Inheritance Tax and how to avoid it

22 November 2007

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Peter Houghton - a specialist in trust tax and estates at Mace & Jones explains how to protect your finances and business interests through the preparation of a tax-efficient will.

What is Inheritance Tax (IHT)?

A 40% tax charge on everything you own over £300,000 (the nil rate band in 2007/2008).

What is taxed?

All assets in your own name; your share of jointly-owned property; assets in certain trusts and gifts made by you in the last seven years of your life amongst other things. Gifts between husband and wife are tax free.

What about my business?

So long as your interest is in an unquoted business or partnership and you have owned that interest for at least 2 years and it is a trading company the value should qualify for business property relief.

What is business property relief (BPR)?

If your business interest qualifies for BPR the exemption is usually 100% - reducing the value for IHT to zero and meaning it can be given away tax free.
If you have a controlling interest in a business but own assets personally (rather than within the company) and you use those assets in the business, the BPR is 50% on the value of those assets.
In most cases it is better to give business assets to children rather than your spouse to make full use of this exemption

What does the Government make from Inheritance Tax?

An expected £4.1 billion in 2007/2008

What can I do to avoid Inheritance Tax?

The choices are:

Do nothing and pay it
Spend it
Lifetime planning - give it away, discounted gift schemes etc
Prepare a good will
Change someone's will after death by a Deed of Variation
Take out insurance to cover the bill and write it under trust

What changes were made in the pre-budget report on 9 October?

The changes only affect married couples and registered civil partners
No other changes were made
The exemption stays the same
However married couples and civil partners can now have double the exemption on the second death - if the exemption was not used on the first death - meaning £600,000 (in 2007/2008) can be passed down tax-free.
Even if one party to the marriage died 20 or 30 years ago the death of the survivor means two exemptions are available.

Isn't this a step in the right direction?

Of course, but the double exemption has always been available for married couples if they carried out careful will planning.
Many married couples made wills incorporating ‘nil rate band discretionary trusts' which meant a £600,000 exemption was available.
The changes are not radical but allow all married couples access to the tax planning which may previously only have been available for the wealthy or prudent.

If I have made a will with a nil rate band trust in it do I need to change it?

We say no - in the vast majority of cases - this type of will still provides flexibility and can ring-fence money e.g. from having to be used for care home fees or if the survivor remarries then from the hands of the new spouse.

About the author

Inheritance tax is a problem. This article can only give you a ‘taster'. Mace & Jones' Tax, Trust and Estate department in Knutsford deals with people on a strictly individual basis giving full and thorough advice on the problems and pitfalls and what you can do to mitigate your potential IHT bill when the grim reaper comes calling.

Peter Houghton can be contacted on 01565 634 234 or email peter.houghton@maceandjones.co.uk. More information can be obtained at www.maceandjones.co.uk.

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