Inheritance Tax checklist

Start planning today to spare your family from a potential Inheritance Tax bill tomorrow

1. The main ways to avoid Inheritance Tax are to spend your money while you are alive or give it away.

2. Work out how much IHT might be due on your estate and regularly review it so you know what potential liability there is.

3. Find out if the rules which took effect from October 2007, which mean that married couples and registered civil partners can now make use of each other’s tax-free allowance without special tax planning, apply to you.

4. If you set up special Wills to deal with IHT, review them to see if they are still relevant.

5. Make full use of any tax-free gifts you can make whilst you are alive.

6. Put life insurance policies under an appropriate trust.

7. If there’s going to be a big IHT bill, think about taking out an insurance policy for your heirs to pay the bill.
8. Make a Will if you don’t have one – otherwise the people you want to inherit may not.

9. Anything you leave to charity is free of IHT, so it can be a useful way of reducing your potential IHT liability while benefiting a good cause.

10. Never take steps that might leave you struggling for money while you are alive in order to save tax after you’ve died.

Trust solutions

We can advise you on a range of different trust solutions, each designed with a particular purpose in mind. Some types of trust  are treated differently for Inheritance Tax purposes.

Many people would like to make gifts to reduce IHT but are concerned about losing control of the money. This is where a trust could help. The rules changed in 2006, making some of them less tax-effective, as a small minority will require you to pay IHT even before you have died, but they’re still worth considering. When talking about trusts, you will hear the terms:

• Settlor – the person setting up the trust

• Trustees – the people tasked with looking after the trust and paying out
its assets

• Beneficiaries – the people who benefit from the assets held in trust

There are now three main types of trusts. Any number of different types of investments can be held in a trust, so you should obtain professional financial advice to decide which is best for you.

Bare (Absolute) trusts 
With a bare trust, you name the beneficiaries at outset, and these can’t be changed. The assets, both income and capital, are immediately owned and can be taken by the beneficiary at age
18 (16 in Scotland).

Interest in possession trusts
With this type of trust, the beneficiaries have a right to all the income from the trust, but not necessarily the capital. Sometimes, a different beneficiary will get the capital, for example, on the death of the income beneficiary. They’re often set up under the terms of a Will to allow a spouse to benefit from the income during their lifetime but with the capital being owned by their children. The capital is distributed on the remaining parent’s death.

Discretionary trusts
Here the trustees decide what happens to the income and capital throughout the lifetime of the trust and how it is paid out. There is usually a wide range of beneficiaries, but no specific beneficiary has the right to income from the trust.

A few trusts will now have to pay an IHT charge when they are set up, at 10 yearly intervals and even when assets are distributed.

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 & Wales and Northern Ireland.

Life assurance cover

Funding a potential Inheritance Tax liability

After taking the appropriate steps to put in place an Inheritance Tax planning strategy, if there is still the potential likelihood of a liability on your estate, or if you have made gifts which have created a potential liability for the recipients if you die within seven years, we can help you review how you could fund this liability in the most efficient way.

By using life assurance cover, it is possible to use the proceeds to fund a potential IHT liability whenever it may arise. Life assurance cover is often the only means of providing immediate protection against a future IHT liability. Each premium payment is classed as a gift for IHT purposes.

The two common policy types are:

• Whole of life policies – to generate a
payment on death to cover the tax liability on the estate

• Reducing term policies – to cover the tax liability payable by the recipient of a gift if the donor dies within seven years

Any policy designed to produce benefits free of IHT for your chosen beneficiaries must be written in an appropriate trust. The trust will enable policyholders to retain control over the ultimate destination of the benefits.