Inheritance Tax planning

Inheritance Tax

Inheritance Tax (IHT) is usually paid on your estate when you die, although it is sometimes payable on trusts or gifts made during your lifetime.

The first £325,000 (2009/10) of chargeable transfers (the ‘nil-rate band’) is not subject to IHT. Cumulative transfers in excess of this figure that occur either at, or within seven years of, death are likely to be taxed at 40%.

From 9th October 2007, on the death of a surviving spouse or civil partner, a claim may be made for the transfer of any unused IHT nil-rate band of a predeceasing spouse or civil partner. This could effectively increase the nil-rate band on the death of the second spouse or partner to £650,000 (2009/10). This rule does not apply to couples living together who have not entered into a civil partnership agreement.

How is IHT calculated?

Currently there are two IHT bands: The first band, known as the ’nil-rate band’, currently £325,000 (2009/10) is charged at the nil-rate. Everything in excess of this band is subject to IHT at a rate of 40%. For example, if your home, personal possessions and savings amount to £420,000 your estate will pay £38,000 IHT (£420,000 - £325,000 = £95,000 x 40% = £38,000).

In most cases it will be the executors or personal representatives who will be responsible for paying IHT using funds from your estate. Normally payment has to be made to HM Revenue & Customs within six months of death, after which interest will be charged on the amount outstanding. There may be further difficulties as the beneficiaries will be unable to gain access to any assets in the estate until the tax has been paid.

Although the executors or personal representatives are usually responsible for paying the IHT, trustees will be responsible for payment of IHT on assets in, or transferred into, a trust. In certain circumstances, people who have received gifts during your lifetime, or from your estate on death, may have to pay IHT.

Reducing the burden of IHT

Through careful planning, the burden of IHT can be reduced. However, it is recommended that professional advice is sought before embarking on any particular course of action to avoid assets transferred being brought back into your estate on death when assessing the charge to IHT.

For example, giving away substantial assets before you die or gifting your home while still living there may not avoid IHT. This is particularly important if part of the planning is to put assets out of the reach of the local authority should you be admitted into care in the future.

With sound professional advice and planning in advance, there will be a number of ways to reduce the burden of IHT:

Making use of all available exemptions and reliefs:

Gifts to spouse or civil partner are exempt.
Normal expenditure out of income is exempt.
Gifts to charities, political parties or national purposes are exempt.
Potentially exempt transfers on gifts where you survive for seven years after making the gift.
Annual exemption of £3,000.
Small gifts exemption of £250 to as many individuals as you like.
Wedding and civil partnership gifts: parent (£5,000), grandparent (£2,500), between parties to the marriage £2,500, others (£1,000).
Business, woodland, heritage and farm relief may be available in certain circumstances.

Other ways of reducing the potential IHT liability include:

Having the correct type of Will in place.
Making use of trusts.
Tax efficient investments.

It is essential that sound legal and financial advice is sought when looking at ways of reducing the burden of IHT to ensure that all aspects of estate planning are considered at the time. This will include a financial healthcheck, making or reviewing your Will, ensuring that someone is appointed to manage your property and affairs through a lasting power of attorney should you become mentally of physically incapable in the future, and protecting your home and savings should you be admitted into care.

For more information on inheritance tax planning, please call equityCare Legal Services direct on 01594 838940 or take a few minutes to complete our enquiry / request callback form and we will contact you as soon as possible.