Inheritance tax planning

I don't claim to be an expert on inheritance tax but there are a few basic things that people should address.

The first thing you should do is MAKE A WILL! and keep it updated.

It is the middle classes who will have the hardest time avoiding this tax. If you are filthy rich, say £100 million, it's not too much of a hardship to give most of your money away while there's still a good chance of surviving the required 7 years and struggling to survive by hanging onto a couple of million. If your house and savings, that you need to live on, make up all of your assets you can't give them away. It's also difficult to shield them from inheritance tax and still have access to them.

The other thing to consider is when you snuff it the executors of your will have to find the money to pay the tax before they get access to the assets. Usually this means the executors have to borrow money and pay interest. The amount involved can easily get into 6 figures.

Suggestions

Annual gifts. You can make annual gifts out of capital of £3,000. If you didn't use all of the previous years allowance you can use the remainder in the current year. Between a husband and wife that's £6,000 a year.

Small gifts. You can make as many small gifts, of up to £250 each, as you like out of income.

Gifts out of income. It's a bit harder to prove but if you can show that gifts have come out of income without impacting on your lifestyle then those are free of inheritance tax as well. It's difficult to show that a single gift qualifies but if there is a regular pattern it is much easier.

Use your nil rate band. Most wills leave everything to the husband/wife first and then to the kids. Everything you leave to the husband/wife is free of tax anyway. By doing this you are wasting your own nil rate band, currently £275,000. So in your will you might leave an amount equal to the nil rate band to somebody else. Of course this supposes that the surviving husband/wife can survive on whatever they have plus the remainder of your estate. A better idea is to create a nil rate band discretionary will trust. Basically what you do is let the trustees (probably the executors of your estate) have complete discretion as to what they do with the money in the trust but you do a side letter explaining what you would like them to do with it. You then hope they will look after the surviving husband/wife. However there is no point in the trust just handing over the money to the survivor. Much better that the survivor uses whatever funds they already have first to keep the money in the trust out of their estate. What you have done is use your nil rate band on your death and then surviving husband/wife uses their nil rate band on their death. It's an easy way to save about £100,000 in inheritance tax.

Paying the tax

There are a few ways in which you can make provision for the executors to pay any inheritance tax due. You can buy an insurance policy. Usually these are whole of life second death policies and they are written into trust. Another way is for the executors to complete Inland Revenue form D20 asking your bank to pay funds directly from your account to the Inland Revenue.

Your home

If you have plans to try and shelter your home from inheritance tax, forget it. Gordon has changed the law so it just isn't possible.

In brief...