Inheritance Tax (IHT)

Inheritance Tax is hated by most, as it effectively taxes capital that has already been subjected to tax, often many times.

However, with careful planning it is possible to immediately reduce this liability and eventually remove it entirely.

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

The Problem

Many more people have become IHT payers - just by virtue of the increase in the value of their homes over many years. Often, well meaning couples have tried to deal with this by setting up discretionary trusts on death (Will Trusts) so as to utilise both Nil Rate Bands under the old system. If this is the case it may be wise to revisit your previous tax planning as it may not now be appropriate as the rules have changed enabling the first unused Nil Rate Band, or part thereof, to be conserved until the second death (Spouse or Civil Partner). It may be sensible now not to leave any part of the Nil Rate Band on the first death as the allowance tends to increase over time and both allowances can be used which was not the case when Will Trusts were used.

IHT is charged at 40% on estates over £325,000 (2009/10). Moreover, many of those in this position have portfolios of shares, unit trusts, OEICs etc, which they hold either directly or through 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. A word of warning here, most investments are eligible to be included in trusts except for ISA’s as these have to be held by a qualifying UK citizen. This means that the tax savings made on income/capital gains could draw your beneficiaries into the IHT net with a 40% tax bill on all of the ISA capital whether or not it is in profit!

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.

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 £325,000 ( tax year 2009/10). 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 reserving income

What can be done

We offer a Personalised Inheritance Tax Report for those who have joint estates worth in excess of £650,000. Please contact us and we can arrange a free initial consultation for you. This will quickly establish the relevance of specific planning. It may be better to discuss certain aspects of your IHT situation before deciding whether you actually require specific planning.

And when?

Planning for IHT is almost always more efficiently done during a period of depressed asset prices as by waiting until a recovery in values will exacerbate the problem creating a higher liability. Better to protect assets now within an IHT protective cocoon and avoid the higher value tax rate later.

Obtaining 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 us on 0800 730 3180 0r by email at info@ac-financial.co.uk