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Inheritance Tax Planning
According to HM Treasury 6% of estates are currently within the charge to inheritance
tax. However, some commentators believe that 25% of the UK’s adult population
have a potential liability to Inheritance Tax and this will more than likely
continue to increase. Given the strong growth in house prices throughout most
of the country over the last few years more people than ever are unwittingly
facing an IHT time bomb. For the 2005/06 tax year HM Revenue & Customs
received a total of approximately £3.3 billion from IHT.
When should I plan for IHT?
IHT planning should be undertaken now! Currently individuals suffer IHT on any
wealth in excess of £312,000 so if you own your own house and have savings, life
assurance policies or business assets you may potentially face a large IHT bill
on any wealth over the threshold. It is important that IHT planning is undertaken
as early as possible as a number of key planning strategies require time to be
effective. This is particularly important where lifetime IHT planning is concerned
as any gifts for IHT purposes only become completely exempt from IHT if you survive
seven years from the date of the gift.
How does IHT work?
IHT is chargeable on death on the value of your personal wealth taking into account
any lifetime gifts made within seven years of your death. IHT is chargeable at
40% on the value of your estate at death less the £312,000 exemption. Any lifetime
gifts made during the last seven years prior to death are taxed at 40% less taper
relief depending on how long before death the gift was made.
What do I need to think about?
The key things to consider when evaluating your IHT position will be:-
- The value of your personal assets both now and in the future.
- Your present and future financial needs.
- Your family’s future financial needs.
Your financial needs
It is important that you consider your financial needs both now
and in the future. As IHT Planning may involve gifting part of
your current wealth to your children it makes sense to ensure
that both you and your spouse are provided for, especially in
retirement.
Your family’s financial needs
As part of IHT planning you would need to consider the requirements
of your family in the future and importantly how much control you
wish them to have over any assets that you gift to them. It is
also important to consider the needs of your spouse if you were
to die first and to this extent adequate provision would have to
be made in your will. When considering the value of your estate
it is also important to consider the intentions of your parent
or any other elderly relatives as they may wish to leave assets
to you in their will.
What if I have valuable business assets?
Generally if you run a business and you have full control of the
business then any associated assets will attract business property
relief at 100%. This will mean that on death the full value of
the assets will be exempt from Inheritance Tax. Similarly, any
assets used by a company over which you have control or by a partnership
in which you are a partner will attract business property relief
at 50%. There are similar provisions for agricultural property.
What can be done to reduce my exposure to IHT?
1. The transfer of assets between spouses and civil partners benefit
from an IHT exemption. Whilst this is a useful exemption there
are other reliefs which are more valuable. Since 9 October 2007
any unused nil rate band on first death will be available for the
surviving spouse to set against their estate on death. This means
that leaving assets to your spouse will not be as potentially problematic
as it may have been in the past. Not only will the percentage of
unused nil rate band on first death will be available to the death
of the second spouse, but they will also benefit from any growth
in the nil rate band in the time between first and second death
as the percentage is applied to the nil rate band as it stands
at second death. For example, if you have only used 50% of your
nil rate band on death then the remaining 50% will pass to your
surviving spouse. On their death, assuming the nil rate band is
now £350,000 for example. their available nil rate band will be
150% times £350,000, i.e. £525,000.
The key issue when considering where to leave your assets on death
is the potential growth in value. If, on first death, the total
joint estate is valued at less than twice the nil rate band at
that time, then any assets which grow in value more quickly than
the nil rate band will potentially lead to an IHT liability in
future. It is sensible to consider this when drafting a will and
decide whether it would be better for such assets to pass to the
next generation on your death.
2. Gifts made during your lifetime are potentially exempt from
IHT and there is no limit on the number or value of transfers that
can be made during your lifetime. This is therefore an extremely
valuable relief if you have assets within your estate that you
do not require to keep in your estate during your lifetime.
3. If you do not wish to gift assets but do not wish control of
assets to be passed over to the donees you can use a trust. In
this case trustees would retain a degree of control over both the
capital and income. The benefit of this route is that you can be
a trustee and continue to have a degree of control over the asset
but the asset will no longer be part of your estate. However it
is possible that this route will involve some level of inheritance
tax being payable but this depends on the type of trust used and
the length of time that the assets are to remain within the trust.
4. If you have any life assurance policies you should ensure that
they are assigned during your lifetime so that on death the policies
do not form part of your estate.
We hope that you have found this guide useful. If you would like some
further advice or assistance please contact
us.