The Financial Group
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THE EDUCATION SECTION Every month we look at a particular financial topic in a little more detail. This month it is Inheritance Tax (IHT). ____________________________ Inheritance   tax   (IHT)   has   traditionally   been   seen   as   a   tax   only   for   the   very   wealthy.   However,   with   a threshold   of   £325,000   (£650,000   for   married   couples   and   civil   partners)   and   the   price   of   houses   still relatively   high,   even   after   recent   corrections,   more   and   more   people   are   finding   themselves   caught   in the   net.   This   could   lead   to   many   people   having   to   sell   long-held   family   heirlooms   or   investment   assets to meet tax bills that a little bit of planning could help avoid . This   guide   is   designed   to   help   you   through   the   maze   of   IHT,   outlining   who   needs   to   be   concerned, explaining   how   it   works   and   introducing   some   of   the   allowances   you   can   use   to   help   mitigate   its   effects on your Estate. If you would like to discuss any of the points raised, please do not hesitate to contact us . Key points IHT (in a different guise) was first introduced in 1796 By 1857 Estates over £20 were taxable Estate Duty was replaced in 1975 by Capital Transfer Tax (CTT) CTT was renamed Inheritance Tax in 1986 The   first   £325,000   of   an   individuals   Estate   -   known   as   the   Nil   Rate   Band   (NRB)   -   is   not   tax   free   -   it   is simply taxed at 0% What is the IHT? Inheritance   tax   is   payable   when   someone   transfers   ownership   of   their   assets,   usually   on   death.   Each   individual   is entitled   to   a   nil   rate   band,   under   which   no   inheritance   tax   is   payable.   Traditionally,   very   few   Estates   have exceeded this nil rate band. However,   despite   recent   corrections,   the   house   price   boom   of   recent   years   has   pushed   more   people   into   the   IHT net.   Alongside   IS As,   death-in-service   benefit   ( unless   written   Trust ) ,   foreign   ho mes   or   less   obvious   assets   such   as paintings   or   cars,   this   has   boosted   the   value   of   an   average   Estate.   Indeed,   even   after   the   housing   market   started to fall in 2007, the Treasury's 2008/09 receipts from IHT payments were still up 20% on 2002/03 The   tax   rate   for   all   assets   over   the   nil   rate   band   is   40%   so   it   is   possible   to   build   up   a   large   bill   quickly.   Also, inheritance tax becomes payable relatively quickly. It is due six months after the end of the month of death. This   does   not   give   the   administrators   much   time   to,   say,   sell   a   house,   or   liquidate   other   assets   if   that   is necessary.   With   that   in   mind,   if   you   unexpectedly   find   your   estate   now   exceeds   the   taxman's   limits,   what   can   you do? Gifts & Exemptions. Although   the   Government   closed   many   of   the   loopholes   on   inheritance   tax   in   the   2006   budget,   a   number   of exemptions   and   allowances   do   remain.   Where   possible,   you   should   aim   to   maximise   use   of   these   exemptions   and allowances   if   you   wish   to   pass   as   much   of   your   hard-earned   cash   onto   your   heirs   as   possible.   For   more   info   click here . Taking practical steps! You   can   take   some   basic   steps   to   ensure   that   you   make   full   yet   practical   use   of   your   allowances   and   exemptions. Planning ahead is very important and, if in doubt, always take professional advice. Step One - the basics Making   a   Will   is   vital.   If   you   die   'intestate'   (without   a   Will),   your   Estate   will   be   divided   up   according   to   the rules of intestacy. Click here  to see a flowchart of how the rules of intestacy work in practice. This   is   particularly   important   if   you   are   not   married,   because   you   would   be   unlikely   to   inherit   a   'common law' partner's money, or even their share of your house. For   example,   under   the   laws   of   England   &   Wales   (the   Administration   of   Estate   Act   1925),   your   legal   spouse or   civil   partner,   along   with   the   personal   chattels,   receives   £250,000   and   a   life   interest   in   half   the   remainder of   the   estate   and   your   children   will   get   the   balance   at   18.   If   you   have   no   children,   £450,000   plus   half   the remainder   passes   to   your   spouse/civil   partner   with   the   chattels   and   the   remainder   to   your   parents   or siblings.   If   you   have   no   spouse/civil   partner,   it   will   pass   to   your   parents   or   then   your   siblings.   If   you   have no legally recognised family, it goes straight to the Crown. Step Two - use your allowances The   basic   allowances   available   have   already   been   briefly   outlined.   Considering   how   you   can   use   these   in advance will help you manage the assets and any cash flow associated with a 'pattern of giving'. In addition,   if   you   can   start   giving   away   some   of   your   assets   as   PETs   when   you   are   still   in   robust   health   and likely to live another seven years, it will save you worry later on. Step Three - using Trusts Trusts   have   long   been   viewed   as   an   easy   way   to   brush   off   an   inheritance   tax   liability.   If   this   were   ever   the case,   it   certainly   was   not   after   the   2006   Budget.   This   closed   down   many   of   the   tax   planning   opportunities for   investors   and   under   the   new   regime,   interest   in   possession   (IIP)   trusts   and   accumulation   &   maintenance (A&M) trusts became subject to the same IHT treatment as discretionary trusts. Transfers   into   most   IIP   and   A&M   trusts   over   the   donor's   nil   rate   band   are   subject   to   an   up-front   20%   IHT charge.   These   trusts   are   also   liable   to   a   periodic   charge   of   up   to   6%   every   10   years   and   an   'exit'   charge when   funds   are   taken   out   of   the   trust.   However,   despite   their   diminished   tax   advantages,   these   trusts   are still useful because they allow for the 'regeneration' of the nil rate band every seven years. Step Four - consider life assurance Life   assurance   can   be   a   useful   way   to   accumulate   enough   money   to   pay   your   inheritance   tax   bill   and,   when placed   in   trust   (and   funded   from   regular   income   as   part   of   a   'pattern   of   giving'),   is   also   free   from inheritance   tax.   This   means   that   you   do   not   create   an   additional   IHT   burden,   because   the   trust   keeps   that lump sum payment out of your estate.   This   can   be   particularly   useful   from   a   liquidity   point   of   view,   as   the   lump   sum   will   be   readily   available   to your beneficiaries to pay the taxes while the estate itself is being unwound.   Another IHT planning tool Discounted Gift Plans (DGTs) Discounted   gift   plans   are   basically   investment   bonds,   wrapped   in   a   trust,   designed   to   minimise,   although not   eliminate,   IHT   liabilities.   You   can   put   a   lump   sum   into   a   plan   and   then   take   up   to   5%   of   the   capital   out tax-free each year. At   the   point   at   which   you   put   money   into   the   plan,   a   designated   discount   rate   decides   how   long   you   are likely   to   live,   how   many   years   the   5%   is   likely   to   be   paid   out   and   therefore   how   much   of   the   trust   is   'yours' and forms part of your estate. The   remaining   assets,   including   any   growth,   are   free   from   tax   providing   you   survive   seven   years.   However, these   schemes   do   depend   on   having   disposable   cash,   a   need   for   income   and   a   reasonable   expectation   of surviving the full seven years. Summary Inheritance   tax   is   perhaps   no   longer   quite   the   ‘voluntary’   tax   it   was   once   considered.   However,   careful planning   to   ensure   you   take   advantage   of   all   the   allowances   and   reliefs   available   could   save   you   a   lot   of money relatively easily. It is never too early to start. ___________________________ As always, p lease do not hesitate to contact us  if you would like further details or information.