A Look At Inheritance Tax Planning Can Help Brighten Your Family's Future

It is a fact that the UK treasury get a significant amount of income from people who fail to plan effectively for inheritance tax. The thought of incurring a large tax liability when you die is even more disturbing because the money used to build your estate was probably taxed when first earned. The words double taxation usually spring to mind.

In 2008-09 HMRC's income from inheritance tax was 2.85bn but if the number of people undertaking effective inheritance tax planning had been greater this amount would be drastically reduced.

UK house prices have increased rapidly over the last two decades meaning many of the people who assumed inheritance tax only affects the rich now have an estate worth more than the 325,000 tax threshold themselves.

In the event of your death the value of your estate for inheritance tax purposes includes everything you own. Property, land, cars, jewellery, antiques, works of art etc. The amount by which the value of your estate exceeds 325,000 would be taxed at 40%.

Spouses or civil partners are exempted from inheritance tax unless they are domiciled abroad when 55,000 becomes the maximum tax free inheritance.

Your Will or Testament is an integral part of your inheritance tax armoury as it states who will receive the assets in your estate. If you don't make a will before you die your estate is left intestate and is divided up according to the Inheritance (Provision for Family and Dependants) Act 1975 in a way which is almost certainly not inheritance tax efficient.

Gifts are an easy way to avoid inheritance tax and are classified in the tax legislation as follows. The first are Exempt Transfers which are gifts to other persons of up to 3,000 annually at any time before death. The second are Potentially Exempt Transfers which are gifts of any amount and must be made over seven years before death to be completely exempt from inheritance tax. If a gift is made within the seven year period inheritance tax will be payable but is reduced by taper relief in proportion to how many years prior to death the gift is made. The third type are Chargeable Lifetime Transfers and are always liable to inheritance tax. A gift into a discretionary trust is an example of a Chargeable Lifetime Transfer. The final type are Gifts with Reservation which are transfers in which the person making the gift retains an interest in it and so will be classed as remaining in the persons estate for inheritance tax purposes.

Trusts can be an inheritance tax friendly way for assets to be bequeathed without losing control of them. When assets are held in trust they are held on behalf of the settlor or testator (original owner) by nominated trustees who then have legal title to the assets. Assets are held in trust solely for the benefit of the trusts beneficiaries who are named in the trust document.

There are a numerous types of trust as they are flexible in design, for example the settlor can also be a trustee and beneficiary of a trust. Trusts are an effective way of avoiding inheritance tax but a trusts tax implications can be very complex so it is always necessary to seek specialist tax advice when setting one up. The most common types are as follows. In a Bare Trust the beneficiaries have immediate and unrestricted access to the capital in the trust and income from the trust if they are over a specified age (18 in the UK). Transfers of assets in to a bare trust are treated the same as potentially exempt transfers.

An Interest in Possession trust entitles a named beneficiary to income from the trust while the capital is held for other beneficiaries. For example a property could be lived in by a testator's wife while it is held in trust until she dies when her children will take legal title from the trust.

In a Discretionary trust trustees are nominated by the settlor and are responsible for deciding when beneficiaries can take capital and income held in the trust. Interest in Possession and Discretionary trusts need to be set up by an experienced tax specialist to ensure favorable tax treatment.

Life insurance can be arranged to payout a sum equal to the inheritance tax liability upon death which obviously allows control over assets to be maintained. Life cover is usually only available to those without health problems.

Gifts and trusts are some of the main ways in which inheritance tax can be reduced meaning you can leave your assets to the people you want to benefit from them. Tax legislation is constantly in a state of flux so it is always wise to get advice from a specialist tax advisor when carrying out Inheritance Tax Planning.


Copyright (c) 2010 Richard Barlow