Thomas Anthony

IHT PLANNING

Protecting Inheritance

Keeping your assets secure for future generations

Protecting your assets in order to benefit your family and loved ones is a key concern for many people. The Government applies stringent taxes to your estate after you have died, so advance planning is essential if you want your possessions and belongings distributed as you intended.

Professional financial advice should be sought when undertaking inheritance planning, due to the specialist and often complex products and solutions used.

Establish your situation and assess your liability

Inheritance Tax (IHT) used to be something only "wealthy" people needed to consider. This is no longer the case. Soaring house prices and the Government’s failure to raise the minimum threshold at a rate faster than inflation means that more and more people are likely to be affected.

Inheritance Tax receipts have risen dramatically over the past few years. A recent survey stated that more than 2.4 million houses in the are now valued at more than £285,000 compared with just 500,000 in 1997 and trend looks set to continue. The inheritance tax trap looks set to catch more people than ever before.

The lower threshold limit — known as the Nil Rate Band stands at £285,000 in the 2006/07-tax year. If the value of your estate (that is, all your possessions, including your house) exceeds this, then on your death your heirs may have to pay tax at a flat rate of 40% on the excess.

However, your house is only one asset you own. There may be many others, for example savings and investments, pensions, jewellery, collectibles as well as other items of value you own including a business. In addition, there are other items, which may be chargeable to IHT, which you need to consider.

Everyone’s circumstances differ to some extent, which means effective IHT planning requires a tailored solution. There are a number of basic steps you can take to secure your partner’s and/or family’s inheritance.

Basic steps to mitigate an IHT liability:

	Order your finances tax-efficiently

	Make a will

	Value your assets

	Transfer Assets

	Understand your pension death benefits

Common misconceptions about IHT

"I don’t need a Will"

Without a valid Will your assets will go where the courts determine, not to where you may have wished.

"I can gift what I like to anyone I choose"

There are strict rules covering the taxation of gifts above a certain amount and, if you die within seven years of making the gift, your beneficiaries may still have to pay inheritance tax.

"It doesn’t matter if I’m not married to my partner"

An unmarried partner does not have the same rights as a married partner when it comes to inheritance and you need to make sure your wishes are properly taken into account.

"My tax–free savings and investments are not subject to IHT"

They face the same IHT rules as ordinary savings and investments.

"Gifts and transfers I make to my children are tax–free"

They are not, and Gifts and transfers to your children are subject to the same tax rules as gifts to anyone else other than your spouse.

"I can give my house to my children subject to the condition that I continue to live there"

There are strict rules covering these arrangements, designed to prevent IHT avoidance.

"My heirs can pay an IHT bill from their inheritance"

The Inland Revenue usually requires any tax to be paid before an estate is distributed, which could mean that your beneficiaries need to take out expensive loans in order to pay the bill and receive inheritance.

Straightforward ways of saving IHT

IHT has many exemptions and relief’s and it is vital to consider them at the outset, although using them in practice can be quite complex.

Use your exemptions

There are many exemptions from IHT; here are some of the main ones:

	The Nil Rate Band — Available for both husband and wife. Currently £285,000 and usually adjusted annually in line with inflation.

	Transfers between spouses — Complete freedom of movement of capital (except a spouse with a non–UK "domicile"). Income is also exempt, subject to certain restrictions.

	The Annual Capital Exemption — The first £3,000 of a lifetime gift made each tax year. The Normal Expenditure Exemption — Regular gifts out of surplus income, as opposed to capital, which do not affect your normal standard of living.

	The Small Gifts Exemption — £250 per recipient every year. The Marriage Gifts Exemption — £5,000 to each of your own children, £2,500 to your grandchildren, and £1,000 to anyone else who is getting married. Charitable Gifts — Gifts to registered charities are wholly exempt.

	Potentially Exempt Transfers — Most gifts in excess of the exemptions (other than into discretionary trusts) made during your lifetime are exempt at the time but subject to the donor surviving a further seven years from the date of the gift.

Use your relief's

The following tax relief’s are also available to help mitigate the effects of IHT:

	Business Assets — Interests in unincorporated businesses and holdings in unquoted trading companies qualify for 100% relief, providing they are owned for two years. Controlling holdings in quoted companies qualify for 50% relief as do land, plant and machinery owned by you and used in a qualifying business.

	Lloyd’s Names — Funds held at Lloyd’s can be treated as business assets with 100% relief.

	Agricultural Land and Woodlands — Land held "in hand" by a working farmer may benefit from 100% tax relief. If your interest in land is as a landlord then, depending on the tenancy terms, relief may be either 50% or 100%. With woodlands you can postpone an IHT bill until the timber is cut or sold.

Have you considered the following:

	How much inheritance tax would your estate have to pay if you were to die today?

	What legacy do you intend to leave behind for those who follow?

	Have you used all of your inheritance tax exemptions?

	Does your will make the best use of the inheritance tax provisions?

	How sure are you that any gifts you have made to avoid inheritance tax are effective?

	Do you wish to avoid inheritance tax but need your investment income?

To talk to Thomas Anthony Wealth Management about your inheritance planning, please complete the online enquiry form and one of our advisers will get back to you.