IHT-Solutions

Will the 6th December bring IHT despair

On the 6th December 2006, Gordon Brown will present his pre-Budget report to the House of Commons.

Whilst, this report is predominantly a review of Government finances, it has also in recent years given the Chancellor the opportunity to "fiddle" with tax rates and so on which could have far-reaching and an expensive impact on inheritance tax planning.

It has been suggested by KPMG, for instance, that the Chancellor may take this opportunity to raise the lifetime rate of IHT applicable to trusts from 6% to 12%. In the light of the fundamental changes to the tax treatment of trusts in this year's budget, which were not anticipated by any commentators, it is probably as well not to speculate at all and just hope for no drastic detrimental change.

I will report fully on the pre-Budget report with my observations on any changes once it has occurred.

IHT and Business assets

Gordon Brown has often stated words to the effect that he wants to create an "Enterprise friendly Britain".

Whilst many business people would argue that the Chancellor does the opposite of what he preaches, often as a result of regulation from Brussels, the Treasury has certainly kept to his word in relation to inheritance tax.

The last Conservative government gave an allowance of 100% in respect of certain types of business assets and the current government has kept and partially extended this exemption during their term of office.

In simple terms, the exemption means that generally privately owned trading business assets or shares are exempt from IHT. In addition, this exemption is extended to shares held in certain types of shares traded on the AIM market upon condition that the relevant shares are owned for at least 2 years.

The key word, however, is traded. If, for instance, as many people now do, you run a property company letting out property for rental income, the business assets exemption will not apply and IHT will be payable on the company on death. Alternatively, if you owned a car park and run it as a trading business, this would almost certainly be exempt for IHT purposes.

In conclusion, the ownership of business assets generally affords generous inheritance tax exemption and planning opportunities but professional advice should always be obtained to ensure that you are invested in the the right type of business asset.

Saving IHT with life insurance policies

A recent report by Standard Life indicates that :- "22% of advisers place less than 10% of their life protection business in trust. Another 60% of advisers place less than half of their protection business in trust, and only 10% of advisers confirmed they place nearly all of their protection business in trust".

The use of an appropriate Trust in conjuction with a life insurance policy is absolutely crucial in saving inheritiance tax and for this reason the statistics set out by Standard Life are worrying because they indicate that a large number of professional advisers may not be giving appropriate IHT saving advice to their clients.

Despite the changes to the taxation of trusts in the Finance Act 2006, if a life insurance policy is placed in the right type of trust then the whole of the proceeds can fall outside the taxable estate of the person who has died.

As this can save up to £40,000 of tax in respect of every £100,000 insured the savings potential is evidently huge.

As part of the review of all my client's affairs, I will always check the status of their life insurance policies and whether or not they are placed in some form of trust and now is certainly not the time to stop.

How you can change a Will after death to save inheritance tax

Many families are caught in a classic "property rich" but "cash poor" situation. As such their property assets exceed by some way the current nil rate band of £285000 (2006/7) resulting in a liability of 40% tax on the balance over this sum but they have little in the way of liquid funds to alleviate the situation simply.

It is, of course, possible to prepare a suitably drawn professional Will to improve the situation but what happens if no such Will has been made by the date of death.

In my professional life, this is a situation that I encounter on a fairly regular basis and the good news is that at the time of writing the law allows the Will of the deceased to be re-written for a period of up to 2 years after the date of death by way of a Deed of Variation.

In simple terms this means that so long as the beneficiary(s) of the original Will are agreed on the variation, the original Will can effectively be re-written to make the estate tax effective. At the current time this can enable an inheritance tax saving of up to £114,000.00, which is not to be sneezed at. I intend to set out some working practical examples of the way in which a deed of variation can be implemented to save inheritance tax over the coming months.

5 Simple but effective tips to save Inheritance Tax

Tax and not least inheritance tax is a complicated business involving long tax returns and reams of new tax law every year following each Budget. As such, much inheritance tax planning is complicated and ideally requires specialist professional assistance

That is not to say, however, that there are no simple solutions. Here are 5 simple but effective tips that you can act upon quickly to ease your IHT burden:-

1. Make or update your Wills. For example it is still possible for married couples or civil partners to save up to £114.000.00 in IHT (2005/06) by preparing well drawn Wills incorporating appropriate nil-rate band discretionary loan trusts. See a Solicitor who specialises in this area of work.!

2. Make use of the annual £3000 individual gift exemption. If you did not make a gift in the last tax year, the gift can be increased to £6000 tax free. You can also make tax-free gifts on the marriage of your children or grandchildren. A parent can give a tax-free gift of £5000 and a grandparent £2500.

3. Make a potentially exempt transfer. An outright gift of any sum during your lifetime will usually become tax free upon the 7th anniversary of the gift.

4. Gift any excess income. If you can clearly show and record that your net income exceeds your normal expenditure you can gift the excess free of tax..

5. Gifts to Charity. Any gift to a registered Charity is tax free. As such, if you have a taxable estate, a gift of £10,000 to your chosen Charity would save £4000 in IHT.

Welcome

The IHT-Solutions blog aims to be a leisurely guide to the workings of Inheritance tax and the way in which it may or may not affect you or or your family personally.

More importantly, I will try to keep you abreast of the latest news and developments relating to IHT and where possible give guidance as to the most practicable means of avoiding or mitigating IHT.

It is, of course, no coincidence that the rapid rise of property prices across Britain in the last decade has made IHT, perhaps more than any other, the most political of taxes. IHT and attempts to avoid it are no longer the preserve of the rich but a major issue for large sectors of middle England (Britain).

As time goes on, I shall aim keep you informed of the political manoeuvrings surrounding IHT. Without a doubt, any relaxation of IHT rates will offer a juicy political carrot to swing before the electorate by any ambitious political party.

At least I have ended on a positive note, please e.mail me with any questions that you may have and I will endeavour to answer them as soon as I am able.