Inheritance Tax

Inheritance Tax is often called the 'voluntary tax' because planning can often reduce or eliminate it altogether. It is however becoming a real problem for the heirs of those who have failed to plan!

We are in an unusual situation for Inheritance Tax (IHT) planning that we have not seen before. This presents both a problem and an opportunity.

The Problem
Many more people have become IHT tax payers- just by the increase in the value of their homes. Many well meaning couples who have tried to deal with this by putting their homes in a double trust type arrangement have seen their efforts thwarted by the Inland Revenue. The Inland Revenue is in the process of landing all these well intentioned individuals with an income tax charge for living in their own homes.

IHT is charged at 40% on estates over £275,000 (2005/6). Moreover, many of those in this position have portfolios of shares, unit trusts, OEICs etc, which they hold either directly or through PEPs & ISAs. Although these portfolios may be showing losses at the moment, as markets continue to recover, 40% of the increase may go to the Chancellor in IHT.

It has always been possible to just give money away to avoid IHT. Normally, provided that you live for seven years after making the gift, you avoid IHT. However, it is not normally practical to do this. Most people need some or all of their capital to live on and thus need to exercise control. Most married couples leave everything to each other and then to the children and grandchildren.

This seems the most practical way, yet it gives the Chancellor £105,200 more in IHT. This happens because by giving everything to each other, one nil-rate band of £275,000 is wasted. 40% of the wasted nil-rate band of £275,000 is £110,000. This happens because whenever married couples give money to each other, this is ignored for IHT calculations.

The Opportunity
Handled correctly; it is possible for married couples to give money to each other in a way that makes use of both IHT nil-rate amounts of £275,000. Putting all or part of this money into an IHT mitigation arrangement means that the Chancellor will not get his 40 %. Immediate IHT savings are possible as well as retaining control of capital and access to income.

What can be done
We offer a Personalised Inheritance Tax Report for those who have joint estates worth in excess of £500,000. Please contact us and we can arrange a free initial report for you. It may be better to discuss certain aspects of your IHT situation before preparing your Personalised Inheritance Tax Report.

And when?
In 1995, when the present government were in opposition, they did not put much of their intended policy in writing. One document that was published in November 1995 was entitled 'Tackling Tax Abuses, Tackling Unemployment'. This document savaged the perceived 'voluntary' nature of IHT, and recommended substantial tightening of the rules. Although nothing has been done so far, this tax is under review. It is quite possible that the government will tighten the rules for this 'voluntary' tax, following lower than expected revenue from taxation. As retrospective legislation is contrary to Human Rights, action taken before any change should ensure that you benefit from the current rules.

Obtain immediate IHT savings whilst retaining control of capital and income must be as close as you can get to having your cake and eating it. Moreover, if you have an existing portfolio which you do not wish to disturb, you can make IHT savings without disturbing your current holdings. For further information please contact info@ac-financial.co.uk