• On first death, using a suitably drawn up will, consider passing assets equal to the nil rate band into a discretionary trust. The benefits of this are that (a) the nil rate band is fully utilised and (b) the surviving spouse, being a beneficiary under the trust, can access the trust funds via the trustees. They can then borrow from the trust and create debts against their taxable estate, helping to reduce the estate further. By using this option, estates of less than  £900,000 for 07/08 shouldn’t pay any tax.

• Giving away your house but continuing to live in it will make IHT mitigation ineffective until you move out, or pay a full commercial rent. The charge to tax would be on the property value at the date the reservation ceases and would remain for the next seven years.

• Assess how much all your assets are worth (including house, life insurance, contents, cars, savings, investments, pensions etc) and then calculate the current inheritance tax liability. You may be surprised.

• The changes in IHT planning post 2006 are the most far-reaching changes since the anti avoidance legislation was brought about in 1986. You should immediateley review your will and any IHT plans you have in place as they may well be affected.

• You can give away much more than £3,000 per year. In fact, you can give away whatever you want from your normal income as long as its regular, and does not affect your standard of living.

• Some trusts allow you to place your money outside your estate but provide you with an annual ‘income’ back. After seven years the capital is outside the estate along with all future growth, and is free from IHT.

• A Purchase Life Annuity (PLA) will take capital outside your estate immediately. This provides a very tax-efficient income and allows for the original lump sum to be returned to the beneficiaries free of IHT. It gives an immediate reduction in the value of your estate by the amount you put into the PLA. Naturally do this in conjunction with any changes in the 2006 legislation.

• Business assets can attract up to 100% relief for IHT. Aim listed funds can be invested into which allow you to attract 100% IHT relief after two years. The benefit is that your capital is also totally accessible. Be careful however that Aim listed funds will carry a higher risk than normal.

• If you have an estate that is mainly made up of houses and other fixed assets, consider raising a mortgage against your property to put into a PLA or a trust. The PLA should fund the cost of the mortgage and life assurance.You will have reduced the value of your estate equal to the amount you borrow, and the monthly cost should be neutral to you.

• On death, you are allowed to use a deed of variation to alter a will to ensure it maximises current tax laws. You must do this inside two years of death and get agreement of all beneficiaries. 

• Consider writing multiple trusts to avoid the periodic and exit charges:

On entry to most trusts (other than absolute trusts) there is a charge of 20% of the transfer which is above the nil rate band at the time. Today a gift into trust of £320,000 would attract 20% tax, £4,000 on £20,000. This should be paid by the trustees not the person who set up the trust (settlor) as the figure would be more.

In the above example if the settlor paid the tax it would be grossed up so the transfer of value would be greater. On the tenth anniversary, a periodic charge may apply. The trust value is assessed and if it is more than the nil rate band at that time, a charge of up to 6% could apply to the value over the nil rate band. In my previous article I pointed out that trusts could be split at the outset as on the anniversary each trust is assessed against the nil rate band. 

So rather than writing one large trust which could be over the nil rate band, better to write numerous which will each be assessed at the tenth anniversary and on exit. In the case of Rysaffe Trustee Co (ci) v IRC (2003) showed exactly that. Numerous trusts were set up on consecutive days. The revenue contended 'that the making of all the settlements were associated operations and the settlor had made one composite settlement by an extended disposition' Park J dealing with the associated operations made the valid point that it was not a valid reason to artificially import the associated operations provisions and to impose the false hypothesis there is only one settlement (trust) when in fact and in law there are actually five.

So there you go! Remember another key point - section 62 IHTA 1984 stated that for a trust to be a related settlement, the settlor had to be the same in each case and the trusts had to be commenced on the same day. Therefore trusts created on different days do not fall within this definition.


Contact Worldwide Financial Planning on 0845 230 9876 or fill in the enquiry form and send to us for more information.