Inheritance Tax

It is a sobering fact that, if you were die in the current tax year, the Taxman would take an eye watering 40% in Inheritance Tax (IHT) of everything you leave behind over £300,000. With the increasing value of property, it is not difficult to have assets exceeding this amount. To make matters worse, the beneficiaries of your will would  probably have to pay the tax from their private resources or with a bank loan before they receive anything from your estate.

Most people would prefer their money to go to their family rather than to the Chancellor so it is worthwhile looking at ways the IHT liability can be reduced. Some simple planning can save large sums of money. Here are some straightforward ideas for reducing your liability:

• Gifts - the most basic way to reduce IHT is to give assets away. Gifts to individuals or to trusts reduce the value of an individual's taxable estate on death, provided that the donor survives for at least 7 years after the gift.
    
  The problem with giving away your assets though is that you may need them yourself. It is important to consider the full implications before making gifts to reduce tax.
      
• Utilise the annual exemptions. Everyone has a £3,000 annual exemption for IHT which can be set against gifts made in that tax year. Other exemptions include gifts out of income made on a regular basis, gifts on marriage of between £1,000 and £5,000 depending on the donor and recipient, donations to charity and small gifts of under £250 per person per year.
      
• If you are married or have a civil partner make sure you utilise your nil rate band for IHT effectively. The nil rate band, which is £300,000 in the current tax, is the amount of money on which your estate would pay no IHT. You may already have set up your wills with provision for a discretionary trust to utilise both partner's nil rate bands. You may want to review whether this is still the best option for you in the light of the Chancellor's pre-budget report.

The report proposes changes to Inheritance Tax whereby if the nil rate band is not used, or only partially used, in the first death, then the nil rate band available to survivor is enhanced by the percentage of nil rate band unused on first death, it does not matter when the first death occurred. This enhancement will be availiable on the survivor's death on or after 9th October 2007. The maximum enhancement is 100%.
  

• Consider providing for future IHT liability. This can be done by putting a whole of life assurance policy in place which will pay out a lump sum on death. The proceeds of the policy should be written in trust so that they go directly to the beneficiaries and do not form part of the estate.

The purpose of this communication is to provide generic information and should not be interpreted as a personal recommendation or advice.

Please contact us if you would like advice on inheritance tax planning. A small outlay now could save your children thousands of pounds.

Not all Inheritance tax planning is regulated by the Financial Services Authority.