News/Events

Inheritance Tax Options [20th March 08]

Inheritance Tax is the tax the Government wish to extract from your Estate upon death and this is, broadly speaking, everything you own less any debts. This will include your property, possessions, investments, etc, and once the total value exceeds £300,000 (known as the nil rate band) for 2007/08, then the Chancellor will be after 40%.

It could also include some gifts made during your lifetime and may also apply where gifts have been made into a Trust.

The Executors of the deceased are liable to pay the HMRC even before probate has been granted. This is usually paid six months after the end of the month in which death occurred. The Executors may have to borrow to pay the tax but since 31^st March 2003, HMRC has allowed the deceased’s bank or building society to release funds direct to them in order to settle the IHT due.

From 9^th October 2007, spouses and civil partners can now transfer their nil rate bands to each other to ensure that the IHT free allowance is fully utilised. This means a couple now have a combined rate band of £600,000 increasing to £700,000 in 2010/11.

Obviously capital passing between spouses and civil partners does not count but there are many other exemptions. For example, gifts to an individual would become free from IHT subject to the donor living for seven years and does not gain any benefit from the gifted asset. These are known as potentially exempt transfers (PETs) but, giving away your house and continuing to live in it will make IHT mitigation ineffective unless a commercial rent is payable or you move out.

In every tax year, you can make an annual exemption gift of £3000 to an individual or Trust without the seven year rule being imposed. If the previous year’s exemption has not been used, then it can be carried over. However, you will have had to have made the maximum gift this year before you can carry back to last year and there are only three weeks left! It does mean a couple could give away IHT free a sum of £12,000 in a single tax year. 

Other tax efficient ways of gifting include those made for a marriage, small gifts, and donations to charities and political parties. Also there are gifts out of income where HMRC state that the gift must not “reduce your standard of living”.

You could place capital into a Trust and there are schemes available that would allow you to receive an income for life. After seven years the initial capital would then be outside your Estate along with any capital growth.

Another effective way is to take out a life policy and write this in trust so that the proceeds on death fall outside your Estate. This does not reduce the Estate but provides funds to maybe pay the IHT. I am currently settling a claim under two whole of life plans for £550,000 where the IHT is just over £500,000 and needless to say the Executors are very pleased indeed to have the funds as probate is a long way off.

Then there are some clever schemes which can give IHT exemption in only two years and these are currently being heavily promoted but beware of charges.

It is clear anyone with an IHT concern needs expert advice so make contact with a qualified IFA to have a review before it’s too late.

This article was written by Langtons - Published in the Western Morning News, This is Money, 20th March 2008