inheritance

Estate Planning

"Inheritance Tax is, broadly speaking a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue"

This goes to prove that there are many people who are prepared to gift the Inland Revenue a considerable portion of their estate.

The beneficiaries of the estate will be taxed on the value of the estate along with certain gifts made from the deceased’s during the last 7 years.

Each individual has a Nil Rate Band where Inheritance Tax is taxed at a rate of 0% on the first £312,000 (Tax year 2008/09), with the excess being taxed at 40%. This Nil Rate Band and will include any transfer of assets/ gifts (also known as Potentially Exempt Transfers) made during the last seven years.

A simple example shows that an estate worth one £1,000,000 could have an Inheritance Tax liability of £275,200.
Value of Estate- £1,000,000
Nil Rate Band- £ 312,000
Estate liable to tax- £688,000
Charged at 40%- £275,200

This means that before probate can be the beneficiaries must find £275,200 to pay the Inland Revenue their slice.

It should be pointed out that married couples or civil registered partners both have a Nil Rate Band, Recent legislation means that the survivor of the couple automatically qualifies for two full nil-rate bands if none of the nil-rate band was used at the time of the first death.

Making a will is the first stepping stone to successful Inheritance Tax planning as this will ensure your assets pass to your desired beneficiaries.

There are exemptions that can be applied:

- Transfers between husband and wife during lifetime and death are free from Inheritance tax.

- Individual annual exemption of £3,000 (£6,000 if this allowance is not used in the previous year).

- Gifts on marriage - £5,000 to children, £2,500 to grandchildren and £1,000 to friend etc.

- Small Gift Exemption of £250 to as many people as you like during each tax year. Gifts in excess of £250 must be offset against the annual £3,000 exemption

- Potentially Exempt Transfers (PETs) where as long as no benefit is derived from the gift will fall outside your estate after seven years.

- Gifts to charities, political parties and for national benefit are also deemed to be free of Inheritance tax.

- Normal Expenditure - a transfer is exempt if it is shown to be regular, out of income without affecting the donor’s standard of living.

Trusts are another valuable tool, which can be used to mitigate against the build up of Inheritance Tax. Basically trusts allow you to place monies and/or assets for the benefit of individuals or a certain purpose.

To create a trust there must be:

- Certainty of intention - the settlor must indicate an intention to set up a trust.

- Subject matter must be clear - it must be clear what asset will be held in trust.

- It must be clear for whom the trust is being created.

There are three main types of trust that are commonly used. These are:

- Interest in possession – You form a trust for the benefit of your children, upon their death assuming the trust is still intact, the asset can be passed to their children.

- Accumulation and Maintenance - Quite inflexible, set up for a specific purpose. Such as grandparents who may want to help with school fees. These trusts are no longer available. Existing A&M trust have been affected by the recent Finance Bill and will effectively become discretionary trusts from 6th of April 2008.

- Discretionary - the most common where the settlor names a beneficiary who in turn has no right to income or capital without the permission of the trustees.

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