If you’ve spent your entire tax-paying life building up your assets, it’ll probably feel unfair to see a large chunk disappear.
Inheritance tax is a death duty that claims a percentage of your total estate over and above an initial allowance (called the nil rate band). Currently the first £285,000 (2006/2007) worth of your assets will survive free of IHT, but any excess is taxed at 40%.
With many of us owning our own homes and property prices rising, more and more of us are becoming affected by this tax.
The good news is there are a number of ways to reduce the impact through inheritance tax (IHT) planning. By taking some simple steps you can save yourself thousands of pounds.
Firstly, make sure you’re in possession of an up to date Will, which can save future wrangling over the distribution of your estate. We’ve partnered with Just Wills, so you can take advantage of its quality, efficient service.
Secondly, if you’re part of a married couple or in a civil partnership, you’re able to utilise both your nil rate bands, thus doubling your tax threshold ie two x £285k = £570k. The potential saving of IHT on the second Nil Rate Band is £114k (£285,000 x 40%) - a huge saving for your beneficiaries.
Thirdly, trusts can be used to reduce inheritance tax and exercise control over your assets. A trust is a legal agreement between three parties - the settler, who makes the gift; the trustees, who look after the gift; and the beneficiaries, who receive the gift. By placing your money in a trust you ensure it goes to the right people at the right time. It’s a valuable opportunity to set funds aside, provide for your beneficiaries and mitigate IHT. There is a whole range of trusts available to you, some of which are briefly described below:
A discretionary trust offers the flexibility of access to your funds and is ideal for nil rate band planning.
An absolute trust is IHT friendly and if you survive seven years will sit outside of your estate, tax exempt. However, it lacks flexibility so you can’t dip back into the fund and you can’t change the beneficiary.
Loan trusts provide you with more control over your capital, but give away any growth this capital makes (in effect freezing the IHT liability).
Discounted gift trusts provide an ongoing income and have an immediate reduction in IHT liability.
We offer these trust solutions plus many others through our award-winning partners Sterling .
Fourthly, it may not always be practical to tie up your capital in a trust, however you’d still like to ensure your beneficiaries receive as much of your estate as possible. A simple solution would be to insure your life for the value for your IHT liability, which means when you pass away the insurance covers any tax owed on your estate and your beneficiaries retain the capital. For insuring the whole of life liability we use Zurich Assurance.
Finally, there is a whole range of small allowances available to reduce the taxable excess of your estate. One of the most valuable is business property relief for which you could qualify for by investing in AIM (Alternative Investment Market) shares. There is often a greater element of risk attached but you don’t need to use a trust and you can call on the money at your discretion.
HM Revenue practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.
All of us want peace of mind that our loved ones will be financially secure when we’re gone. This can be a complex area of advice. We believe face to face advice is important in helping you make the right choices.