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"Inheritance tax is a voluntary tax, payable by those whose distrust
of their heirs is slightly greater than their dislike of the
government." - Roy Jenkins

Inheritance tax (or Death Duties as it was formerly known) is a tax 
levied on the value of someone's estate on death. It is charged at a 
flat rate of 40% on estate values above a nil rate band allowance 
(£325,000).

It used to be considered a tax on the rich, but with house prices 
rising exponentially in recent years it can now affect many who would 
previously have considered themselves outside of its remit.

On death the first £325,000 of assets are not 
subject to inheritance tax. Everything above this level is taxed at a 
flat rate of 40%. Prior to the pre Budget Report in 2007, a husband 
and wife would have to have taken specific tax planning steps to 
ensure they both took advantage of their nil rate bands. However the 
rules have now changed, and a widow or widower can now take advantage 
of both nil rate bands without any planning. This change in rules is 
retrospective, which means that someone whose spouse died several 
years ago can still have the first £650,000 of their assets passed on 
tax free. It is important to note that where planning had previously 
applied on first death, the percentage of the allowance used at the 
time is deemed to already have been used.

There are a number of steps that can be taken to ensure your assets 
are structured in the most effective manner, and these include wills 
and trusts.

Wills

Making a will is essential to ensure that your assets are passed on according to your wishes.  The rules of intestacy (dying without a will) are complex, but are unlikely to result in assets being allocated as you would want.  Basic wills can overcome this, and for those with larger assets, it is also possible to do tax planning through a will by allowing for the formation of trust funds.

Gift Allowances

There are a number of gift allowances available that enable you to remove some assets from your estate without having to wait seven years as would typically be the case with most gifts.  For example it is possible to gift the sum of £3,000 each year in this way, as well as utilising the previous year’s allowance if this has not already been done.  There is also a small gift allowance of £250 that can be made to as many people as you like, and other one off allowances such as £5,000 to a child when they get married.

Trusts

Trusts are often perceived as highly complex and only for the wealthy, but this is not necessarily the case.  Whilst there are undoubtedly some trusts which fall in to this category, there are also a large number that can benefit those of more modest means, both in terms of controlling their assets and also saving tax.

For example, Loan Trusts enable an individual to remove further capital growth from their estate whilst still providing access to the original capital loaned.  Discounted Gift Trusts enable someone to make an irrevocable gift of capital outside of their estate for inheritance tax purposes whilst still benefiting from a regular income.  Probate Trusts do not have any tax benefits, but they enable beneficiaries to receive the assets of the trust fund prior to probate being granted.  Gift Trusts enable you to gift away assets from your estate, but still retain control as to when the beneficiaries receive these assets. 

We work closely with bespoke trust specialists who are able to devise the most appropriate trust structure for your needs.

Contact us for help with your own requirements »