Initial Factors

Inheritance tax (IHT) is payable on the death of an individual, or in some cases when they place money into a trust or a company. The level of tax payable is based on the value of an individual’s estate when they die (i.e. the value of assets owned minus any liabilities), this can also include some gifts they may have made previously.

Inheritance tax is payable at a rate of 40% on the value of an individuals assets above the Nil Rate Band (NRB), which is currently £325,000. No inheritance tax will be due on an estate worth less than £325,000. Following the pre-budget report in October 2007, this is now effectively doubled to £650,000 for married couples and civil partners as individuals are able to set any unused NRB on their spouse’s death against their own estate in addition to their personal NRB.

Recent years have seen growing numbers of people with assets worth more than the NRB and who are therefore seeing their estate become subject to IHT on their deaths. Your estate could include more than you realise. It is often easy to dismiss IHT as something that may not affect you as your property may not be over, or much over, the IHT threshold. However with all your other assets, such as investments, life cover, bank accounts, as well as physical assets such as cars, furniture and family heirlooms, many estates are considerably over the threshold without the individuals being aware of it.

Lord Jenkins of Hillhead saw IHT as "essentially a voluntary levy paid by those who distrust their relatives more than they dislike the Inland Revenue". He felt and we agree, that with careful planning nobody needs to pay Inheritance Tax.

It is worth having a meeting with one of our skilled advisers today to see whether or not this is an issue that does affect you and what you can do now to help reduce a future liability. Doing some forward planning now may save your family a small fortune in the future.

Which Solution?

There are many different options and solutions to address the effects of Inheritance tax. Detailed below are a number of options available to you. It is possible that none, some or a combination would be required to achieve your goals – seek advice to ensure the most appropriate solution is produced.

Factors to consider when considering Inheritance Tax Planning

Making a Will

It is essential that any client undertaking Inheritance tax planning has a Will in place, as this will ensure that on death, their assets will be distributed in accordance with their wishes, If someone dies without making a will, their assets will be distributed in accordance with the laws of intestacy, which may not be as they wished and may not be as effective for inheritance tax planning.

Deed of Variation

Where a client has received an inheritance within 2 years they may be able to use a deed of variation to give the inheritance to someone else, with no IHT implications.
A deed of variation allows beneficiaries of a will to change its contents after the death of the individual concerned. This must be executed within 2 years of the date of death and all beneficiaries must be in agreement.

The deed must state that it has effect for inheritance tax as if the deceased had made the changes prior to death and this must be signed by all beneficiaries. This may be useful if a client inherits money or assets they do not need, and the inheritance increases their own liability to IHT. In such circumstances the inheritance can be redirected elsewhere.

Life Cover

Consideration should be given to arranging a whole of life policy under trust to provide a lump sum to pay any IHT arising on a client’s death. These policies can be guaranteed, where the premium will be fixed for life or arranged on a maximum basis or standard basis, where the premium is reviewed and may increase.

Premiums for such plans will be considered as gifts, so care should be taken to ensure they are treated correctly, either as exempt gifts (via annual allowances or normal expenditure relief) or PETs/CLTs depending on the type of trust used.