Do you have the Will to protect your wealth from the ever-present threat of Inheritance Tax By Jan Thompson

25th November 2014

Jan Thompson Partner of St James’s Place Wealth Management, is based locally in Winchmore Hill, and is inviting local residents to discover the simple yet highly effective steps you can take to preserve and protect your wealth. Preserving and protecting your wealth surgeries are being held locally by appointment on 7th & 8th January 2015 from 10-5pm. All surgeries last appox 40mins and are held in the strictest confidence and without obligation.

It seems like a long time since the Conservative Party said it would raise the Inheritance Tax (IHT) threshold, above which deceased estates are taxed at 40%. Since forming the coalition government they have yet to turn those words into action and have confirmed the threshold will remain unchanged until at least 2018.

The days are long gone when IHT could reasonably be regarded as a tax only for the very wealthy. Many of us still think that we are unlikely to be affected by it, but many of us would be wrong. The IHT threshold – officially known as the ‘nil rate band’ – currently stands at £325,000. Consider what your house is worth today. For many people, this alone is enough to exceed the threshold.

Married couples and civil partners can pass assets to each other without paying IHT, while they are alive or on their death. Since October 2007 married couples can now transfer any unused portion of their nil rate band to the surviving spouse when they die. So it’s now possible for the surviving spouse or partner to leave assets of up to £650,000 before IHT becomes payable. (It’s important to remember that the full nil rate band of £650,000 is not available to unmarried couples.)

Thankfully, there are a number of things you can do to reduce any liability. A good place to start is with your Will. Everyone should consider having a Will and, just as important, one that is IHT-efficient. If you don’t, or if there are mistakes in the drafting, the laws of intestacy may distribute your assets in ways that you never intended, or your estate may be taxed in ways that could otherwise have been avoided. It’s estimated that UK taxpayers waste £530m a year in IHT payments which could have legally been avoided by simple tax-planning measures when drawing up a Will. (www.unbiased.co.uk – TaxAction Research, February 2014).

If you own a business, your Will should cover your business assets unless you have made appropriate succession plans with your partners You should also review it whenever your circumstances change – a subsequent marriage, for example, automatically revokes a Will.

Your Will is the place to take advantage of the rules on charitable legacies which came into effect on 6 April 2012. If you bequeath money to a charity, it will not be subject to IHT – that’s not new. But, if you leave 10% or more of your taxable assets to charity, what remains attracts IHT at a reduced rate of 36%.

In fact, the lower rate of 36% could apply even when less than 10% of your estate is left to charity if, for instance, the estate includes trust assets.

The rules are somewhat complicated and therefore it’s important to take professional advice.

There are other well-proven methods to reduce IHT, and one is making gifts during your lifetime. These reduce the size of your estate and therefore the size of any IHT bill.

Some gifts depend on you surviving at least another seven years before they officially move outside your estate. There are, however, some very useful exceptions to this rule which mean that the assets move outside your estate, and beyond the reach of IHT, immediately.

Every tax year, for example, you can make gifts totalling £3,000. On top of that, each year you can make small gifts of up to £250 to any person and to as many people as you like, provided you have not made any other exempt gifts to that person. Investing that sum annually into a Junior ISA for a grandchild or godchild could accumulate into a much-appreciated sum by the time they turned 18. Potentially the most generous exemption for IHT purposes, however, is the one that allows you to make regular gifts as part of normal expenditure from your income. These payments must be part of a regular pattern and may not come out of your capital. You must also keep enough income to maintain your standard of living, so you are unable to make gifts out of your salary or pension if you then have to use your capital to maintain your standard of living. Gifts that qualify as normal expenditure out of income have no specified maximum, though they will be limited automatically by the size of your surplus income. The exemption will be claimed on your death by your personal representatives. Therefore it is important to keep accurate records of any gifts you make which will help your representatives to claim it retrospectively.

Remember that IHT is a complex area and, without professional help, it can be very easy to get things wrong.

To receive a complimentary guide covering Wealth Management, Retirement Planning or Inheritance Tax Planning, produced by St. James’s Place Wealth Management, contact Jan Thompson of St. James’s Place Wealth Management on 07568 321207 or email jan.thompson@sjpp.co.uk

(Please note that the following editorial applies to English/Welsh Law only)