News & Updates

Inheritance Tax Planning

 

At T C Young we are being increasingly consulted on tax planning issues. Property prices have increased over the years, but the value of assets which can be passed on "tax free" to the next generation have not. We can assist you to ensure that your legal affairs are organised in order to minimise your tax liability and are most commonly consulted in relation to Inheritance Tax planning.

 

  • When is Inheritance Tax payable?

Inheritance Tax is chargeable on your net estate at your date of death, i.e. your total assets less any debts/liabilities, but will also include the value of any gifts made by you in the previous seven years which are chargeable transfers and therefore to be aggregated with your estate. If you are in receipt of trust funds these may also have to be aggregated with your estate. Inheritance Tax is only chargeable on any portion of your chargeable estate that is in excess of the nil rate band. This is currently set at £312,000 for the 2008/09 tax year and £325,000 for the tax year 2009/10. Inheritance Tax is charged at a rate of 40%.

 

  • Are there any exemptions?

There is no Inheritance Tax payable on any assets transferred to a surviving spouse/civil partner on the death of the first spouse/partner, regardless of whether these assets exceed the nil rate band. In the past, this meant that the first spouse's nil rate band was effectively "lost" on their death if the entire estate passed to the surviving spouse and often Wills were set up to include a nil rate band discretionary trust to provide an income to the spouse/children, with the capital passing to the children on the second death. However there are to be changes to the Inheritance Tax regime in 2008 to create a transferable nil rate band between spouses/civil partners where the second death has occurred after 9th October 2007. This will allow for the transfer of the percentage of the nil rate band which was unused on first death. Therefore, if the entire estate passed to the surviving spouse/partner, the nil rate band on their death will be doubled.

 

Gifts to charities are also exempt from Inheritance Tax. Provision for charitable legacies in your Will are a good method of minimising any Inheritance Tax liability. We can update your Will to include such legacies if you wish. We can also advise on and set up Charitable Trusts. It is no longer the case that only people with no family or close relatives set up such trusts. Many families are generous in their lifetime giving and prefer to pass on a share of their wealth via a trust rather than absolute gifts to a finite number of charities. We would be happy to discuss this with you.

 

  • What can I do to reduce my Inheritance Tax liability?

In addition to making provision for charitable legacies in your Will, there are also a number of measures which can be taken during your lifetime in order to reduce the tax liability on your death. These include:-

 

(1)     Making use of your annual gift exemption - everyone has an annual Inheritance Tax exemption of £3,000. This allows you to gift up to £3,000 a year which will not be liable to Inheritance Tax on your death. The annual exemption (or any part of it which is unused) for one year can be carried forward to the next year, but no further.

 

(2)     Regular gifts from income - any regular gifts made out of your disposable income (i.e. your income after tax etc) are free from Inheritance Tax so long as they are part of your normal expenditure. These gifts must be made from income (not capital) and can include monthly payments to someone (or other regular payments) or regular payments of premiums on a life insurance policy.

 

Exemptions also apply in respect of small gifts (up to £250) and gifts on marriage/civil partnership.

 

If you make a gift which does not fall into one of the above categories, it will be classed as a Potentially Exempt Transer (PET). PETs are only exempt from Inheritance Tax if you live for seven years after making the gift. Otherwise, they will be included in your estate for the purposes of calculating Inheritance Tax on your death. To qualify as a PET, a gift must be outright and you must not retain any benefit from the asset you are gifting. If you do retain some benefit (e.g. gifting your home to your children, but continuing to live in it), the asset will remain part of your estate for Inheritance Tax purposes.

 

  • Taxation of Trusts

Until recently, another common method of reducing a person's Inheritance Tax liability was the creation of a trust, often an Accumulation and Maintenance Trust for the benefit of grandchildren. The creation of the trust was treated as a PET and was therefore exempt from Inheritance Tax if the person who created the trust survived for seven years after making the gift. The Finance Act 2006 radically changed the tax treatment of these trusts, which had previously received preferential treatment. From 6th April 2008 such Trusts will be treated in the same way as full Discretionary Trusts. They will be subject to certain additional charges (exit and 10 yearly charges) at a rate of up to 6%. However, trusts which provide for vesting of property in beneficiaries at the age of 18 will still be subject to the old, preferential tax treatment. If you set up a trust in the past or are a beneficiary of trust funds, you should be aware of the changes and how they affect you. Discretionary Trusts, placing in assets up to the value of the nil rate band, remain popular and are an effective way of benefiting the family without control passing at too early an age.

 

The above gives only a brief summary of some possible options for Inheritance Tax planning. Please contact our Private Client Department should you wish further information or wish to review your current situation.

 

  • Ø Isabel Ewing (Partner) E-mail: iee@tcyoung.co.uk Direct Dial Telephone: 0141 225 2563
  • Ø Lesley Hurst (Partner) E-mail: lah@tcyoung.co.uk Direct Dial Telephone: 0141 225 2579

Information also available on our website http://www.tcyoung.co.uk/