Inheritance Tax planning

In the main, Inheritance Tax only becomes payable when someone dies. At that time, the value of everything they own, from their house to the coins in their pocket or purse, has to be added up - this is called 'their total assets'. If their total assets exceed the Nil Rate Band (325,000 in 2009/10) then tax on the surplus is likely to be payable at 40%. The Government has already announced that the Nil Rate Band will increase to 350,000 in 2010/11 and the Conservatives have said that they will increase it substantially if they win the next General Election.

If a Spouse or Civil Partner has inherited all the estate of the first to die, then the Nil Rate Band is doubled-up on the second death ( 650,000 in 2009/10).

The key exemptions to remember are:

  • Gifts to Spouse (assuming both are domiciled in the UK)

  • Normal, habitual expenditure out of income

  • Annual 3,000 gift exemption, which can be carried forward for one year only if unused

  • Gifts to charities, which must be UK/EU registered

  • Gifts for national purposes - various educational establishments, museums, galleries, etc

  • Gifts to qualifying political parties

  • Gifts of UK land to registered housing associations

Also there some other important allowances, such as:

  • Business and Agricultural Property Relief

  • A 100% deduction can be made in respect of the value of assets employed in a trading company or farming business owned for two years or more.

  • Potentially Exempt Transfers (PETs)

  • Lifetime gifts of assets not subject to an exemption or relief are deemed to be PETs and fall outside of the Donor's estate after the expiration of 7 full years from the date of the gift. This is no longer available for most gifts into Trusts.

So, if your estate is over the Nil Rate Band and the impact of inheritance tax on your family's future wealth is a concern. Are there things you can do to mitigate that potential liability? The short answer is "yes".

The least controversial and most straightforward is to give the surplus assets away and live for a further 7 years. Giving away assets during your lifetime may not be desirable, or even viable. There are also rules and regulations to deal with "incomplete" gifts. For example, giving your home away by transferring the title to your heirs, but continuing to live there rent-free is termed a Gift with Reservation of Benefit and will be completely disregarded for inheritance tax purposes. Also, whilst you may feel that assets are surplus to requirement now, they may be needed in the future in the event of a change of circumstances; for example a deterioration in health. .

Everyone should consider using these gifting exemptions and allowances to help reduce the impact inheritance tax may have on your estate. An example of how gifts can be beneficial could be where the money is to help with the costs of your Grandchildren's education. If you prefer to keep a close eye on the money, then making payments into a simple trust that can be handed over later may be attractive. Also, it is worth bearing in mind that an annual lump sum of 2,880 or 240 per month can be paid into a personal pension for any child from their date of birth and the Government will top this up with tax relief at 20%.

Regular payments out of income can also be used to fund a life assurance policy written under trust, which would then provide a valuable tax-free lump sum on death.

We have at our disposal a number of sophisticated schemes, which exploit the allowances whilst affording some access and/or use of the assets during your lifetime, without falling foul of the rules and regulations referred to earlier.

In conclusion, if you think you have an inheritance tax issue ask for advice, we may just have the solution!