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Inheritance Tax Planning

When looking at ways to legally reduce the inheritance tax liability on your estate, there are a number of areas that should be considered:

What is my "Estate"

Your estate includes all assets that you own including homes and land, cars, shares and investments, cash and savings, jewellery, antiques and all other personal possessions.

Spousal Exemption

There is no inheritance tax payable on assets that pass between spouses and civil partners. This is known as the spousal exemption. The only exception to this is where one partner lives overseas. When a man and a woman live together as husband and wife but are not legally married, they have no entitlement to the spousal exemption. Same sex couples only have spousal exemption once they have a registered civil partnership.

Nil Rate Bands

Inheritance tax is levied on all assets in your estate at the date of your death. The Government allows what is called a nil rate band, which is currently £312,000 and is due to rise to £325,000 for 2009-2010.

In his pre-budget statement in October 2007, the Chancellor announced new legislation permitting the transfer of the nil band rate between spouses and civil partners. This means that on the death of the surviving spouse or civil partner, the nil rate band may be increased by up to 100%. This benefit is not available to unmarried couples. However they can still achieve substantial inheritance tax savings by making tax efficient Wills.

In general, inheritance tax is charged at 40% on assets which exceed the nil rate band. Therefore, if your total assets do not exceed the nil rate band then no inheritance tax will be payable. However given the steep rise of house prices an increasing number of estates are valued above the nil rate band.

Gifts

A number of gifts can be made each year that will not trigger inheritance tax in the event of your death. For example a parent can give a wedding gift of £5,000, a grandparent £2,500 and a friend or other relative £1,000.

There is an annual allowance of £3,000 that can be given away each year. If you do not use all of your allowance in one year you can add the difference to the next year’s allowance. However, you can only carry the allowance forward for one year, so a maximum tax free allowance of £6,000 can be achieved.

Small gifts of £250 can also be made to numerous people in the year. Gifts can be made to as many people as you like but the same person cannot receive more than one gift. You can also not leave a gift to the same person who received a gift from the annual exemption of £3,000.

Maintenance payments are also not classed as gifts for the purposes of inheritance tax.

Potentially Exempt Transfers and Taper Relief

Your liability for inheritance tax may be minimised by giving away some of your assets during your lifetime. However you should first ensure that you can afford to give away the particular item concerned without affecting the standard of living of yourself and/or your spouse. These gifts are known as ‘potentially exempt transfers’ or PET’s. The reason the gift is called a ‘potentially exempt transfer’ is because, when calculating the inheritance tax liability, the Government will treat any gifts made up to 7 years prior to your death as forming part of your estate at the time of death. If you survive 7 years the gift is exempt from inheritance tax.

As we cannot always predict when we will die, this is only a potential inheritance tax saver. If you survive 7 years then there will be no tax to pay. However, if you do die within the 7 years and the gift exceeds your annual allowance of £3,000 and is also in excess of the nil rate band, then after three years, taper relief is available which reduces the amount of inheritance tax payable.

We can advise you about taper relief in more detail if you have made gifts or are considering doing so in future.

If you intend to make a large gift, hoping that you will survive the 7 years, but have concerns over the tax implications if you die unexpectedly, an insurance policy can be purchased to cover any potential inheritance tax liability.

If you make a gift but retain a benefit from it, the Inland Revenue will still include the asset as part of your Estate when calculating your inheritance tax liability. For example, if you give away your house to your children, but continue to live there without paying the full market rent, HM Revenue & Customs will treat this as a gift with reservation of benefit and will include the house when valuing your estate.

You would be well advised to seek professional advice from The Specter Partnership before making any gifts with a view to saving inheritance tax as you could unintentionally cost yourself, or the recipient of the gift, more money in tax. There may, for instance, be Capital Gains Tax implications that need to be considered.

Business and Agricultural Property Relief

The rules in relation to family businesses and farms are relaxed in relation to inheritance tax. In many instances, where the property is part of a family owned business, no inheritance tax will be payable on the value of that property, as 100% relief will be available. In some circumstances a 50% reduction in the inheritance tax liability in respect of those assets will be available and we can advise you on this.

The rules in relation to Business and Agricultural Property Relief are complex and will depend upon your particular circumstances.

If you would like more advice please telephone us on Freephone 0800 019 3460.

Trusts

There are a number of advantages to putting property or money into trust as opposed to making gifts. Trusts are written agreements which state how particular assets will be held, upon trust, for the benefit of specific individuals. The individuals being given the assets placed in trust for them are known as beneficiaries. The person providing the assets is known as the settler and the persons appointed to administer the Trust are known as the Trustees. The assets being placed in the Trust can be wide ranging and include insurance policies, property, shares and cash.

There are many types of Trust that can be created and the choice will depend upon the asset, class or number of beneficiaries and the tax implications. Trusts are one of the most effective ways in which to avoid inheritance tax and help provide for your family.

Trust law is wide and varied and we advise that you telephone us on Freephone 0800 019 3460 to find the best solution.