What is Inheritance Tax?

Inheritance Tax (IHT) is a tax paid to the Government when you die on everything you own. As long as the total value of what you leave behind is less than £312,000 (2008/09 tax year), there won’t currently be any IHT to pay. This is known as the nil rate band i.e. from £0 - £312,000. The nil rate band for IHT and the rate of tax is usually set by the Chancellor each year in the budget.

Any assets above the nil rate band could be taxed at a whopping 40%.

Doesn’t this tax only affect the rich?

It used to, but not any longer. Soaring house prices in recent years has meant many more of us will be affected. When you also include the value of your other belongings such as your car, jewellery, furniture and so on, it’s easy to see you could be worth much more than you think.

Is IHT my problem?

Although IHT won’t affect you personally, it could be an extra burden for your loved ones when they are grieving. And do you really want to see up to 40% of the wealth you have worked hard to create in your life going to the government after your death?

The executors (or legal personal representatives) of your estate are responsible for arranging payment of the IHT. If you’ve chosen members of your family for this task this could mean even greater stress for them at a difficult time.

How do I know my estate is likely to have a potential IHT liability?

You can work out potential liability to Inheritance Tax by using our online IHT Calculator to see how much you could potentially be giving away to the taxman.

Can I do anything to help reduce IHT?

The good news is yes. There are solutions available.

Trusts

Trusts are a way of getting assets out of your estate but still having some control over what happens to them if you are a trustee. The two main benefits of putting money into Trust are:

• These assets may not be included in any IHT calculations
• Money held in trust can go straight to the beneficiaries after your death as they won’t be held up by Probate (or Confirmation).

This is a complex area requiring specialised advice.

Wills

You may be surprised to learn that you can write your Will in a way that could reduce tax. By leaving your estate to your beneficiaries in the right amounts, you could protect them from the headaches associated with having to pay an IHT bill.

If you’re married (or you and your same sex partner are registered as civil partners from 5 December 2005), the trick is to make good use of the nil rate band whilst you and your spouse are still alive.

It may seem sensible to leave your estate to your spouse because no IHT is payable on assets left to your husband or wife. However, you could just be delaying the IHT problem, or even making it worse.

Apex CB Financial Planning would be pleased to introduce you to a legal adviser at Ellis Jones Solicitors who can advise you on the benefits of making a will and other legal matters. Apex CB Financial Planning acts as an introducer for Ellis Jones Solicitors and takes no responsibility for advice that they may provide.

Discounted Gift Trusts

A discounted gift plan is designed for customers who want to gift money to a trust as part of their IHT planning strategy, while retaining a right to future set payments from that trust which are often called "income".

The role of the discount is only relevant if the customer dies within the first seven years of creating the plan. In that case, the amount added back into their estate for IHT purposes might be less than the original cheque they wrote, hence the name "discount", which can reduce IHT. The value of the discount depends on the age, health and sex of the customer as well as the level of withdrawals selected.

The discounted gift trust may be suitable for:

• Those who have surplus capital which they are certain that they will never require in the future, but from which they do need to obtain regular withdrawals.
• Individuals who are confident that they are likely to live at least 7 years.

Following the investor’s death the trustees have the flexibility to choose to retain the investment within the trust, encash the investment or assign out the policy to adult beneficiaries. This can be a significant advantage, since any encashment of the policy will trigger a chargeable event for income tax purposes.

Inheritance Tax Relief Portfolios

A number of AIM Portfolio investments have been introduced to take advantage of the Business Property Relief (BPR) available on shares listed on the Alternative Investment Market (AIM). Full exemption from inheritance tax on the capital invested is achieved after the shares have been held for 2 years.

Business Property Relief (BPR) was introduced in the 1976 Finance Act and amended in subsequent years. The 1996 Finance Act amended the provisions making it significantly more attractive to private investors who are concerned about potential inheritance tax liabilities. Under the amended rules any qualifying investments held for two years or more at the date of death will benefit from 100% business property relief, i.e. their value will effectively be disregarded for inheritance tax purposes.

Apex CB Financial Planning can help you to find a suitable solution to your inheritance tax problem, taking into account your current and future needs. This is a highly specialised are of planning and should not be entered into without financial advice.

For information on tax in general, please click here