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.