This article is part of Morningstar's "Perspectives" series, written by third-party contributors. Here David Truman, of Menzies LLP reveals the secret to effective inheritance tax planning.
With HMRC under ever more pressure to increase its tax take, wealthy individuals are coming under the spotlight. One area that has escaped HMRC’s scrutiny is basic inheritance tax planning. Complex schemes are expensive to set up and liable to attack by HMRC, but IHT planning needn’t be complex or expensive. Focusing on the fundamental aspects of planning can protect wealth without upsetting the taxman.
Make a will
Even if you want everything to go to your spouse, you should make a will. If you have no will, intestacy rules will apply and your estate may not be distributed according to your wishes, which could have IHT implications. Your entire estate can pass to your spouse tax free, but if you die intestate part of your estate may go to other family members. Apart from creating family tension, transferring assets to other family members could incur an IHT charge or reduce your nil-rate band allowance.
Work out if you will be affected by IHT
Everyone has a nil rate band allowance of £325,000, or £650,000 for married couples if the first deceased passes their full unused allowance on. Add up value of your house, insurances, pensions, savings, investments, furniture, cars, jewellery etc. If your estate is worth less than the nil rate band, there is no need to spend money on IHT advice.
Find out if business property relief applies
If you own a business, you may be able to pass it on to family members without incurring any IHT. This relief applies to a range of assets including unincorporated businesses, unlisted personal companies, farms, woodlands and assets used in a business. There are conditions applying and the assets need to have been held for more than two years to qualify. The rules do not cover investment businesses.
Set up a life assurance policy written in trust
By setting up a policy in trust, the payout will not be subject to IHT. Having it set-up in trust puts it outside of your estate, and executors can cash the policy during probate to cover IHT payments.
Make gifts during your lifetime
Known as potentially exempt transfers, you can give away assets and as long as you live seven years after making the gift, it will not be included in your estate for IHT purposes. However, care should be taken on the timing as gifts of assets that have appreciated in value may be liable to capital gains tax.
Use the annual IHT gift exemption
The first £3,000 given away each tax year is ignored by HMRC and is not subject to IHT. If you don’t make a gift in one year, you can carry it forward into the next tax year.
Consider gifts from income
If you have a good retirement income from a pension or earnings, you can reduce your estate by giving money regularly to grandchildren for example. As long as it is excess income (i.e. losing it will not affect your lifestyle), then it can be given away with no IHT consequences.
