Facing up to Inheritance Tax

A common misconception that many people have about Inheritance Tax(IHT) is that they are not wealthy enough to have to worry about it. However, with the substantial rises in property prices in recent years, more and more people may face a potential IHT bill.

IHT is payable on the balance of any estate worth more than the prevailing threshold(£255,000 in the current 2003/2004 tax year) with any excess being taxed at the rate of 40 per cent.

There are however a number of planning methods that can be under taken in order to reduce exposure to what is often referred to as a 'voluntary' tax.

First and foremost it is essential to ensure that an adequate will is in place to specify the beneficiaries of the estate in the most tax efficient manner. The will should also be regularly reviewed to take into account changing circumstances.

Inter-spouse transfers on death are exempt from IHT although it needs to be borne in mind here that without any other planning, this will simply pass the problem on to the surviving spouse.

As to reducing the value of the estate liable to IHT, one of the simplest methods that can be used is to give assets away during the lifetime. These gifts become what are known as potentially exempt transfers and, should the donor survive at least seven years form the date of the gift, the assets will not form part of the estate for IHT purposes.

Small gifts and gifts in consideration of marriage can be used to reduce the value of the estate on an ongoing basis although there are limits to the amounts that can be given away under these provisions.

More complex planning measures include the use of trusts for example where a jointly owned main residence is concerned of the donor wishes to pass assets to grandchildren rather than children.

Finally, where a substantial IHT liability is expected and cannot be avoided, it may be worth considering a life insurance policy, the proceeds of which can be used to meet the liability,.

As can be seen from the above, there is plenty of scope for planning where IHT is concerned and where a potential liability exists, thought needs to be given to this area as soon as possible.

Should you wish to discuss in more detail any of the matters raised above, please contact either Danny Mehta or Basit Ahmad on 01344 627517 or office@mehta-co.com.