Inheritance tax planning

You don’t have to be seriously wealthy for your estate to be subject to Inheritance Tax (IHT) after you die. Currently, IHT is levied on everything you leave over £325,000 (2009/10). Inheritance tax planning is a complex subject and it’s important to obtain professional advice if you have any concerns about your particular requirements, as this could save you thousands of pounds of potential lost tax.

You might consider taking advice on IHT planning to:

Keep your assets within your family

Protect your Nil Rate Band if you were to die and your partner re-marry

Protect assets passed to children or grandchildren from the risk of them becoming bankrupt or divorced

Protect your assets from the need to fund long-term care in later life

Reduce an IHT liability

Avoid an IHT liability

These are some of the typical questions that we are asked most by our clients:

Q: Should I write a will?
A: The simple answer is ‘yes’. It’s easy to put off making a will. But if you die without one, your assets may be distributed according to the law rather than your wishes. This could mean that your spouse or partner receives less, or that the money goes to family members who may not need it.

These are some of the financial reasons for making a will:

if you aren’t married or in a civil partnership (whether or not it’s a same sex relationship), your partner will not inherit automatically. With a will, you can make sure your partner is provided for

if you’re divorced or if your civil partnership has been dissolved, you can decide whether to leave anything to an ex-partner who’s living with someone else

you can make sure you don’t pay more IHT than necessary

Q: How can I minimise the value of my estate for IHT purposes?
A: You cannot be taxed on money that was never yours. It is sensible to ensure that as much as possible is outside your estate. Check that all current or new life insurance plans are written under an appropriate trust. Your existing life policies could be transferred into such a trust. If your employer pays a death benefit, complete a nomination form and make sure any money goes directly to the person you choose and not into your estate. It is also worth thinking about legacies you receive. Someone who benefits from a legacy could divert that gift to another person. You can apply for a ‘deed of variation’ within two years of the death of the giver.

Q: What are the effects of getting married?
A: Anything you pass on to a spouse (the same concession applies to same-sex couples who register under civil partnership laws) is free of IHT. However, legacies between unmarried couples are not tax-free. This may become a significant issue when a couple jointly own their home, which could lead to some people having to pay an IHT bill just to continue living in their home.

Q: Can I gift my home to my children?
A: For many families, their homes are their biggest asset. The government has clamped down on schemes to get around the ‘gifts with reservation’ rules. These allowed people to give away homes, but still live in them. Now, income tax can be charged for living rent-free in a home you once owned. But there are still ways to reduce IHT. Most couples who own a home together are joint tenants. This means that if one person dies, the other automatically becomes the outright owner of the property. The alternative is to register as ‘tenants in common’, each owning half the property absolutely. This means that on death, your share may be left to someone else to keep down the size of your estate.

Q: Are there any investments that will enable me to reduce an IHT liability?
A: Some investments are given favourable treatment for IHT purposes, including shares in unquoted businesses, woodlands, farms and farmland. Many shares on the Alternative Investment Market (AIM) also qualify for relief. Investing in AIM shares is one way of reducing an IHT liability on an estate. Qualifying AIM shares offer more IHT relief than some other assets and qualify as ‘business property investments’. If property is held as AIM shares in certain trading companies for a period of at least two years, it becomes eligible for Inheritance Tax Business Property Relief at 100 per cent and will fall out of the estate for IHT purposes. This relief is a relief by value, the shares being treated as having no value for IHT purposes. Not all AIM companies are eligible for Business Property Relief. Please note that AIM shares may be more volatile than shares listed on the main market, the London Stock Exchange. There may also be a more limited market for AIM shares, which are generally higher risk investments in smaller company shares.

Q: Should I consider trusts to minimise an IHT liability?
A: When writing a will, there are several kinds of trusts that can be used to help minimise an IHT liability. On 22 March 2006, the government changed some of the rules regarding trusts and introduced some transitional rules for trusts set up before this date. This is a very complex area of IHT planning and professional advice should always be obtained.

Q: Could I use a life insurance policy to pay for a future IHT bill?
A: A whole-of-life insurance written under an appropriate trust could be used to provide a lump sum on death that falls outside your estate. On death, the proceeds of the policy would be used to settle the IHT liability. The premiums are treated for tax purposes as a gift from regular income. The advantage is that you retain your wealth through your lifetime and so have the funds if, for example, you need to go into long-term care.

Q: In which other ways can I reduce the value of my estate?
A: Giving away money will reduce your estate, but will not cut the tax liability immediately. You have to survive for seven years for most gifts to escape the IHT net. However, within that last seven years, the HM Revenue & Customs (HMRC) allow gifts of up to £3,000 each tax year. Unlimited gifts up to £250 per person per tax year are exempt, as are payments of up to £5,000 for wedding gifts. The most powerful concession is that regular gifts made from normal income can be exempt from IHT. You must show you have been giving regularly and are not materially reducing your standard of living or running down savings. This concession allows parents or grandparents to help children without fear of IHT tax problems in the future.

Timely decisions on how jointly owned assets are held, the mitigation of IHT tax, the preparation of a will and the creation of trusts can all help ensure your dependents are left financially secure. If you would like to discuss your particular situation, please contact us. Don’t leave it until it’s too late.

IHT planning is a complex area of financial planning and you should seek professional advice prior to taking any course of action. The value of investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not an indication of future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.