Inheritance tax (IHT) was first introduced as capital transfer tax in 1975 by the then Labour Government. It was intended both to raise money and to re-distribute wealth from the rich to the poor – it was even promoted as a Robin Hood tax.
The reality today is very different. The truth is that 10 per cent of households are already exposed to the tax. With asset values rising on average at 7.5 per cent per annum, but with the IHT threshold rising at only 2.5 per cent in line with general inflation, more households are being drawn into the net every year. Based on figures produced by Lombard Street Research, by 2009 approximately 15 per cent of all households could be affected.
First and foremost, everybody with assets should make a Will. Only with a valid Will can you be certain that your estate goes to the right people. It is estimated that three in four people fail to make a Will and die intestate. A Will can help you cut your IHT liability. Everybody has an IHT tax-free allowance, known as the nil-rate band, currently in this tax year set at £285,000.
If a Will is structured correctly, married couples and civil partners could take advantage of both their nil-rate bands, thus dramatically reducing the number of estates falling into the net.
Most married couples and civil partners own their homes jointly, which means that on the first death the property would automatically transfer to the survivor. This means that no IHT is levied on the first death and the nil-rate band is wasted.
|
 |
Three simple steps
Firstly, your solicitor can change the ownership of the property by severing the joint tenancies so that the property is held as tenants-in-common. In this way, the half-share that each partner owns can be transferred in accordance with their Will.
Secondly, the Will can set up a nil-rate band discretionary trust so that value up to that amount can transfer into trust at the time of the first death for the benefit of the spouse, children, or other heirs.
Thirdly, the Will can include a clause which gives the executors power to settle the amount due to the trust by means of an IOU against the surviving spouse. By this means all the property, or other investments, transfer directly to the surviving spouse, but the first IHT tax nil-rate band is not wasted.
By taking the trouble to make a Will in the right terms, you could not only save IHT but you will make life much easier for your family. If they have to suffer the trauma of your death, they don't want it compounded by financial difficulties.
Make the most of your family's assets
Investments in family businesses are treated in a very favourable way by the tax rules. In most cases, once you have held your investment for two years, it qualifies for a full exemption from IHT.
This applies, for example, to a partner's share in a trading partnership, or shares in an unquoted family trading company. The problem with this is that most family businesses are not held to the bitter end, but are sold when the owner retires. In such cases, they move from having a valuable asset fully protected from IHT to a lump of cash fully exposed to tax. Fortunately, all is not lost because other assets can also qualify for this relief.
If you would like to find out more, please email or contact us for further information.
|
