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A guide to Inheritance Tax Planning

Inheritance Tax is charged at 40% on all assets owned at the date of death in excess of the Nil Rate Band. The current Nil Rate Band limit is £325,000. If your Estate is worth less than this on the date of your death (or the equivalent Nil Rate Band at that time) there is no tax to pay. If your Estate is worth more, then the Nil Rate Band is taxed at 0% and the balance at 40%. However gifts made within the seven years prior to death can affect the amount of the Nil Rate Band available and are offset against it first.

Some questions which we will need to ask you and which you may wish to consider are:

  • How much are my assets worth?
  • How much are my spouse’s assets worth?
  • How much are our joint assets worth?

There are also some simple tax planning steps which you can utilize:

Annual Exemption
Gifts of up to £3,000 in total in each year (being individual gifts in excess of £250). This is separate from the Small Gifts Exemption (see below) and the two cannot be combined to make a gift of £3,250. Unused allowance can be rolled over for a maximum of one year, but should be used as early as possible each tax year to avoid passing away without having utilized it.

Small Gifts Exemption
You can give up to £250 to any number of people in any tax year.

Gifts On Marriage
Up to £5000 from a parent to their child; up to £2,500 from a grandparent to a grandchild; up to £1,000 to anyone else.

Regular Gifts Out of Normal Income 
E.g. giving excess income away on a regular basis as part of your lifestyle.

Gifts Between Spouses and Civil Partners
Always free if you are both domiciled in the UK or both domiciled outside it. Domicile is a complicated concept but for immediate purposes, it is the country in which you expect to see out your life. 

Gifts To Maintain Your Family 
Your spouse, civil partner, or former spouse or civil partner and your children under 18 or in full time education.

Placing Life Policies in Trust
The benefit of a Life Policy can be written in Trust for a selected person or persons, but advice should be taken before doing so from your legal and/or financial advisor.

Nominating Pension Benefits
In favour of intended beneficiaries.

In addition to the above steps, we can advise you on the suitability of your circumstances for the following:

A. Trusts – discretionary, interest in possession and accumulation & maintenance trusts.

A Discretionary Trust is one in which Trustees are appointed with an absolute discretion as to when and if a beneficiary is to receive either an income or capital payment. The Trustees also have absolute discretion over the amount paid. No beneficiary has a right to any payment, so no demands can be made, but it is an extremely flexible trust and can be used for tax planning purposes.

An Interest in Possession Trust is one where a beneficiary is given the right to the income for life or the right to occupy property, and after that person’s death the income and capital is paid to other beneficiaries.

Accumulation and Maintenance Trusts are very useful hybrid discretionary trusts for those with grandchildren who wish them to benefit from their Estate. Such trusts only work from grandparent to grandchild.

Immediate Post Death Interest Trust – similar to Accumulation and Maintenance Trust with certain beneficial tax planning rules.

B. Potentially Exempt Transfers (PET) – gifts of money or assets.

If a person survives seven years after making a gift, it will normally escape any Inheritance Tax liability. If survival is less than three years the gift is counted in full. If death occurs between three and seven years, then the amount of tax the gift could attract is reduced on a sliding scale. As any tax payable is the responsibility of the beneficiary, it is important to take advice before making potentially exempt transfers.

C. Transferable Nil Rate Bands

From the 9th October 2007 a transferable Nil Rate Band arises when one party to a marriage, or civil partnership, dies and the amount of their Estate that is chargeable to Inheritance Tax does not use up all of the Nil Rate Band they are entitled to. If this were the case, the unused part can be transferred to the surviving spouse or civil partner when they die in future. This roll-over of Nil Rate Bands can mean therefore that on second death, up to £650,000 in the current tax year is exempt from Inheritance Tax.

It is very important that full records of a first deceased’s assets are kept, as they will be relevant on second death for working out a claim for relief.

In addition to the above, where we can advise you directly, there are also investment products available which can assist in the mitigation of Inheritance Tax. Whilst we are not qualified to advise you on these ourselves, we can put you in contact with one of our panel of Financial Advisors who will be pleased to advise you in connection with matters such as life assurance, and appropriate investment products.

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