Inheritance Tax

Isn’t it time you assessed your estate’s potential liability?

In the event of your premature death, unless you plan carefully your family could end up paying a sum in Inheritance Tax (IHT). Have you recently assessed your potential liability to IHT? If so, and you have a potential liability, have you planned to reduce it? We can help you ensure that more of your hard-earned assets go to the people you want them to rather than falling into the hands of the taxman.

IHT facts
If you are single or divorced, current UK legislation allows the first £325,000 (2010/2011 tax year) of your estate to be free from IHT, or £650,000 if you are married or have entered into a civil partnership or are widowed (providing no previous gifts were made by the deceased spouse). Under current legislation the taxman could take 40 per cent of everything you leave over the threshold (known as the nil rate band) and this includes properties, personal effects, cars, savings, investments and insurance – collectively known as your estate.
There is a range of allowances that you can use to mitigate a potential IHT liability. The major ones are as follows:

Annual Exemption – everyone is entitled to give away £3,000 exempt from IHT in any one tax year. If not previously used, then this allowance can be backdated one tax year, so in effect £6,000 could be given per donor to begin with, thereafter £3,000 per annum (optional).

Marriage Gifts Exemption – each parent can give wedding gifts of up to £5,000 to each of their children. Grandparents can gift up to £2,500 to each grandchild. Also, you can give up to £1,000 as a wedding gift to anyone else. These gifts must be given before the wedding day. You can make gifts utilising more than one of the above allowances to the same person.

Small Gifts Exemption – any number of gifts to different people up to a value of £250 each can be made in a tax year. If the total value of gifts to any one person exceeds £250, then all gifts to that person must be deducted from the £3,000 Annual Exemption mentioned above. All of the above have the effect of reducing the estate upon which the IHT can be levied.

In most cases, any direct gift amount made either direct or into an absolute trust by any one person over the exempt gift allowances is a Potentially Exempt Transfer (PET). This means that you, as the donor, need to live for seven years from when the transfer is made for the gift to fall outside your estate. During the seven-year period the amount of tax payable on death reduces each year. This is known as ‘taper relief’. However, this relief applies only to the part of a gift that is in excess of the nil rate band.

Gifts to Trust – this method allows the placement of monies in a suitable investment and then this is wrapped within a trust, of which you and other people of your choosing can be trustees. The monies remain in trust and all, or amounts of this, can be distributed when you choose.

Life Assurance Policy – this is used to insure the liability with a ‘whole-of-life policy’. Under some circumstances, this can be a cost-effective way of providing for the eventual bill and can be reasonably simple to set up. The ‘whole-of-life policy’ has a sum assured which is paid to the beneficiaries on death; due to the fact it is written under an appropriate trust, it can be paid prior to the rest of the estate being released and can, therefore, be used to contribute towards or pay for the IHT bill for the estate.

Trusts

Helping you control and protect your assets

One of the most effective ways you can manage your estate planning is through setting up a trust. The structures into which you can transfer your assets can have lasting consequences for you and your family, so it is important that you obtain professional advice
as the right structures can protect assets and give your family lasting benefits.

A trust is a legal arrangement where one or more trustees are made legally responsible for assets. The assets – such as land, money, buildings, shares or even antiques – are placed in trust for the benefit of one or more beneficiaries.

They are not the sole domain of the super-rich. Trusts are incredibly useful and flexible devices that people employ for all sorts of different purposes, including Inheritance Tax planning.

In its simplest form, a trust is just a legal mechanism for separating the ownership of an asset into two parts: the ‘legal’ ownership, or title to the asset, on the one hand, and the ‘beneficial’ ownership on the other hand.

It is in the course of Inheritance Tax planning, though, that people are most likely to come face to face with trusts, and seek to get an understanding of what they are and how they work. Their use is widespread and, despite some recent adverse changes in tax law, they remain an important tool in estate planning.

The trust is created when the settlor transfers assets to the trustees, who hold the assets in trust for the beneficiaries. The main reason a person would put assets into a trust rather than make an outright gift is that trusts offer far more flexibility than outright gifts.

The trustees are responsible for managing the trust and carrying out the wishes of the person who has put the assets into trust (the settlor). The settlor’s wishes for the trust are usually written in their Will or given in a legal document called the trust deed.

The purpose of a trust

Trusts may be set up for a number of reasons, for example:

– to control and protect family assets

– when someone is too young to handle their affairs

– when someone can’t handle their affairs because they are incapacitated

– to pass on money or property while you are still alive

– to pass on money or assets when you die under the terms of your Will – known as a Will trust

– under the rules of inheritance that apply when someone dies without leaving a valid Will (England and Wales only)

There are several types of UK family trusts, and each type of trust may be taxed differently. There are other types of non-family trusts. These are set up for many reasons, for example, to operate as a charity, or to provide a means for employers to create a pension scheme for their staff.

When you might have to pay Inheritance Tax on your trust

There are four main situations when Inheritance Tax may be due on trusts:

– when assets are transferred—or settled—into a trust

– when a trust reaches a ten-year anniversary of when it was set up

– when assets are transferred out of a trust or the trust comes to an end

– when someone dies and a trust is involved when sorting out their estate

The treatment of trusts for tax purposes is the same throughout the United Kingdom. However, Scottish law on trusts and the terms used in relation to trusts in Scotland are different from the laws of England and Wales and Northern Ireland.

Paying Inheritance Tax

Estimating how much liability you could leave behind for your loved ones

Usually the ‘executor’ of the Will or the ‘administrator’ of the estate pays Inheritance Tax using funds from the estate.

An executor is a person named in the Will to deal with the estate – there can be more than one. An administrator is the person who deals with the estate if there’s no Will.Trustees are responsible for paying IHT on trusts.

Work out if Inheritance Tax is due on an estate
To estimate how much Inheritance Tax you could have to pay, add up the value of all your wealth, subtract your liabilities and the £325,000 nil rate band allowance, and then multiply the remainder by 40%.

If you are married or in a registered civil partnership, add up your combined estates and reduce these by two nil rate band allowances of £325,000 each (£650,000) before applying the 40% rate to estimate your potential liability to Inheritance Tax.

Married couples and registered civil partners are allowed to pass their possessions and assets to each other tax-free, and, since October 2007, the surviving partner is now allowed to use both tax-free allowances (providing one wasn’t used at the first death).

Gifts made within the last seven years are not included in the calculations but may be liable to IHT on a sliding scale.

The calculation for valuation of your estate is for your general information and use only and is not intended to address your particular requirements. It should not be relied upon in its entirety and shall not be deemed to be, or constitute, advice. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their
particular situation.

If IHT is due on the estate, you would need to complete HM Revenue & Customs (HMRC) form IHT400. You may also need to send other forms at the same time.

If no IHT is due, you’ll need to complete form IHT205 to tell HMRC that no IHT is due on the estate.

You or your solicitor will need to send the forms with your application for probate (‘grant of representation’). This is called ’confirmation’ in Scotland.

The grant of representation (confirmation) gives you the right to deal with the estate as the executor or administrator.

Deadline for paying Inheritance Tax
The executor of a Will or administrator of an estate usually has to pay IHT by the end of the sixth month after the person died. After this, the estate has to pay interest.

You can make early payments before you know what the estate owes. Interest isn’t due on this amount.

You can pay IHT in instalments over 10 years on things that may take time to sell, for example, property and some types of shares.

There are different deadlines for paying IHT on a trust.