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Affairs of estate

Making use of annual IHT exemptions can help reduce a liability. Towry Law Financial Services financial consultant Matt Pitcher reviews the estate planning process.

The Government received around 2.5bn in inheritance tax in the last tax year. The tax is charged on the value of an individual’s assets at death but also applies to some lifetime gifts.

Although everyone is entitled to leave a certain amount without it being subject to IHT – the nil-rate band – this is currently only 263,000.

Amounts over this are subject to tax at 40 per cent and it is the role of the financial adviser to minimise the amount of tax that will eventually be payable to the Inland Revenue.

To achieve this requires careful planning in the context of a client’s financial circumstances and objectives. This can only be accomplished by completing a thorough fact-find to ensure the financial adviser has all the information required to make appropriate recommendations.

A checklist should include all the details shown in the table (right).

It is only on completion of this initial stage that an adviser can begin to assess the value of an estate and move on to understanding any issues that arise. This first review may reveal some fundamental flaws or misunderstandings which may require further investigation. Matters which may need to be looked at more closely include:Is the client UK-resident and domiciled? IHT is charged on the worldwide assets of individuals domiciled in the UK and the UK assets of those domiciled outside the UK.Does the client lack a will?

lDoes the client have an unmarried partner?Are any gifts and transfers being made to children?Reservations of benefit.Death benefits from pension schemes.Trusts.

When the client’s circumstances have been clarified and the liability calculated, the adviser can proceed to advising the client on minimising IHT.

It must be ensured that the client is making full use of tax allowances and opportunities to minimise tax bills. The adviser should also explain various schemes which may fall outside the IHT net, including unvested funds in pension schemes, enterprise investment schemes after two years and discounted gift schemes where there is an immediate benefit depending on the age of the investor and further benefits after seven years.

Married couples must consider their IHT liabilities separately. The nil-rate band is available for both a husband and wife so it can be advisable to transfer assets to make use of both nil-rate bands. However, any measures taken that the Revenue considers to be solely for tax avoidance may be investigated and potentially undone, so professional advice is highly recommended.

The client should make full use of all IHT exemptions. The main exemptions are shown in the table (above right).

Potentially exempt transfers, including most gifts made in excess of the exemptions, other than into discretionary trusts, are exempt but subject to the donor surviving for seven years from the date of the gift.

The following tax reliefs may also play a part in structuring IHT recommendations:

Business assetsInterests in unincorporated businesses and holdings in unquoted trading companies qualify for 100 per cent relief, providing they are owned for two years.Controlling holdings in quoted companies qualify for 50 per cent relief, as do land, plant and machinery owned by the client and used in a qualifying business.

Lloyd’s NamesFunds held at Lloyd’s can be treated as business assets with 100 per cent relief.

Agricultural land and woodlandLand held “in hand” by a working farmer may benefit from 100 per cent tax relief.If the interest in land is as a landlord, then, depending on the tenancy terms, relief may be either 50 or 100 per cent.

o With woodlands, an IHT bill can be postponed until the timber is cut or sold.

Items chargeable to IHT include gifts into discretionary trusts, lifetime gifts greater than 3,000 a year made to anyone other than a spouse and made within seven years of death, school fees plans bought for children other than the client’s own and reservations of benefit, such as the family home given to children where the client still enjoys the benefit.

Use of trusts has been popular for IHT planning and there are a number of ways in which they can increase the amount left to beneficiaries. This is a complex field and may require the services of a professional.

Once other planning has been taken into consideration, a life insurance policy can be written into trust which will normally be equal to the IHT liability when the policy is taken out.

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