What is Inheritance Tax?

Inheritance Tax (IHT) is essentially a tax on death. It is however avoidable with the correct planning and advice.

Many people in today's climate of ever increasing house prices are becoming more exposed to IHT and this is something that very few appreciate. With a rate of 40% payable on all assets over the current threshold of �325,000 it is easy to see your hard earned assets diminish in one foul swoop.

While the simple answer is to give away all your assets before you die this in most circumstances is not the most practical or efficient way of dealing with Inheritance Tax.

Inheritance Tax rules have been tightened

The government has increased the inheritance tax burden for people who leave money to their children.

It has been common for parents to write wills so that money inherited by their young children is held in trust until they are 25.

Trustees look after the money for the children's benefit once inheritance tax (IHT) has been paid.

The new rules mean that these trusts must now pay out at 18, or pay even more tax.

If they persist with a later payout date then by April 2008 new rules will apply.

18 or 25?

Where a trust is created on the death of a parent, for instance as a result of a clause in their will, IHT already kicks in at 40% and will continue to do so.

If the payout age is 18 then nothing else will change.

But if the parents decide that the children cannot be trusted with a large sum of money while they are still a teenager, then more taxes will be applied.

Every ten years the value of the money in the trust, over the IHT threshold, will be taxed at 6%.

And there will be an exit charge if money is taken out of the trust in between the ten-year anniversaries.

New trusts created for the benefit of disabled people will be able to avoid this.

Lifetime trusts

Lifetime trusts are those created by people when they are still alive, and contain money put aside for the benefit of, say, grandchildren.

Here, IHT is avoided, at least at the standard 40% rate.

But now, when new lifetime trusts are created, a new 20% tax will be levied immediately on the amount over the IHT threshold regardless of the payout age.

Then as time passes by, the periodic 6% charge and the exit charges will also be enforced.

Again, the only exception will be trusts for the benefit of disabled people.

From April 2012 a reduced rate of 36% applies where 10% or more of the net estate is left to charity.

Planning actions which can be taken:

  • Ensure your Wills are written correctly
  • Gifting assets
  • Placing assets in to Trust
  • Insuring the liability
  • Discounted Gift Bonds

Listed above are the most common ways of reviewing your IHT situation and we will be pleased to discuss any of them to find the most suitable for your needs.

There is a brochure available here which explains Inheritance Tax planning.