Estate Planning

Don’t leave your heirs facing an unexpected tax bill
An increasing number of households could be at risk of paying inheritance tax (IHT). The 40 per cent tax charge is payable on the value of an estate over the nil-rate band threshold, £312,000 for an individual and £624,000 for a married couple, based on the current 2008/09 financial year.

When you add up the value of your property, savings and investments and other belongings, you may be surprised by how much your estate is actually worth and you could therefore be looking at a sizable tax bill.

There are a number of ways in which, with some careful planning, you could mitigate or potentially remove an IHT liability against your estate, thereby ensuring that your heirs are not left with an avoidable tax bill.

Unfortunately, though, some families do not start thinking about IHT planning until it is too late. The first thing to do is to work out if the tax will be an issue. Start by adding up the value of your savings, investments, properties and other personal possessions. You also need to include funds held in an Individual Savings Account. Although the proceeds are tax-free during your lifetime, they are subject to death duties.

When an estate passes between a husband and wife, or from one civil partner to another, IHT is not payable. In addition, married couples or civil partners can transfer the unused element of their IHT-free allowance to their spouse when they die. By doubling up the allowance this financial year, a couple would escape IHT on £624,000.

During your lifetime, giving away assets is a simple and legitimate way to reduce the value of your estate, as long as you do it in time. You can gift up to £3,000 a year and it is immediately exempt from IHT, or £6,000 if you did not make a gift of this kind in the previous tax year.

A married couple giving for the first time could, therefore, hand over £12,000 to their children in one year. After that, the maximum for a couple is £6,000. You could also escape IHT by giving £250 to any number of people every year, but you cannot combine it with the above exemption.

Parents can give £5,000 to each of their children as a wedding or civil partnership gift. Grandparents can give £2,500 and anyone else £1,000. Gifts of any size to political parties or charities are also exempt. If a gift is regular, comes out of income and does not affect your standard of living, any amount of money can be given away and ignored for IHT.

It is possible to make further tax-free gifts known as potentially exempt transfers (PETs), but you have to survive for seven years after making the gift. If you die within seven years and the gifts are valued at more than the nil-rate band threshold, it may be possible to apply taper relief. The tax reduces on a sliding scale if the gift was made between three and seven years earlier.

You can give away most assets, but these have to be an outright gift from which you can no longer benefit. This excludes giving away your family home. If you hand it to your children and continue to live there, you have to pay a market rent, which can wipe out the tax benefits. It is important to make a note of such gifts to pass on to the executor of your will.

Loan trusts are designed for people who cannot give away assets because they need to live off the income, but want future investment growth to be IHT-free. This type of arrangement is very specialist and you should always receive the appropriate professional advice before embarking down this tax-planning path.

In most cases, IHT must be paid within six months from the end of the month in which the death occurs, otherwise interest is charged on the amount owing. Tax on some assets, including certain land and buildings, can be deferred and paid in instalments over ten years.

Levels and bases of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor.