Inheritance Tax Planning
NewsEach individual has a nil rate band for inheritance tax purposes on their estate (in the current tax year 6 April 2009 to 5 April 2010 this is £325,000).
Assets left to your spouse or civil partner are exempt from inheritance tax. However these assets remain taxable when your surviving spouse dies.
In October 2007, the government introduced changes to allow for a transferable nil rate band between spouses or civil partners. This means that if you leave all your assets to your spouse, his or her estate can benefit from a doubling up of the nil rate band in the year that they die. For example if you died in the tax year to 5 April 2010 and your spouse died in June 2010 (the preannounced nil rate band for which is £350,000), then there would be no inheritance tax on your estate (spouse exemption) and your spouse’s estate would have an effective nil rate band of £700,000 (ie double the nil rate band in the tax year in which they die).
This for many people has removed the need to set up a nil rate band discretionary trust, which was commonly recommended and used before this change.
This also assumes that there are no significant gifts for example in the 7 years prior to your death eg to your children (which would use up part of your nil rate band).
There currently exists the ability to give away assets, for example to your children, with these becoming exempt from inheritance tax if you survive for 7 years after making the gift, and provided that you do not reserve any benefit from them.
The reservation of benefit rules mean that a gift of your main residence to your children is not effective for the purposes of inheritance tax saving if you continue to live in it, as you would thereby be reserving a benefit from it.
There are also exemptions from inheritance tax for charitable gifts in your Will. You can also each give away up to £3000 per tax year to non-charitable beneficiaries eg your children, which would then fall outside your estate immediately for inheritance tax purposes. If you have not used this allowance in the previous tax year, you can also carry forward this allowance from the previous year - so a couple could then each give £6,000 to their children in the current tax year.
There are also exemptions for lifetime gifts you can afford to make from your regular income.
There are also separate partial or full exemptions on certain types of agricultural and business property.
In each case we recommend that you take individual advice before acting. Our private client team are happy to help in drafting and reviewing your Wills, and advising as part of your tax and family inheritance planning for the future.
Craig Russell