Basics for Inheritance Tax Planning

Inheritance tax has undoubtedly become much easier after the government’s change of heart in relation to the nil rate band, but still today, many people are not making use of some of the basic aspects of this planning that they should be.

In April you will be allowed to give away a nil rate band of £312,000 per person. That’s good news. The old situation used to occur where you had to use that nil rate band on first death or you lost it. This has now been removed by the chancellor and on first death you no longer need to use it as it can be used on second death. Indeed you can also use a nil rate band from the past for a deceased spouse if it has not been used.

Without going into any complex tax planning ideas, there are a number of simple options that you can consider which are being missed.

Each year you have an annual exemption of £3000 that you can use. Most forget that it can also be carried forward for one year. As we are close to the tax year end, if you haven’t used last year’s allowance, you should now use both, giving you an allowance of £6000. Of course post April 5th 2008 you can give a further £3000 away.

Many of us get into the habit of using our ISA allowance each year but forget we have the £3000 allowance above. For younger beneficiaries it is also a good idea to use a trust to give the money to, to hold until they reach 18.

There are a range of other exempt gifts that can be made including: Gifts to a spouse or civil partner, maintenance payments, wedding gifts, gifts to institutions and charities, small gifts, and also an often missed one, which is normal gifts from income.

The gifts out of normal income is an area you should consider. It is commonly believed that you can only give away the normal annual exemption above, but you can actually give away considerable amounts of capital each year in excess of this £3000. As long as your gift is regular, and is out of normal income, you will be allowed to gift as much as you want.

The most common (and appalling) method I see in Inheritance tax planning is the approach taken to insure against the tax. Basically an adviser calculates your estate value, takes off the nil rate band, and then multiplies the remainder (excess) by 40%. This is the amount that he deems your beneficiaries would have to pay on death. He then insures you, so that on second death the death benefit is paid to your beneficiaries so they can pay the tax and release the estate.

This obviously isn’t tax planning, it’s a straight forward guarantee that the Revenue get their money. All you are simply doing is ensuring the Revenue get the money and you are paying for it during your lifetime through life insurance premiums. So in short you are paying the tax in advance.

Whilst in twenty years of planning we have less than five cases on our books where we have used life cover, it is a regular default option for many advisers. My view is that it was never an effective approach to the planning, it didn’t mitigate the tax and should very rarely, if ever, have been used.

The biggest concern, however, is the issue that has arisen since the chancellor’s change as mentioned above, where he has allowed you to use both the nil rate bands on second death.

There are now thousands of people with life insurance in place to cover the tax who no longer need it, who are (if they weren’t before) wasting their money. If you are in that situation revisit this cover and use your money for something that you need to use it for!

If you have an Inheritance tax query for Peter call 01208 816667 or e-mail info@wwfp.net and take a look at our section on Inheritance Tax Planning.

Tags: gift allowance, Inheritance tax, life insurance, nil rate band, trusts

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