Brookmill IFA Ltd

Inheritance Tax

With the dramatic rises in property values seen since the 1970s and the increases in investment values in the 1990s, many people could now find that the value of their homes and investments adds up to more than £312,000, the level at which Inheritance Tax (IHT) can become payable for the tax year 2008/2009 rising to £350,000 by 2010/11.

In simple terms, IHT may become payable when you die based on the net value of your estate and taking into account any chargeable gifts that you have made in the previous 7 years. Some gifts may even incur an immediate tax charge.

Each individual is entitled to an amount on which no IHT is payable, known as the Nil Rate Band (£312,000 for the tax year 2008/2009). If the net value of your estate is more than this figure, then the excess is potentially liable to IHT at the current rate of 40%.

Gifts between husband and wife

There is an important exemption, known as the Spouse Exemption. Any gifts between husband and wife, whether during their lifetimes or on death, are usually free from IHT. Therefore, if everything is left to the survivor on the first death, no IHT will be payable at that time.

All too often, however, the Spouse Exemption is used in isolation on the first death with the result that the Nil Rate Band, available at that time, is wasted. This often means that IHT is needlessly incurred on the second death.

How a Will can help reduce IHT?

By taking advantage of IHT exemptions and reliefs, a correctly drafted Will can save tax. If you are married, you should examine the possibility of rearranging your estates so that you are each in a position to make effective use of the Nil Rate Band on the first death. For more information contact us.

Making Lifetime Gifts

A further way of reducing your liability to IHT is to give away assets while you are alive. Some gifts are immediately exempt from tax when they are made but most will only escape tax if you live for a further seven years.

Understandably, many people are concerned about giving away capital and the income that goes with it for fear that they, or their spouse, could face financial hardship at some date in the future. Loss of control is another important factor.

Gifts with reservation

To be effective for IHT purposes, a gift must be outright and unconditional. If there are any 'strings attached', it will be considered as a 'gift with reservation' and will be rendered invalid for IHT purposes.

So how can these problems be removed?

By rearranging how your investments are held you can:
- gradually lower the value of your estate and reduce your IHT liability
- ensure that any future growth on your capital accrues outside your estate and therefore passes free of IHT to your beneficiaries
- still receive a regular tax efficient 'income' (and retain access to the balance of your original investment)
- retain a high degree of control over who will finally benefit when you die.