THE INHERITANCE TAXMAN COMETH

Jacqui Bevan describes how many families continue
to be caught out by the Inheritance Tax Trap

The Government stands to reap a revenue harvest of £3.3bn* from Inheritance Tax (IHT) for the fiscal year 2005/06, a figure that is expected to rise to £3.6bn in the current financial year.

Soaring property prices in recent years have brought the issue of IHT to the forefront for millions more people. Yet while many people are aware of the existence of IHT planning, few still do anything about their potential liability.

With more and more estates potentially liable to IHT, not preparing for it is akin to asking one’s children and grandchildren to simply sit down and write a large cheque to HM Revenue & Customs (HMRC). It comes as a very rude awakening to people to discover that a large proportion of their wealth might actually have to be sold in order to meet the IHT bill on death unless careful planning and provision has been made.

IHT is a time bomb waiting to go off and people need to consider three vital courses of action:
• ensure a Will is written and planned correctly to save the maximum amount of tax
• transfer assets through the prudent use of lifetime gifts
• create an IHT efficient fund to enable beneficiaries of an estate to meet the tax liability without disturbing family wealth.

IHT is taxed at 40% irrespective of the personal circumstances of the heirs. One of the quickest fixes is to make sure that both spouses (or civil partners) use their nil-rate band, the threshold amount before the tax kicks in (in his spring Budget, Chancellor Gordon Brown raised the IHT threshold in line with inflation to £285,000). The way to do this is for each partner to write Wills that bequeath the exact amount of the nil rate band to a discretionary trust.

There are still many things that people can do to make sure that as much of their estate as possible stays out of the taxman’s grasp. As ever in these matters, it is essential to seek specialist, professional advice.

The St. James’s Place Partnership offers a number of solutions, including the ability to obtain an immediate discount on IHT from an individual's estate through our Discounted Gift Plan. In addition, an estate's liability to the tax can be capped via our Gift and Loan Scheme and other sophisticated asset arrangements involving trusts.

Also, overseas assets such as a second home continue to be picked up by the taxman's radar if people remain resident in the UK. By moving abroad, UK-based assets are likely to remain taxable and even if a person dies several years later HMRC may still be able to argue that worldwide assets are assessable for IHT. This is because it is not only 'residence' that is relevant for UK IHT consideration but also 'domicile'

Most people prefer their hard-earned assets pass to their families rather than the taxman and there remain many routes to take – some simple, others more complex and needing professional advice. But whatever you do, act sooner rather than later to ensure that your heirs are not subject to a hefty bill on your death.

St. James’s Place has produced a Guide To Inheritance Tax, a free copy of which is available from Jacqui on 01628 474192.

*Pre-Budget report 2005 - HMRC