Keeping your wealth in the family

Inheritance Tax planning matters

In order to protect family and loved ones, it is essential to have provisions in place after you’re gone. The easiest way to prevent unnecessary tax payments such as Inheritance Tax (IHT) is to organise your tax affairs by obtaining professional advice and having a valid Will in place to ensure that your legacy does not involve just leaving a large IHT bill for your loved ones.

Effective Inheritance Tax planning
Effective IHT planning could save your beneficiaries thousands of pounds, maybe even hundreds of thousands depending on the size of your estate. At its simplest, IHT is the tax payable on your estate when you die if the value of your estate exceeds a certain amount. It’s also sometimes payable on assets you may have given away during your lifetime, including property, possessions, money and investments.

IHT is normally chargeable when assets are transferred to someone other than your spouse or registered civil partner when you die. Importantly, there is no IHT when assets are passed between spouses or registered civil partners. For this reason most IHT liabilities occur on the second death.

IHT is currently paid on amounts above the nil rate band, or Inheritance Tax threshold, which is £325,000 (£650,000 for married couples and registered civil partnerships) for the current 2010/11 tax year. If the value of your estate, including your home and certain gifts made in the previous seven years, exceeds the IHT threshold, tax will be due on the balance at 40 per cent.

Making a Will
Before you can start planning to reduce a potential IHT bill, you should decide how you would like your estate distributed in the event of your premature death. Your instructions should be detailed in a professionally written Will, which sets out who is to benefit from your property and possessions after your death.

Gifting money
Any amount of money given away outright to an individual is not counted for IHT if the person making the gift survives for seven years. These gifts are called ‘potentially exempt transfers’ and are useful for tax planning. Death within the seven year period would give rise to a proportionate value of the gift being assessable to tax

If gifts are made that affect the liability to IHT and the giver dies less than seven years later, a special relief known as ‘taper relief’ may be available. The relief reduces the amount of tax payable on a gift if death occurs between years 3 and 7 after making the gift.
Money put into a ‘bare’ trust (a trust where the beneficiary is entitled to the trust fund at age 18) counts as a potentially exempt transfer, so it is possible to put money into a trust to prevent grandchildren, for
example, from having access to it until they are 18.

However, gifts to most other types of trust will be treated as chargeable lifetime transfers. Chargeable lifetime transfers up to the threshold are not subject to IHT but amounts over this are taxed at 20 per cent, with a potential further 20 per cent payable if the person making the gift dies within seven years.

Some cash gifts are exempt from IHT regardless of the seven-year rule. There are various tax exemptions you can make use of. For example, regular, affordable gifts from after-tax income, such as a monthly payment to a family member, are exempt as long as you still have sufficient income to maintain your standard of living.

Any gifts between husbands and wives, or registered civil partners, are exempt from IHT whether they were made while both partners were still alive or left to the survivor on the death of the first. IHT will be due eventually when the surviving spouse or registered civil partner dies if the value of their estate is more than the combined IHT threshold, currently £650,000. (This assumes the nil rate band of the first death is intact and not used elsewhere).

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