Inheritance Tax

Modern Inheritance Tax Planning

lower IHT The tax-take:
Despite recent moves by Government designed to reduce the bite of inheritance tax, the tax produces an increasing portion of Government revenues. Tax raised last year was £3.3bn; double that in 1997; with an estimated £3.6bn in 2008-09. A large part of the revenue is due to the increase in value of homes, even at a time when house prices are falling. Professional commentators describe the tax as “inherently unfair”, since the tax can bite heavily on co-habiting people and on many prudent people who have saved out of already taxed income and assets.

Reducing the tax-take on your estate:
Inheritance tax is applied to the value of your estate on your death at the rate of 40% on any amount exceeding the nil rate allowance (£312,000 in 2008-09). Consider how you can reduce the tax on your estate by:

• Using your annual £3,000 exempt allowance;

• Making small gifts of £250;

• Giving gifts of money on marriage;

And
The overlooked and very valuable gift exemption that is making gifts classed as “normal expenditure out of income”.

Gifts between spouses and civil partners are exempt and do not attract inheritance tax. Furthermore gifts that are made during your lifetime and at least 7 years before the date of your death should escape inheritance tax entirely.
In addition you can make gifts into trusts that do not attract inheritance tax as long as the value does not exceed the nil rate allowance. If this amount is exceeded the “chargeable transfer” attracts inheritance tax at 20%.
Finally relief from the tax is available for trading businesses, including farms. But businesses that are really only investments and are not involved in trading do not qualify for relief.

Threading your way through the myriad of rules is one solution for a person concerned to minimise the effect of the tax. However Government has published so much new legislation in the Finance Acts of 2004; 2006 and 2008, to the point that acting without proper advice is not to be recommended nowadays.

Where to start saving tax:
It is sound inheritance tax planning to use either all or at least as many of your reliefs and exemptions as possible. In particular you should make sure that full use is made of the nil rate allowance(s). Before the Pre-Budget Report (PBR) on 9th October 2007 married clients were advised to make wills, which included a gift of the nil rate band to a discretionary trust for maximum tax efficiency. In the PBR Government arranged for any unused portion of the nil rate allowance on the first death to be carried forward and used on the death of the surviving spouse or civil partner.

Unfortunately this is not the whole story. To make this idea work HM Revenue & Customs (HMRC) must have positive proof that the deceased’s nil rate allowance is not fully used up; executors will become involved in detective work to unearth the evidence. There could be situations in which satisfactory evidence cannot be found. HMRC could easily insist on adequate proof as they are after all being asked to give a tax concession of £124,800 currently.

But second and equally important; where the deceased gives the surviving spouse or civil partner an absolute interest in the whole estate, it may not be that easy to protect the deceased’s assets. No one can know exactly what protection could be required; however some of the more common situations where protection could be needed are:

• Payment of care fees

• Personal bankruptcy

• Business failure

By writing wills which include a discretionary trust the deceased’s assets can be protected simply and effectively. In addition it could be possible to save further inheritance tax.

The next step:
Send us a copy of your will and a list of your assets with approximate values, including ownership details, and we will provide an opinion and preliminary advice, free of charge and without any obligation.

Please note: Wills are not regulated by the Financial Services Authority.