Inheritance Tax Planning

How to avoid the Inheritance Tax Trap

Can I do anything to help reduce Inheritance Tax?

Fortunately, yes you can. There several ways, described below.

Gifts

By planning several years ahead and using gifts and exemptions, you can help ensure that your family’s inheritance goes to your loved ones, and not to the taxman.

There are two main ways of "gifting" your assets:

1. Exemptions

   The following are some of the main exemptions :

   • Transfers between spouses
   • Annual gifts of up to an aggregate value of £3,000 in any one tax year
   • Gifts from income
   • Small gifts up to £250
   • Gifts on marriage
   • Gifts to charities & political parties

2. Potentially Exempt Transfers (PETs)

   Any gifts not covered by the above are called Potentially Exempt Transfers (PETs).

   The Seven Year Rule

   • Any assets you "gift" to other people fall outside your estate after 7 years and are not subject to IHT.
   • If you die before seven years have passed, the value, over the nil rate band, will be subject to IHT on a sliding scale. This ranges between the full amount, in the first three years, to 20% of the total bill, in year six.

   PETs are very useful in reducing IHT, but there are restrictions in the rules.

   • Gifts must be outright and have 'no strings' attached to be eligible. For example, if you decided to give ownership of your house to your children, but continued to live there, without paying rent, this may be considered a 'gift with reservation'. In this case, your house would still be considered as part of your estate and subject to Inheritance Tax.

Trusts

What is a trust?

A Trust allows you transfer money out of your estate whilst still maintaining some control over what happens to it. As a 'donor', you can impose restrictions, such as when the money is released and how it can be spent.

The two key advantages of trusts are:

1. Money held in trust is usually not included in IHT calculations.
2. Money can be transferred to your loved ones more quickly after your death, as it will not usually be held up by probate.

Will I still have access my money while I am alive?

This depends on which type of Trust you choose. If you maintain access to the money, this may still be considered to be inside your estate and therefore not IHT effective. The type of Trust you choose will depend on your needs and is best talked through with a qualified adviser.

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 loved ones, in the right proportions, you could protect them from having to pay an IHT bill.

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

Remember:

• Take professional legal and/or financial help when writing or updating a Will
• Always  be specific and clear when naming beneficiaries
• Clarity is key to help to prevent any challenges to your Will
• Make sure that your Will is a secure place and that some one you trust knows where to find it.

The Financial Services Authority does not regulate Will Writing.