be paid in instalments over 10 years. If, however, a property is sold within four years of death at a price below the valuation fixed for probate, then the executor can elect for the IHT liability to be recalculated based on the reduced value. Only the executor can make this election, so if the property is passed to a beneficiary and then sold, the election is not available. When a property is sold, the IHT due becomes payable immediately. Arranging the sale of a property just to save IHT requires careful thought as the costs associated with such a transaction are not inconsiderable.
Where a house is transferred to a beneficiary, the base cost of the asset will be the IHT value. Therefore, when the value of such an asset falls, a subsequent sale by the beneficiary may lead to a loss for Capital Gains Tax purposes.
The other main issue to consider as one gets older is the possible need to fund the cost of long-term care. This is a much greater threat to the wealth of most families than IHT, since the system is, in practical terms, confiscatory.