The current regime
the majority of lifetime gifts of capital are treated as 'potentially exmpt transfers' or PETs. So long as the donor lives for at least seven years from making the figt, there will be no possibility of an IHT charge whatever the size of the gift.
Assets falling into the categories of either agricultural or business property may never give rise to an IHT liability due to the availability of relief at 100 per cent.
Potential problems
Many people are simply not in a position to make substantial lifetime gifts of capital. As a consequence there is likely to be sifnificant capital value in our estates on death. The position then is that the first £275,000 of value is tax free (being covered by the 'nil rate band') but any balance, subject to any exemptions and reliefs, is charged to IHT at 40 per cent.
Typically, the most valuable assets in an estate are the family home and investments. These are unlikely to be eligible for any IHT reliefs.
Don't waste your exemptions
In view of these possible problems, it is important to consider ways of mitigating any potential IHT liability. Certain gifts made by individuals qualify for specific IHT exemptions. We can discuss with you ways in wchih you could consider using one or more of them to build up funds gradually outside your estate without incurring an IHT liability. The use of trusts in conjunction with exmemptions may also enable you to retain control over your funds. A husband and wife can each take advantage of the exemptions.
One of the most important exemptions is for gifts between spouses. This applies to both lifetime and death transfers and to transfers iinto trust as well as outright transfers. The spouse exemption will also apply to same-sex couples from 5 December 2005 if they have registered their partnership under the terms of the Civil Partnership Act.
Wealth preservation tips
- It may be desitable to use the spouse exemption to ensure that both spouses can make full use of exemptions and the £275,000 nil rate band.
- Trusts can provide an effective means of transferring assets out of an estate while still allowing flexibility in the ultimate destination.
- Have you considered a trust to ensure that any life assurance proceeds are not taxable as part of your estate on death?
- What will happen to any business or agrictultural property included in your estate on death? Leaving it to your spouse will waste any available relief. Consider leaving such property to someone else.
Wills
An efficient and up-to-date Will is important. There are other strong, non-tax reasons for making a Will. A Will should enable your estate to be unlocked quickly and handled by someone you trust.
Furthermore, if you die without a Will, the intestacy provisions will apply and may result in your estate being distributed in a way you would not have chosen.
In the two-year period following a death, the terms of a Will can be varied using a Deed of Variation. However, using this should be viewed as a backstop. Trying to agree on a revised distribution of an estate can often lead to serious family arguments!
Wills Checklist
- Do you have a Will?
- Where is it kep - do you and your family know?
- Is it up to date?
- Does your Will make full use of IHT exemptions and reliefs?
- Do you have adequate life assurance?
We can help and advise you on the following:
- Understanding how the IHT regime works
- Making best use of availble IHT exemptions and reliefs.
- Achieving a tax-efficient Will so that your family benefits in the way you wish and IHT liabilities are minimised
- Using trusts as part of estate planning
Levels and bases of, and reliefs from, taxation are subject to change. The Financial Services Authority does not regulate inheritance tax planning and estate planning.
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