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Inheritance Tax Planning. Changes You Have to Know About

By Jo M Robinson

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Published: 14Oct2009
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The position with regard to Inheritance Tax and Wills has been subject to a degree of change following the Pre Budget Report on 9th October 2007. This article aims to give you a balanced view of the changes which were implemented.

The situation before 9th October The basic inheritance tax position for married couples and civil partners before October 2007 was fairly straightforward. The threshold for Inheritance Tax is £325,000 (tax year 2009-2010), with the balance potentially being subject to tax at 40%. If the first spouse died and left everything to the survivor then, on the first death, there would be no inheritance tax payable, due to the availability of spouse exemption. However, in these circumstances the nil rate band of the first to die had not been fully utilised. With the survivor owning all of the assets there was a bunching effect which meant that, on their death, there could be a large inheritance tax bill since they only had their own Inheritance Tax threshold to set against the bunched estates.

The situation after 9th October For second deaths occurring on or after 9th October 2007 the inheritance tax impact of the 'bunching' of estates at the time of that death can be reduced by the survivor's Executors making a 'transfer claim' to the tax office. The effect of this claim is that the proportion of unused nil rate band on the estate of the first to die can be clawed back for the benefit of the second estate. A transfer claim would involve ascertaining the proportion of the unused nil rate band of the first to die and then transferring that to be set against the taxable value of the survivor's estate. The effect of this is that if none of the nil rate band had been utilised on the first death the estate of the survivor could claim back the full value of their unused nil rate band. Meaning, in effect, that the available nil rate band for the second estate would be £650,000 (being £325,000 x2)

It must be remembered that the Inheritance Tax threshold has not been increased to £650,000.

Annual exemption Each individual can transfer assets up to £3,000 p.a., which will be exempt from IHT. Transfers can also be made using the previous year's exemption if it was not used during the previous year.

Small gifts Gifts up to £250 can be made each year, during an individual's lifetime, to any number of beneficiaries. The gifts cannot be part of larger gifts and they do not include gifts to trusts.

Normal expenditure out of income Regular gifts made out of income which do not reduce the donor's standard of living are also exempt from IHT.

A frequent use of this exemption, and also of the £3,000 annual exemption, is to pay regular premiums to life assurance policies arranged under trust for children or grandchildren. This is a very effective way of transferring regular amounts using the exemptions.

Gifts for education or maintenance Transfers to the donor's children who are either under 18 or are in full time education, or provision for a dependent relative, are exempt, providing they are considered to be reasonable.

Marriage gifts Gifts up to specified levels may be made on marriage which will be exempt from IHT

Gifts to charities, political parties, or for national benefit Gifts to charities, political parties or for the national benefit are exempt from IHT.

Businesses or Agricultural assets The value of some business and agricultural assets may be reduced wholly or partially. If you require details please ask us.

Insurance Policies An insurance policy can be arranged to cover the tax liability on death.

Who pays the IHT and when is it due? The tax is payable by the legal personal representatives of the deceased. It is due 6 months after the end of the month in which death occurs. However, the personal representatives are not able to obtain the authority to administer the estate until the IHT has been paid, so in practice it is often paid before the due date.

Jo Robinson is head of operations at FB Wills Direct a division of Flint Bishop Solicitors. Find out about making a will quickly and cheaply at our web site www.fbwillsdirect.com or contact jo.robinson@flintbishop.co.uk

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