The impact of Inheritance Tax on our estates is increasing at an alarming rate. If your estate exceeds the nil rate band of £312,000 or the nil rate band at the date of your death then subject to a number of other factors, tax will payable at 40% on the excess.

There is no Inheritance Tax payable on transfers or gifts between husband and wife or civil partners – this is known as the spouse (or civil partner) exemption.  Many couples simply create wills leaving everything they own to each other and then on to their children, for example, on the second death. 

Whilst there would be no Inheritance Tax to pay on the first death, the fact that the surviving spouse receives all the assets means that their estate will be significantly larger, potentially leaving a large Inheritance Tax bill when they then pass away.
It is possible, through careful lifetime planning and correctly structured wills to reduce, and even erase, any Inheritance Tax liability.  Examples of such planning are as follows:-

• ensure that you take advantage of the gifting allowances, being careful not to reserve a benefit for yourself in the gifted asset or the gift will be ineffective for Inheritance Tax purposes – e.g. giving away a holiday home or car and then continuing to use it yourself.

• will any of your assets qualify for 100% Inheritance Tax relief – perhaps they are business assets or agricultural property?

• creating trusts either within your will or during your lifetime to reduce the tax burden

• entering into a Discounted Gift Scheme if you do not need access to capital and would like to pass it to your family, free from Inheritance Tax, but would like to keep the right to receive a regular income.  You would make a gift into a single-premium insurance bond, fixing how much income you will take until your death.  If you survive for 7 years, the bond will not be counted as part of your estate and your family will be able to keep any growth in the bond together with the remainder of your investment.  Even if you did die within 7 years, your family may get a discount on the Inheritance Tax because your right to draw an income from the gift reduces its value.  The extent of the reduction will depend on your health, gender and the level of income you withdraw.

• entering into a Loan Trust.  Under this scheme, you would make an interest free loan which is repayable on demand, and the proceeds are invested in a single premium life assurance bond written into trust for your chosen beneficiaries.  As the bond grows in value, the growth will fall outside of your estate for Inheritance Tax purposes.  However, the value of the gift itself will remain in your estate for Inheritance Tax purposes as it was not an outright gift by you but a loan which is repayable to your estate.

• if you are a beneficiary of a will and your inherited wealth is likely to create an Inheritance Tax problem for you, it is possible to re-distribute the deceased’s estate through a Deed of Variation so that you can re-direct your inheritance to a new beneficiary or perhaps into a trust.  There is a time limit for a Deed of Variation – it must be signed within 2 years of the date of death of the testator.

The advice you require will depend on your individual circumstances, which we will discuss in detail with you before beginning any drafting or confirming our advice.

As solicitors, we are unable to provide you with any financial advice but we may refer you to someone who is authorised by the Financial Services Authority, as we are not.  However, as we are regulated by the Solicitors Regulation Authority, we may be able to provide you with certain limited investment services where they are closely linked to the legal work we are doing for you. 

We are more than happy to work with your own independent financial adviser, if you would like us to.  Alternatively, we have a panel of advisers whom we have worked closely with for over 10 years and we are very pleased with their professional services for our clients.

We are an unusual private client firm of solicitors in that we fully support the use of independent financial advisers to enhance and achieve the objectives of our clients in a way which, on occasions, cannot be achieved by legal advice alone.

Liz Britton works closely with Linda Pratt who is a member of STEP – the Society of Trust and Estate Practitioners.

To discuss Inheritance Tax in more detail, or to arrange an appointment, please contact Liz Britton on 01943 885107 or email liz.britton@ridingslaw.com.