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Inheritance Tax
(IHT) - is sometimes
referred to as a "stealth" or "voluntary tax" because more people pay it
than need to. Recent rises in house prices mean that even more people are at
risk of having to pay it. Discussing inheritance tax planning can be
difficult as it raises uncomfortable issues. However, by spending a little
time, you can avoid leaving your money to the Inland Revenue. The
following steps will help:
You could be at risk of leaving your family a large IHT bill if what you own (your assets) minus what you owe (your debts) amounts to the IHT threshold (known as the nil rate band). If the value of your house has risen and you have nearly paid off your mortgage, or it is covered by a life policy, then you could be nearer the threshold than you think. The table below will help you work out if you already have -or could have- an IHT liability. Simply add up your assets, deduct your liabilities and then deduct the IHT nil rate band (currently £312,000 tax year 2008/2009), the resultant figure is then multiplied by 40% to calculate the tax due to the Inland Revenue
By completing the above calculation you will have identified whether you have an immediate IHT liability or if you are near the threshold. If you have or will shortly have a liability to IHT you need to take action now to avoid leaving your family to pick up the bill. What do you want to achieve ? Who do you want to benefit from your estate ? The first thing to decide is who should benefit from your estate. Some types of estate planning pass the tax liability on to the person who benefits, so you may want to skip a generation and pass the estate to your children or grandchildren, for example.If you want your children/grandchildren to benefit, are they from your current marriage or a previous one ? It is important to have a Will . However, setting up a trust may also be useful, as if people believe they should have a greater share of your assets, they could contest your will. Do you want anyone outside your family to benefit ? If you want to leave money to a charity or political organisation then you can do this now, or in your will, as these sorts of gift are exempt from IHT. If you want other individuals to benefit, you need to plan carefully to ensure you reduce any potential IHT as much as possible. Do you have a Will ? If so, when did you last update it ? A Will is the first step in effective estate planning and particularly important if you have unusual family circumstances or are not married. If you do not have a Will - some surprising people could benefit - see our intestacy diagram If you want your partner to benefit from your estate are you married ? If you are married then any assets you give away to your spouse are exempt from IHT as long as they live permanently in the UK. However, passing assets to your spouse simply delays the IHT liability until their death, so it is still important to minimise this. If you are not legally married then you will also need to plan carefully to ensure you reduce any potential IHT. What do you plan to use any PEPs/ISAs for ? If you are using these for capital growth then you should remember that the value of these plans is counted for IHT purposes. This means that 40 % of the entire investment including growth could go to the Inland Revenue. Do you have a company pension scheme ? Is the benefits list up to date ? If you do have such a scheme you need to make sure that you regularly update the benefits list (which details who your pension benefits will be paid to if you die), foe example if you remarry or on the birth of children. If you have another type of pension, you may be able to take action to ensure that no IHT will be due. This will depend upon the type of pension yo have. Can you afford to give money away absolutely or will you need access to it ? Although estate planning can reduce IHT, it is important to think about future needs to ensure that such plans would not tie up important funds when needed most. When do you plan to retire and where to ? You will have to consider whether you will need additional income in retirement. If you plan to retire abroad then you assets will be taxed differently than if you retire in UK, so you may need to plan differently. Do you own your home solely or jointly ? If it owned jointly, it is important to plan so that your partner can continue living there and would not run the risk of having to sell to settle any IHT bill. How close to paying off your mortgage are you ? Ironically, having paid off your mortgage before you retire can be bad IHT planning as the full value will then be included in your estate. Debt can be good for IHT planning. How can you reduce your liability ? Having determined how much your potential IHT liability is and what you wish to achieve for your family we invite you to contact us to discuss the ways in which we can reduce this liability in line with your wishes.To request more details and the necessary forms and information to commence the preparation of your attack on your IHT liability - either complete the information & request form or e-mail us and mark the enquiry IHT
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