IHT MITIGATION

Many people have generated significant wealth over recent years through property appreciation , the sale of  a business, accumulated savings or inheritance.  Whilst wishing to retain control of their assets they are also concerned that a significant proportion of their wealth may not be passed onto the next generation due to the Inheritance Tax which is charged at 40% on most of their estate.  

WHAT SHOULD BE MY FIRST STEP IN IHT PLANNING ? 

 

Your initial step should be to ensure you have correctly drafted wills.  If you have had nil-rate-band planning done before the pre-budget speech on October 9th 2007, this will need reconsidering in light of the changes.  If you have not undertaken this planning, a will sets out your preferences for who receives what from your estate after death and trust planning can further reduce your inheritance tax liability.   In addition to this, correctly drafted trusts can prevent the sale of your home to pay long term care fees in the future, as well as avoiding your children being disinherited as a result of remarriage.  In any event, your wills should be reviewed regularly to keep pace with changes in legislation and in your family circumstances. 

 

WHAT IS A NIL RATE BAND ? 

 

This is the entitlement every individual has to pass on to their chosen beneficiary without paying inheritance tax.  For the current (2008-2009) tax year, the NRB is £312,000.  Please note that between spouses and civil partners, there is no inheritance tax.  Therefore, any amount can pass to the surviving spouse on first death without incurring a tax bill.

What differences do the pre-budget speech make to our circumstances? If you are a married couple or civil partnership who had used your nil rate band (NRB) planning before 9th October 2007 within a will, the following would apply: Mr Smith dies and his NRB is used to put £300,000 into trust now, then his surviving spouse will only be able to use their NRB upon death, which in 2010 will be £350,000, totalling £650,000.   If, however, the first NRB was not used when the first spouse died and was rolled up with the seconds spouse's nil rate then £700,000 of the couples estate would be exempt from IHT after 2010.  A 40% tax on the difference of £50,000 would mean an additional tax of £20,000 tax bill if the trust was used. This example highlights the need for existing wills to be reviewed, as the previous planning could now be counter-productive. Beyond making wills, how can we further reduce our future inheritance tax bill? 

 

You can gift assets of up to £3,000 each year and the value will immediately be deducted from the estate value.  Any assets valued in excess of this amount will become Potential Exempt Transfers (PET’s) and will therefore be included in the estate within 7 years of the gift.  After 7 years they no longer form part of the estate.  Additional gifts can be given to couples about to marry and there are other rules governing gifts from income rather than from your capital savings.  Our advisors can assist you in utilising these rules.

 

INVESTMENTS CAN BE PLACED INTO TRUSTS , the most popular of these being a Loan Trust or Discounted Gift Trust.  To determine which trust is the most appropriate, our advisors will review your circumstances and plan investments to suit your needs for access to the income and capital, both of which can be arranged for you.  One of the key benefits is that growth on your investment immediately falls outside the value of your estate and therefore is not taxed under the inheritance tax rules.  The level of risk on these investments can range from deposit based to shares in AIM (the alternative investment market) subject to minimum investment levels, thereby ensuring there is an investment type to suit everyone.

 

It is also possible to insure against any future IHT liability by taking out a Whole of Life insurance policy for a sum assured equal to the potential liability and writing the policy in a trust in favour of the potential beneficiaries.

WE OWN OUR HOME JOINTLY.  IS THIS DISADVANTAGEOUS ? 

 

Often the largest asset owned is the family home. Husbands and wives are usually, but not always, "joint tenants". Legally, this means that each party owns 100% of the property, having further implications for long term care planning.

 

However, where the property is held as "tenants in common" (where each spouse owns a specific proportion of the home, often 50% in each name) either party may make a gift in a Will of his or her share of the property. It is therefore worthwhile considering "severing" the joint tenancy in the house, and each party giving his or her share in the house to the children under trust with the right for the surviving spouse to live in the property until his or her death.  

These are just some examples of Inheritance Tax planning and professional advice should always be taken.

So to find out more about how you can mitigate your potential Inheritance Tax liability just complete the form below or contact one of our specialist advisers on 0845 6039376 for an immediate reply.