| Inheritance tax (IHT) is normally payable on death but | | | | sounds a lot but with house values now so high tax |
| can be partly payable earlier. It is also sometimes | | | | may be payable. Beyond the threshold the tax rate is |
| called a voluntary tax because there are so many | | | | 40%. |
| ways of avoiding it. However, they are not | | | | PETs and ICTs made within seven years of your |
| straightforward. | | | | death are counted in order of payment and so are set |
| Investments free of IHT | | | | against the threshold first. There is taper relief from the |
| Provided you have invested for at least two years, | | | | fourth year but it only applies to amounts which |
| the following are exempt: | | | | exceed the threshold. |
| - investments in AIM and unquoted shares (these can | | | | Paying IHT |
| be invested via unit and investment trusts) | | | | It must be paid before grant of probate (official |
| - commercial forestry | | | | permission for executors to act) but assets cannot be |
| - assets connected to Lloyds of London. | | | | sold before getting probate, so it may be necessary |
| Making gifts during your lifetime | | | | for the executor(s) to borrow. |
| Inheritance tax (IHT) may be payable on gifts you | | | | If the estate includes property, it is possible to defer |
| make before your death but, if you can afford it, there | | | | payment of the proportion of IHT payable equal to the |
| are a number you can make free of IHT. Of particular | | | | proportion of the property value to the whole estate. |
| importance are the £3,000 annual exemption | | | | Some banks and building societies will release cash |
| (higher amounts on marriage) and the unlimited number | | | | from the deceased person's account for the purpose |
| of gifts of £250 to any one person. | | | | of paying IHT. |
| PETs, ICTs and taper relief | | | | Certain investments which include life cover, such as |
| Gifts to individuals or certain trusts not otherwise | | | | with profits bonds, although subject to IHT, can be |
| exempt are potentially exempt transfers (PETs). Tax | | | | written into trust so that they pass directly to your |
| is avoided if you live for seven years thereafter but if | | | | heirs and can then be realised to meet some at least |
| not it may be payable on your death. | | | | of the tax bill. |
| Gifts to companies or discretionary trusts are called | | | | Estate planning |
| immediately chargeable transfers (ICTs) and half the | | | | So far as planning is concerned, the importance of |
| IHT rate of 40% is payable immediately. The | | | | making a will cannot be overstressed. Otherwise, |
| balancemay become payable if you die within seven | | | | intestacy rules apply, which may not suit you. |
| years but if no tax is due then you cannot recover | | | | If a married couple's joint estate may exceed the |
| what has been paid. | | | | threshold they need to find a way of using the exempt |
| When PETs and ICTs within seven years of death | | | | amount on the first death. The problem usually is that |
| are included in an estate, they are first set against the | | | | the survivor cannot manage without the assets, |
| threshold in chronological order. If their total exceeds | | | | particularly the house. |
| the threshold then the relevant donees (the recipients | | | | There are ways in which this problem can be |
| of the gifts), not the estate, are responsible for paying | | | | overcome but they need to be watertight so the use |
| the IHT on them. | | | | of a solicitor experienced in IHT planning is essential. |
| If the period since the excess amounts were paid is | | | | Usually a trust is set up to come into operation on the |
| more than three years, then taper relief applies. Tax on | | | | first death and receive assets up to the exempt |
| the relevant amounts is reduced to 80% of the full | | | | amount. It is possible for the surviving spouse to be a |
| charge (i.e. 32% tax) in the fourth year, 60% of it | | | | beneficiary. |
| (24%) in the fifth year, 40% (16%) in the sixth year and | | | | If all the beneficiaries agree, a will can be changed |
| 20% (8%) in the seventh year. | | | | within two years of the death this is called a deed of |
| In the case of ICTs, tax already paid is deducted from | | | | variation. |
| the tax due but cannot be used to create a refund. | | | | If you know that IHT will be payable, make some |
| Tax payable on death | | | | provision for it, such as life assurance. For a married |
| Amounts left to your spouse are free of IHT and most | | | | couple, a joint life second death policy can be taken |
| couples leave everything to each other, but this may | | | | out, written into trust for the beneficiaries so that it |
| not be the best solution. | | | | escapes the IHT net. Check whether your bank |
| The first £242,000 of taxable estate (the | | | | building society deposits will be released. |
| current exempt amount or threshold) is free of tax. It | | | | |