Inheritance tax planning
Sadly many people pay inheritance tax totally unnecessarily and often opportunities for reclaiming IHT already paid are also missed.
The current inheritance tax nil rate band is £312,000 (2008-09 tax year) rising to £350,000 in the 2009-10 tax year. Transfers between spouses are 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 and thus have up to twice the nil rate band.
The treasury collected a record £1.7 billion in the first half of 2006, representing an increase of 13 per cent on the previous year’s figures. In the five years up to 2003-04, the number of estates worth less than £500,000 paying inheritance tax increased by 75 per cent, accounting for 71 per cent of all estates paying inheritance tax. Source: Halifax 7th Aug 2006, as reported on the London Stock exchange website, April 2007.
What is really sad is that much of the time these voluntary taxes could have been avoided or at least reduced.
So what can be done?
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 gift single gifts of up to £3,000 or the small gifts of £250 are free of inheritance tax as is the gift of surplus income although it does have to pass the “regular and habitual test to qualify. Larger capital gifts 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.
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.
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!
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.
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 an “Enduring 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.