Gardner Leader

Inheritance Tax planning

‘The avoidance of taxes is the only intellectual pursuit that carries any reward.’

Whether or not you agree with John Maynard Keynes, most people would accept that, having paid a lifetime of taxes, it makes sense to take a few simple steps to ensure that no more tax is paid on death if it is avoidable.

Let’s start with some Inheritance Tax (which is always abbreviated to IHT) basics.

If the value of everything you own when you die exceeds the IHT threshold (which is called the ‘nil rate band’), the excess will be taxed at 40%.

Anything left to a spouse or civil partner is exempt as are gifts to charity. Reliefs apply to certain types of business and agricultural property which are very useful.

It is now possible to make a claim to transfer any unused nil rate band (NRB) on an individual's death to the estate of a surviving spouse (or civil partner) who dies after 9^th October 2007. This will apply when the NRB of the first of a married couple to die was not fully used. On the second death the unused amount, (calculated as a proportion of the NRB applicable on the first death) is added to the surviving spouse's NRB. The claim can be made whenever the first death occurred, provided the second spouse dies after 9^th October 2007.

So, for example, if the first spouse died at some time past leaving everything to the survivor, the NRB will be 100% unused by virtue of the spouse exemption. If the survivor dies in say 2010 when the NRB is £350,000, that would be increased by 100% to £700,000. However, if the first spouse died in May 2007 when the NRB was £300,000 and had left £150,000 to the children, only 50% of the NRB could be transferred, so the survivor's executors in the above example could only claim £525,000.

It will, therefore, be important to keep records of gifts made out of the estate of the first spouse to die. Where the death occurred years previously this may present a difficulty. Any lifetime gifts made within 7 years prior to the date of death are added back into the estate. Furthermore, any ‘gifts’ in which the use of the item gifted was retained by the person who gave it, are not effective to avoid IHT, so for example, its no good giving the house away if you still live in it.

So, the simple way to avoid the beneficiaries under your Will having to pay IHT is to make sure you die with an estate worth less than the nil rate band (or twice the NRB if a transfer claim can be made from a deceased spouse's estate)! Easier said than done if you own a property and have built up savings for your old age and then find you have nothing to spend them on!

But do not despair. We have some answers!

For a start everyone has a nil rate band so if you are married or civil partners, make sure that a transfer claim can be made by the executors of the second spouse's estate.

Think about investing in business and agricultural property, which qualifies for relief once you have owned it for 2 years. If there is business or agricultural property within the estate of the first spouse to die, consider using the relief by gifting it to children or a discretionary trust.

If you have received an inheritance within the last 2 years, is there any scope for varying the distributions made under the Will or intestacy?

Try to reduce the value of your estate by making effective lifetime gifts. Gifts of up to £3,000 in any one tax year don’t count if death occurs within 7 years; nor do regular gifts out of surplus income of whatever amount.

However, there is another catch when it comes to lifetime gifts. Gifts of assets other than cash, like shares and property, may result in an immediate liability for Capital Gains Tax (CGT). A gift is treated as a disposal for the value of the property at the date of the gift. CGT will be charged on the difference between that and the value when it was acquired (plus a small amount for indexation and taper relief until that is phased out in April 2008).

Having read this you may think that IHT planning is something of an intellectual pursuit, but the tax savings can be considerable relative to the costs of doing it.

For more information please email us.

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