article
Estate planning in the post coalition era
16 July 2010
One of the earliest casualties of the new coalition government
has been the increase in the threshold for Inheritance Tax (IHT).
The Conservative’s campaign policy to increase the threshold to £1
million would have released many families from the tax trap but the
prospect of tackling Britain’s £163 billion deficit has resulted in
such an increase being axed.
In his emergency budget, Osborne left the nil rate band
threshold (NRB) at £325,000 (£650,000 per couple) and it is likely
to remain that way for the foreseeable future. Everything over the
NRB is taxed at 40%.
Whilst the housing market may have dipped over recent years,
average family wealth has increased significantly over the last
five decades. As a result, many more families fall into the IHT
bracket. e.g. a family with a house worth £600,000 and savings
(including inheritance from parents) of say, £300,000, would have
an IHT bill of £100,000.
Despite the NRB freeze there are still a number of ways to
reduce tax:
- make a will - one in three people fail to
make a Will, wrongly believing everything passes to their spouse.
This is not necessarily the case. If you die intestate the law
stipulates which relatives benefit and this could trigger a tax
charge. Making a will can ensure that your assets pass
tax-efficiently.
- gifts - lifetime planning can reduce your
tax bill. If you make a gift and live for 7 years, no IHT will be
payable.
- life policies - review your documents and
check that they are written in trust to shelter them from IHT.
- annual allowances - make use of personal allowances. You
can gift up to £3,000 pa (plus previous year if unused) – e.g. a
couple could gift up to £12,000 without IHT implications.
- small gifts - any number of £250 gifts
can be made (provided not more than one gift to any one individual)
without any IHT consequences.
- regular gifts from surplus income - if
you have surplus income you can gift this without IHT implications
and without the need to survive 7 years provided it does not affect
your standard of living. Consider making regular payments to cover
nursery, school or university fees.
- wedding gifts - if you have a child who
is getting married you can gift up to £5,000 or £2,500 to
grandchildren and £1,000 to anyone else (potentially up to £40,000
saving £16,000 of tax). The key is to plan early and take
professional advice.
- business property and agricultural property
relief - if you run your own business the net value
of relevant property might qualify for relief of 100%. Similarly,
agricultural land and property may attract relief. Careful planning
can ensure this is used to maximum potential in your Will.
- charitable gifting - charities are exempt
for IHT purposes.
- trusts - discretionary trusts are useful
because they enable you to retain control over assets which you
gift; they can shelter funds from IHT and at the same time preserve
wealth for future generations.
This article was first published in the
Birmingham Post Wealth Management supplement
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