Estate Planning

Estate Planning
Inheritance tax (IHT) has traditionally been seen as a tax only for the very wealthy. However, with a threshold of £312,000 (£624,000 for married couples and civil partners for 2008/09) and the price of houses in this country at all time highs, more and more people are finding themselves caught in the trap.

What is inheritance tax?
Inheritance tax is paid when someone passes over ownership of their assets on death. Each individual is entitled to a nil rate band under which no inheritance tax is payable and traditionally very few estates have exceeded this nil rate band.

Although inheritance tax is technically payable on the transfer of assets after death, there are a number of measures in place to ensure that people don't simply hand everything over to their loved ones on their death beds to avoid it. Any gifts given within the seven years prior to death need to be included in the value of an estate for inheritance tax assessment. Equally, you shouldn't forget ISAs, death-in-service benefit, foreign homes or less obvious assets such as paintings or cars, when calculating the value of your estate.

Planning
To make sure you make full yet practical use of your allowances and exemptions, there are some basic steps you can take. Planning ahead is very important.

Step One – the basics
Making a will is vital. If you die 'intestate' (without a will), your estate will be divided up according to the rules of intestacy. This is particularly important if you are not married, because you are unlikely to inherit a ‘common law’ partner's money, or even their share of the house under the rules of intestacy.

Step Two – use your allowances
The allowances available have been outlined above. Considering how you can use these in advance will help you manage the assets and any cash flow associated with a 'pattern of giving'. In addition, if you can start giving away some of your assets as PETs when you are still in robust health and likely to live another 7 years, it will save you worry nearer the time.

Step Three – using trusts
Trusts have long been seen as an easy way to brush off an inheritance tax liability. If this were ever the case, it certainly isn't after the 2006 Budget. This closed down many of the tax planning opportunities for investors. Under the new regime, interest in possession (IIP) and accumulation and maintenance (A&M) trusts (until that point the most popular vehicles for IHT planning) became subject to the same IHT treatment as discretionary trusts.

However, despite their diminished tax advantages, these trusts are still useful because they allow for the 'regeneration' of the nil rate band every seven years.

Step Four – consider life assurance
Life assurance can be a useful way to accumulate enough money to pay your inheritance tax bill and when placed in trust (and funded from regular income as part of a 'pattern of giving'), is also free from inheritance tax - i.e.: you do not create an additional IHT burden because the trust keeps that lump sum payment out of your estate.

Summary
Inheritance tax planning is a complex area, however careful planning helps ensure you take advantage of all the allowances and relief’s available and could save you a lot of money.