Paris Smith’s Anthony Nixon explores inheritance tax reliefs and planning opportunities for married couples

Business owners, whether they are sole traders, members of a partnership, or shareholders in unlisted companies, have the opportunity to make huge inheritance tax (IHT) savings. Provided the business is not mainly an investment business, relief is available both for lifetime gifts and on death.

It is important that married couples make the best of IHT business relief when the first of them dies. It may seem simple to leave all assets to a surviving spouse, to take advantage of the complete IHT exemption.  But this often wastes relief. Suppose the survivor sells the business? What if the rules for relief change, or the focus of the business changes so that its main activity is investment? Value that could have been free of IHT, is then liable to 40% IHT on the second death.

What is and is not investment is sometimes a difficult question. Because of the value of IHT business relief, HMRC police it aggressively. We have had a lot of success in arguing some of these cases and getting full relief for our clients.

Our advice is for any assets qualifying for IHT reliefs to go to a trust set up under the will of the first spouse to die.  The right arrangement allows the family to capture all the reliefs available on either death.

It is best to set up the framework for this plan in wills while both of the couple are still alive. But, if this has not been done, almost as good a result can be obtained by a variation within two years after the first death. Those two years also give the opportunity for a trust in the will to be cancelled or varied if it does not work out favourably.

And the trust may increase other IHT allowances.

The basic £325,000 IHT allowance is available to everyone. It is used up by any gifts in the seven years before death, unless those gifts are to a spouse or to UK charities.

If, on the death of one of a married couple, everything is left to the survivor, there is no IHT. Since the basic IHT allowance is unused, it can be carried forward to the survivor, who then has a double allowance on their death.

An extra £175,000 allowance for each spouse can take the double allowance of £650,000 up to £1 million. Like the basic allowance it can be carried forward to the survivor if unused by the first to die.

This extra allowance is only available if it reflects part or all of the value of a home given direct to children or grandchildren. So it is not available to:

• Those without children or stepchildren;
• Those who don’t own their home;
• Those whose home is worth less than the extra allowance.

Crucially, the extra allowance starts to disappear for anyone whose assets at death are worth more than £2 million.  £1 of allowance is removed for every £2 over the £2 million threshold, giving an effective 60% IHT rate for assets just over the threshold.

This threshold for the extra allowance ignores IHT reliefs. So a gift of business assets to a trust on the first death, may help to keep the value of what the survivor owns below the £2 million threshold for this extra IHT allowance.

There is a critical opportunity to plan for IHT in the two years after the death of the first of a married couple. It will usually be clear in those two years if the survivor’s assets might go over £2 million. Some reductions in the value of what the survivor owns can be made by redirection within the reliefs and allowances available to the first to die; others can be made by outright gifts by the survivor. There are different consequences of these two routes for gifts, which need to be explored carefully.

There are exceptional IHT saving possibilities for those who have been married and widowed more than once. With the right planning both the basic IHT allowance and the extra allowance can be tripled.

• parissmith.co.uk