Definition Amount of Exemption Nil Rate Band £312,000 Gifts to Spouse / Civil Partner Unlimited Gifts to other Individuals £3000 in total Gifts to UK Charities Unlimited Regular Gifts out of Income Unlimited Gifts in Consideration of Marriage / Civil Partnership £5000 made by Parent £2500 made by Grandparent £1000 made by anyone else Small Gifts £250 to any number of different recipients

Pre-Budget Report 9 October 2007

As a result of the change made in this announcement a married couple, or civil partnership, can carry forward any unused Inheritance Tax nil-rate band on the first death for use on the death of the surviving spouse / civil partner.

Tax Year Nil Rate Band 2007 / 2008 £300,000 2006 / 2007 £285,000 2005 / 2006 £275,000 2004 / 2005 £263,000

 

Avoid Inheritance Tax

There are three courses of action to take to avoid Inheritance Tax:

Step 1 – Draw up a Will ensuring it is written correctly to save the maximum amount of tax.

Step 2 – Transfer assets through the use of lifetime gifts.

Step 3 – Create an IHT-efficient fund to enable beneficiaries of an estate to meet the tax liability without disturbing family wealth.

The Will
Failure to make a Will sees your assets distributed according to intestacy rules.

• It is important to ensure any existing Will is up to date and Inheritance Tax efficient.

Lifetime Gifts
Gifting is an effective way to reduce Inheritance Tax liability.

Gifting some of your possessions directly to beneficiaries will remove that item from your estate. In this instance the gift must be absolute with you retaining no interest in it whatsoever.

Three types of Gift:

• Exempt Transfers – The Gift becomes exempt from Inheritance Tax on Death e.g transfers between spouses / civil partners or donations to charity.
• Potentially Exempt Transfers – The exemption applies if the Gift is given seven years before death.
• Chargeable Lifetime Transfers – Gifts into a discretionary trust which become immediately subject to IHT, where the gift exceeds the nil rate band, at a rate of 20%.

Trusts
A trust is a legal obligation called upon by a particular person (Trustee) to deal with someone's estate, in a particular way, for the benefit of the Beneficiaries.

Examples of reasons for setting up a trust:

• Passing money tax efficiently between generations thus avoid Inheritance Tax
• Providing a gift to a child but remaining in control of it until they are suitably responsible
• To reduce Inheritance Tax liability on the death benefits from pension plans & life assurance policies

UK Inheritance Tax Planning

There are a number of packaged trust arrangements that can help a large number of individuals with UK Inheritance Tax Planning.

These are offered by various financial institutions. Some examples are:

• Discounted Gift Trusts – These are designed for people who do not need access to their capital and want to pass it to their families free from Inheritance Tax, but want to retain the right to draw a regular income.

The Discounted Gift Trust works by making a gift into a single premium insurance bond for your chosen beneficiaries, fixing the level of income you want to draw until your death.

The gift is a Potentially Exempt Transfer so if you survive seven years the insurance bond does not count as part of your estate.

• Loan Trust – These are designed for people who want to retain the right to draw on their original capital as well as income.

You (Settlor) make a loan payment to the trust. The trust then pays back the loan, usually in monthly instalments over 20 years.

Any growth from investments within the trust is immediately outside the estate for UK Inheritance Tax planning purposes. The outstanding loan amount would form part of your estate for Inheritance Tax purposes.

On death the outstanding loan can be assigned to your beneficiaries or the loan called in and the monies distributed in accordance with the terms of your Will.