Inheritance tax planning
Sadly many people pay inheritance tax totally unnecessarily and often opportunities for reclaiming IHT already paid are also missed. Recently the government has canceled the planned increase in the IHT nil rate band and it seems likely in these hard financial times that they will aim at increasing receipts in this area, thus if this tax is to be avoided planning is wise if not essential.
The current inheritance tax “nil rate band” is £325,00 (2009-2010 tax year) thus if your estate is below this amount you will pay no inheritance tax, if its above you (or rather your executors) will pay 40p in the pound on the balance over the nil rate band, thus an estate of £425,000 would give rise to a tax liability of £40,000. It is important to remember that if you leave your estate to your spouse then that is exempt, as are gifts to charities.
Recent changes in legislation allow a widow to now use the un-used nil rate band of a deceased spouse . So if your husband/wife passed away leaving everything to you then you will (currently) have a nil rate band of £650,000, although you will have to jump through a few hoops to claim the higher allowance.
Whilst for some the above allowances, leaves no or only limited tax to pay, for many the amount of this tax paid is significant. What is really sad is that much of the time these “voluntary” taxes could have been avoided or at least reduced and thus many estates end up paying tax unnecessarily.
So what can be done?
In some cases it may actually still be possible to reduce the IHT payable on a deceased person’s estate or even reclaim IHT already paid, and certainly it is always worth gaining advice on this, however plainly it would be better and cheaper to deal with the matter prior to death.
The first thing to establish is how much your estate is worth and who owns it (dont forget the life policies not held in trust).
Then the next step is to make sure that you have used all the tax free allowances you can, in particular that each spouse has used their own nil rate band . Consider the use of a nil rate band discretionary trust, although the use of these are now less likely to be needed (due to the ability to use a deceased spouses unused allowance), they do still have there place and can be particularly useful to protect estates from the effects of Long Term Care or in the case of second marriages.
Prior to death, single gifts of up to £3,000 per year or the small gifts of £250 are free of inheritance tax as is the gift of surplus income although in practice this needs careful management and record keeping or it may be disallowed. Larger capital gifts can be made and may be treated as “potentially exempt” and become exempt after 7 years.
Certain investments such as forestry and agricultural property are also exempt from inheritance tax after 2 years, as are investments in small private companies or those listed on the AIM market . There are also special investments known as EIS’s which benefit from tax free status after two years and also provide income tax relief and capital gains tax deferral. With all the above real care needs to be taken as these can be risky investments and you could loose more than the 40% you are trying to save, advice is essential !
There are also various trust arrangements such as gift and loan and discounted gift, to name just two, that can be used for IHT mitigation and avoidance purposes. These are often wrapped around investments provided by life companies. These can be very effective, although they are only suitable for certain situations and sadly I believe are often mis-sold. Again good “independent and non commission based advice” is essential !
The other main route is not to avoid the tax but to make provision to pay for it via a life policy held in trust, this can actually often be the simplest way of solving the problem, and actually leaves you free to enjoy or spend your estate without tying you in unnecessary knots! Here it is important to get the correct type of insurance policy and the right trust arrangement to suit your specific needs and risk tolerance.
Personally I always encourage my clients to give away what they dont need, remembering that gifts to charities within your will is free of IHT but a gift prior to death may also benefit from gift aid and thus allow the charity to reclaim 25% tax relief on your gift, and you to claim higher rate tax relief if applicable.
Warning on writing a will
We would strongly advise against the thought of a do it yourself or distance will writing service, but instead would recommend that you use the services of a good quality solicitor specifically working in this specialist field. As part of our service, we provide recommendations and then work with our clients’ solicitors, or recommend solicitors to carry out any work needed.
Whilst gaining professional assistance on the above we also advise that clients should consider putting in place a “Lasting Power of Attorney”, which will ensure that your affairs are looked after if you are not physically or mentally able yourself to do so.
If you are interested in getting further advice on the above issue or want to consider investment in trusts, forestry, smaller companies, EIS’s or any other form of investment, then contact us.
Please note, the Financial Services Authority does not regulate will writing or tax planning services.
