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Inheritance Tax

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Inheritance Tax

Inheritance Tax is often referred to as a voluntary tax. What this means is that by careful planning this tax can often be mitigated or not paid at all.
Although there has been a recent fall in property prices, the long term rise in property values prior to July 2007 has pushed many people's estate value over the Inheritance Tax threshold of £325,000 (2009-2010 tax year, £350,000 2010/11). Unlike capital gains tax, this tax is still 40% and is bad news for the 1.4 million UK homeowners who now fall within the clutches of this tax.

What is Inheritance Tax (IHT)?

IHT is a charge on the value of all the assets of a person upon his/her death. The 40% rate applies to everything over the value of the nil rate band, i.e. anything over £325,000. It is also applied to the value of gifts made in the 7 years before death except between spouses and civil partners.

But civil partners and spouses together now have a nil rate band that is worth up to £650,000 at the current IHT rates and nil rate threshold.

Let’s say one partner died on 7 April 2009 and they leave £50,000 to each of two children, then the sum of £100,000 is chargeable to inheritance tax. But this is below the £325,000 nil rate band, and therefore the legacies pass free of tax to the children with £225,000 of the nil rate band still unused. This can be transferred to the estate of the survivor. Let’s say the surviving partner dies in February 2011, then the nil rate band for that partner is £350,000 plus the balance carried over of £225,000 i.e. £575,000.

What can I do about Inheritance Tax?

Without proper tax planning, many people can end up leaving a huge tax liability on their death, considerably reducing the value of the estate passing to chosen beneficiaries. Additionally, many people do not realise that inheritance tax is due before assets from the estate have been realised, which could cause rushed sales of properties and thus depressed prices. Most of us are keen to ensure that the fruits of our hard earned labour pass to our families when we die, not the government. To do this we need to plan ahead.

We have considerable experience in the design and implementation of Inheritance tax mitigation schemes for our clients and also have the right contacts for appropriate legal and accounting advice for the areas which we can’t completely mitigate by investment advice.
We also feel that now is a good time to begin planning for inheritance tax due to the current depressed economic conditions. Assets, including properties and investment portfolios transferred to children now, while prices remain depressed, will mean that any subsequent gain in value of these assets will fall out of the IHT net.

For example, say an investment portfolio worth say £250,000 two years ago is transferred now to someone at a value of £150,000. If this subsequently recovers to £250,000 in another two years time, then only £150,000 is considered for IHT purposes, as opposed to the full £250,000 if no transfer were to occur and this were the value of the portfolio at the time of death. If you want all the benefits of a qualified independent financial adviser working for you, backed up by a chartered accountancy qualification, please do get in touch.