Inheritance Tax Planning

IHT is charged at a flat rate of 40% on your estate at death. Your estate will include all the assets you own, such as your house, cash in bank accounts and personal belongings, but will also include any foreign assets, any assets you have given away in the last seven years, assets which you have given away in which you still retain an interest, and also the capital value of trust funds from which you receive an income.

Some exemptions help to reduce the IHT that will be payable. The main exemption is the Nil Rate Band. From April 2009 this is £325,000. This means the first £325,000 of your estate will be exempt from tax - however, if your home or your share of your home is included in your estate, it is easy for your estate to exceed this threshold.

There are various methods of planning your estate to ensure it is both efficient for IHT purposes and provides for your beneficiaries properly. A professionally drawn Will is always the foundation of IHT planning.

Exemptions and Reliefs

• Exempt Beneficiaries - in your Will, you can leave assets to beneficiaries who are exempt from IHT. For example:

• Transferable Nil Rate Band - if you are married or in a civil partnership, any percentage of your Nil Rate Band that is not used on your death can be transferred to your spouse or civil partner. Therefore, as a gift to a spouse or civil partner is exempt from IHT, leaving the whole of your estate to them means your full Nil Rate Band would be unused, so your surviving spouse’s own nil rate band will be doubled.
• Business and Agricultural Property Relief - if business property or agricultural property form part of your estate, careful planning can ensure that relief of up to 100% is available on these assets. However, ‘business’ and ‘agricultural’ property is specifically defined, and there are certain restrictions and conditions so eligibility should be discussed with us.

Planning using your Will

• Life interest trust - this can be set up in your Will. By leaving assets on trust for life to your spouse, then on their death to any children, you ensure that the assets are not only protected to pass to the children, but also protected from assessment for your spouse’s care home fees should care become necessary in the future. These trusts can also be effective for IHT purposes.
• Discretionary trusts - due to the Transferable Nil Rate Band these are not as common as they used to be, yet in certain circumstances are still very useful for IHT planning. Pilot trusts for minor beneficiaries of Wills can be extremely useful for IHT planning as a number of separate trusts can be set up, for example a trust for each beneficiary, each trust benefiting from its own IHT nil rate band.

Lifetime Planning

• Certain financial products can remove capital from your estate whilst at the same time providing an “income”. You should always discuss financial products with an independent financial advisor before you invest. There are various different types of products available, for example:

- Investments that qualify for business property relief
- Life assurance
- Discounted gift trusts

• Lifetime gifts will also remove capital sums from your estate to help reduce your IHT liability. You should always be sure you still have access to enough capital before making any gifts. Certain lifetime gifts are exempt from IHT, for example:

- small gifts
- certain gifts on marriage
- £3000 annual exemption, which can be backdated for one year
- normal expenditure out of income, which leaves you with enough income to maintain your normal standard of living
- most gifts made more than seven years before your death. Gifts in the seven years before your death, apart from the exemptions mentioned above, will become chargeable to IHT on death.

• Pilot trusts set up to receive funds such as death in service benefits, which are then held on trust for named beneficiaries outside of your estate.
   
• Life assurance trusts set up to receive funds from life assurance policies

Next steps

Depending on your circumstances, some of these estate planning methods will be more effective than others.  Even with the simplest estate there will usually be ways to maximise available exemptions and minimise tax. Therefore, if you would like to discuss the options available and the most appropriate planning tools for your specific situation, please contact a member of our Private Client Team.
 
Useful Information

Wills, Inheritance Tax and Capital Gains Tax: An Aide Memoire for Commercial and Agricultural Clients

Life Assurance Trusts

The Use of Pilot Trusts with Death in Service Benefits