Depreciating assets are good for inheritance tax!
16th May 2025
Posted in Articles, IHT, Inheritance Tax, Trusts and Estates by Andrew Marr
There is a whole group of profligate old people who smugly declare that they are ‘SKIers’. Here SKI stand for ‘Spend the Kids’ Inheritance’. We cannot deny that spending is a highly effective form of inheritance tax (IHT) planning. If you blow your fortune so that your assets are less than the £325,000 nil rate band (or £650,000 if you have an extra nil rate band from a deceased spouse) then there will be no IHT (the figure can be up to £1m if we take account of the residence nil rate band). However, most people are not happy to engage in such an extreme form of IHT planning because they are keen to pass as much wealth as possible to their kids. There are ways of engaging in less extreme ‘spending planning’ which can reduce inheritance tax without compromising spending habits.
Example
Russ is a wealthy boat fanatic who also loves cars. If you go to his house you will see a driveway rammed full of Porsches and Range Rovers. He plans to spend £200,000 on a new boat, even in the knowledge that this will depreciate to £120,000 when it leaves the yard. With this in mind (and based on sound tax advice) Russ asks his 86-year-old father (also a keen boating enthusiast in his youth) to buy the boat. There is no pretence about the fact that Russ will use the boat, and his father will leave the boat to his son on his death (if it has not been sold by that time). If we assume that the boat is worth £80,000 on the death of his father, then £120,000 will have been removed from his estate, saving £48,000 in IHT. The Government will effectively have subsidised £48,000 of the boat’s depreciation!
This could possibly be taken further if Russ’s father does not have liquid assets to buy the boat. Russ could potentially lend his father the money so that his father attracts a deduction for the loan owing. The family would need to be mindful of any previous gifts made by Russ’s father to Russ that could restrict the offset of the loan against his father’s estate (under s103 FA 1986).
Forbes Dawson view
Although gifting assets and surviving seven years is a popular IHT planning technique, not all parents have spare assets that they are able to give away, although they can still have sizeable estates. Furthermore, gifts require a seven-year survival period for the donor to be fully effective which older donors may not achieve. This kind of planning has an immediate impact and does not require any difficult lifestyle choices for the donor. For a donor with an IHT estate of over £2m, an acquisition of a depreciating asset could also have the effect of resurrecting the residence nil rate band which tapers away at the rate £1 for every £2 that the estate exceeds this threshold – and this will turbo-charge the savings mentioned above. We are clearly not suggesting that people should go out and buy depreciating assets just to save IHT. That would be putting the cart before the horse! What we are saying is that some wealthy individuals may be able to structure the ownership of depreciating assets more tax-efficiently by involving their parents. Care must be taken here to demonstrate that legal and beneficial ownership of the assets do rest with the parent(s) and if it is funded by a loan, that a proper loan agreement is prepared.
