Inheritance Tax Advice

It is becoming increasingly difficult to avoid Inheritance Tax (IHT), heirs are obliged to pay 40% of anything over £28,000, it is important to note that this includes the value of any property that you are planning to pass on. This means that it is not only the very rich that IHT applies to, if you own a home, have a few investments, and perhaps have some additional savings then you could fall into the Inheritance Tax bracket. There are ways to reduce or eliminate the IHT that you are expected to pay, however the Inland Revenue are clamping down on the most popular ways to do this.

It is expected that over the next few years, more people will be included in the IHT bracket as a result of property values rising, The Inland Revenue is already collecting about £2 billion, in Inheritance Tax, so here are a few ways to keep the amount you are expected to pay down to a minimum.

The law allows you to leave an estate worth up to £285,000 (as at 6th April 2006) without having to pay any Inheritance Tax upon it. This £285,000 is called the 'Nil Rate Band'. After the first £285,000, or the Nil Rate Band, the remainder of your estate will be charged 40% Inheritance Tax.

How can a Will save tax for married couples ?

Transfers of property and gifts between husband and wife no matter how large in value are exempt from Inheritance Tax. This is known as the inter-spouse exemption rule. Each partner's estate is assessed individually at the time of their demise for Inheritance Tax purposes and each partner qualifies for the Nil Rate Band providing together an aggregate exemption of £570,000.

So if you are a married couple, one of the simplest and most effective ways of avoiding some Inheritance Tax, is simply to take advantage of two Nil Rate Bands. For example:

If Mr. & Mrs. Smith have a joint estate worth £600,000, they may upon the death of the first spouse give away to their beneficiaries £285,000 without having to pay Inheritance Tax, thereby utilizing a Nil Rate Band. However, if they do not do this and simply pass the estate to the remaining spouse, when the estate is eventually split it will only be allowed a single Nil Rate Band, rather than the two which could have been used.

Using 2 Nil Rate Bands:

Mr. & Mrs. Smith have £620,000 upon the death of the first spouse. £285,000 is given away free of Inheritance Tax, using the Nil Rate Band, leaving £315,000 to the second spouse. Upon the death of the second spouse, another £285,000 will be allowed free of Inheritance Tax, using the Nil Rate Band, leaving only £50,000 liable to Inheritance Tax at 40%, resulting in Inheritance Tax of £20,000.

Using only 1 Nil Rate Band:

Mr. & Mrs. Smith have £620,000. Upon the death of first spouse, all the money is left to the remaining spouse without using the Nil Rate Band. Upon the death of the remaining spouse, only the one Nil Rate Band of £285,000 will be allowed, leaving an estate of £335,000 liable to Inheritance Tax at 40%, resulting in Inheritance Tax of £134,000.

However, this could leave the surviving spouse in a difficult financial position with not enough capital to generate the income they require. The solution is for each spouse to establish a Nil Rate Band Discretionary Trust which allows for the surviving spouse to gain access to funds if necessary. An amount equal to the Nil Rate Band on death is placed in a trust fund and income is paid to the surviving spouse. The spouse is also entitled to whatever capital is needed out of the trust.

Joint assets

Often the largest asset owned is the family home. Husbands and wives are usually, but not always, "joint tenants". Joint assets pass directly to the surviving spouse and do not pass under the Will. These joint assets cannot be used to fund the Discretionary Trust Fund. However, where the property is held as "tenants in common" either party may make a gift in a Will of his or her share of the property. It is therefore worthwhile considering "severing" the joint tenancy in the house, and each party giving his or her share in the house to the children with the right for the surviving spouse to live in the property until his or her death. Although the property would still be owned jointly with your spouse, the significant difference is that on the death of the first spouse the 50% share owned by them can then be used towards satisfying the Nil Rate Band Discretionary Trusts.

These are just some examples of inheritance tax planning. Inheritance tax planning is usually a complex and long-term affair and professional advice should always be taken.

All lifetime transfers not covered by exemptions and made within seven years of death will be added back into the estate for the purpose of calculating the tax payable. This will then be reduced by taper relief.

Main Exemptions

1. Most transfers between spouses.
2. The first £3,000 of lifetime transfers in any tax year (husband and wife each have own exemption) plus any unused balance from previous year.
3. Gifts of up to but not exceeding £250p.a to any number of persons.
4. Gifts in consideration of marriage to bride and/or groom of: up to £5,000 by a parent, up to £2,500 by a grandparent, or up to £1,000 by any other person.
5. Gifts made out of income that form part of normal expenditure and do not reduce the standard of living.
6. Gifts to charities, whether made during lifetime or on death.