When you die, Inheritance Tax (IHT) will be charged on your personal wealth, together with all or a proportion of your lifetime gifts made in the preceding 7 years.
Most gifts (excluding gifts into trusts) made during your lifetime will be entirely exempt from IHT if you live for 7 years after making the gift.
The full rate of tax is 40%, but this is reduced on a sliding scale for gifts made between 3 and 7 years before your death.
IHT is payable where a person's wealth is in excess of £300,000 (£285,000 before 6 April 2007. Therefore, if you own your house and have some savings, life assurance policies or business assets, your estate could be liable.
Planning to minimise the liability to IHT should be a team effort between yourself and your professional adviser.
The sooner you plan for IHT the better. Here are some of the factors you will need to take into account:
1. Value of Assets
Have you considered the total value of all your assets? Don't forget, the value of some types of asset (e.g. property, which can change dramatically over the years).
2. Financial Security
You need to make sure that you and your spouse are properly provided for, particularly in retirement. It would not make sense to give assets to your children only to find that in later years you need to ask for some or all of them back!
3. Family Matters
You should consider what degree of control you would wish your children to have over any assets you transfer to them.
You should also work out how much your spouse would need if you were to die first. This would, of course, need to be reflected in your Will.
It may be important to find out the intentions of parents or elderly relatives with regard to their own assets.
IHT and Your Business
Shareholdings in unquoted trading companies attract Business Property Relief at 100%.
In other words, your business can normally be passed on with no IHT being paid.
Assets owned by you but used by a partnership in which you are a partner, or a company which you control, attract Business Property Relief at 50%.
Similar reliefs apply to agricultural property.
Reducing the IHT Bill
As previously suggested, IHT planning is best undertaken as a joint effort between yourself and your professional adviser. There are areas of opportunity currently available, some of which are listed below:
Transfers of assets between spouses are exempt from IHT, but other lifetime gifts may be more tax-efficient.
Annual Exemptions, currently £3,000, may be given away each year without forming part of the 7 year 'clock'.
Regular gifts out of taxed income may be tax exempt.
Any number of small gifts up to £250 per donee are exempt, as are gifts of specified amounts made on the occasion of marriage.
Lifetime gifts are potentially exempt from IHT and there is no limit on such transfers. This is an excellent way of transferring assets that you do not need to keep in your estate, although it may be advisable to cover substantial gifts by insurance against death within 7 years.
A Trust may allow the transfer of assets out of an estate for IHT purposes, but permit trustees (which may include the transferor) to exercise some degree of control over the capital or income. There may be an IHT charge, but this would be at 20% rather than 40%, and only if the transfer exceeds £300,000 (£285,000 before 6 April 2007).
Life assurance policies (unless designed to cover IHT liabilities) should be assigned during lifetime so that the proceeds do not form part of the estate on death. The most common assignees are spouses, family members and Trusts. If the assignee is a Trust there may be an IHT charge under the provisions introduced by FA 2006.
If you're not sure whether you need to take action with regard to IHT planning, try answering the following questions:
Have you made a Will?
Has your Will been safely lodged so that it can be easily accessed after your death?
Have you considered how to fund any IHT liability?
Do you have medium and long-term financial objectives?
Do you know the present value of your estate?
Have you arranged your affairs to take advantage of the IHT threshold of £300,000?
Are you sure you have the right amount or type of life assurance?
Have you considered making gifts to family members that take advantage of the IHT exemptions and relief?
Have you considered how IHT may affect your business?
Are you aware that business assets can be given away without having to pay Capital Gains Tax and IHT?
Have you considered the use of Trusts in estate planning?
Are you sure your estate plan is up to date and takes account of your personal wishes and all potential tax-saving strategies?
If you have any 'no' answers, you should consider seeking professional advice as soon as possible. If you would like to maximise your Inheritance Tax planning opportunities, please contact
Please note: This
guide is intended to provide basic information
only. Where specific advice is required, we recommend
that you seek proper professional help; either
from this firm or other suitably qualified person