Inheritance Tax Planning

Inheritance Tax (IHT) is payable on death and is a complex subject with the Law and Tax changing regularly. These notes are for guidance only and some details may change.

The threshold for paying IHT for the tax year 20008/2009 is £312,000. Any amount of chargeable assets above this amount is taxed at 40%!

With the house price boom over the last few years many more families are falling into this trap and significant amounts of tax are being paid.

It is worth noting that one of the first responsibilities of Executors is to calculate the IHT liability and pay any amounts due before Grant of Probate can be issued. This means your Executors will have to find this amount, either from their own resources or a bank loan, as they will not be able to access your assets until after Grant of Probate is issued. Not only will your assets be eroded by the tax, but also the costs of the loan.

As an example, an estate worth £362,000 will attract IHT of £20,000!

All assets transferring between husband and wife, on death, are exempt from IHT. The recent announcement (October 2007) by the Chancellor to allow husband and wife to both benefit from the threshold limit has greatly benefited the average household. Married couples can now enjoy the benefit of a threshold equivalent of up to £624,000 as the first death allowance is now no longer lost but held over until second death.

However, that is not the end of the problem and everyone should seriously consider the question of Inheritance Tax, regularly, to ensure they are taking advantage of all opportunities to mitigate any tax that may be due.

An important first step is to fully understand your chargeable assets and your future capital and income requirements as the main priority must always be to ensure you do not materially affect your own position just to avoid an IHT liability. A fact find will help with this and we can guide you through the process.

Possibly the other main asset, apart from the family home, held by most people is their Pension scheme. This can be a Company scheme or a Personal Pension Plan. It is essential to ensure that all death benefits from these schemes are taken out of the estate. There are two main reasons for this. Firstly, it reduces the estate for IHT purposes and, secondly, it makes the funds readily available for the survivor.

Also, you can give lifetime gifts of any amount. These are known as Potentially Exempt Gifts (PETs). Simply, if you survive for seven years after making a PET the asset is considered outside your estate and is exempt from IHT provided you have received no material benefit from the transfer. Should you die within the seven-year period there is a sliding scale of tax reduction with no reduction in the first 3 years.

A typical example of a PET is gifting your home to your children. However, if you remain living in the property without a formal rental agreement at a market rate the transfer would be considered void, irrespective of how many years have elapsed, and the asset would be included in your estate for IHT purposes.

You can give small amounts each year, known as Exempt Gifts. The current limits are up to £250 to as many different people as you wish, up to £3000 for any one gift, but not any of those receiving a £250 gift. There are also certain Exempt Gifts to various family members on marriage.

All gifts to Charity are exempt.

And, of course, both partners can make the gifts.

You do need to watch out for any Capital Gains Tax which may be due as the transfer is viewed as you realising the asset.

It is also important that the estate is equalised between both partners so that you both own 50% of the combined assets. This will give you both more flexibility in your tax planning.

Transferring your property to Tenants in Common allows each partner the facility to give their share to anyone they wish. Of course, this is normally the children.

However, you need to be sure the survivor can manage on what is left after gifts to other parties.

One option is for part of the estate to be placed in a Discretionary Trust, on death, with the survivor being one of the beneficiaries of the trust.

The typical example is part of the family home being placed in the trust and the survivor remaining in the home. However, if the survivor receives any benefit from the arrangement an “interest in possession” is created and interest, or rent, must be paid on the benefit, otherwise the transfer will fall into the IHT trap.

The trustees will also need to demonstrate active management of any trust through regular and fully recorded meetings and transactions.

If the payment of IHT is unavoidable a suitable life assurance policy, written in trust, could be put in place to meet the tax demand.

We can advise on how all of this affects your own situation and ensure you take full advantage of the options available.