Falling shares can work in favour of inheritance tax

In times when the economy is struggling, just like it is at the moment, there can be opportunities to use the tax system to work in your favour. This can be particularly true of inheritance tax.

Inheritance tax can be a frustrating tax as it is seen by many people, to put it bluntly – a death tax. To tax a person’s worldly goods, savings and investments upon their death seems a waste of all their efforts, and the living relatives can only fume in frustration.

So, if you are looking to leave as much of the value of your estate as possible to future generations, now may be a good time to take action.

As share and property values have taken a beating in the last few months, the value of your overall estate has probably gone down. Indeed, it might even be lower than the inheritance tax (IHT) threshold, in which case there would be no tax due on your estate upon your death.

However, this does not mean that you shouldn't do anything about it.

IHT can be minimised in two key ways:

1. Exempt gifts – which total less than £3,000 per year
2. Potentially exempt transfers (PETs)

The £3,000 for exempt gifts can be carried over to the following year if you didn’t make full use of it in one year. The figures double for married couples. This is a good way of filtering money down to your inheritors without the taxman getting a cut.

PETs are gifts over and above the £3,000 allowance, but which still come under the nil rate band of IHT – currently £312,000 (and again, it’s double for married couples). However, even if the PET is made from an estate above £312,000, it will not be subject to tax as long as it was made seven years prior to the death of the donor.

As share prices and property prices have been falling, some investments and even second homes may now fall within the nil rate band.

Although PETs may end up being tax free, capital gains tax (CGT) may be due at the time of making the gift. Once more, in times of economic hardship, this can be an advantage. CGT is worked out by taking away the purchase cost from the value when “sold” or passed on. Thus, if its value is currently down, the CGT will be reduced too. In addition, there is an annual CGT exemption of £9,600, so some assets will have no CGT payable at all now, since values have gone down.

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