Don't lose out on inheritance tax planning advantages

With the long awaited Finance Bill gaining Royal Assent last week, legislation on personal taxes has now been finalised. Inheritance tax (IHT) has become a term familiar to many as a result of the public debate with Government about new rules on IHT and trust arrangements.

PricewaterhouseCoopers is urging taxpayers to make sure that they understand and review their IHT arrangements to ensure they are up to date with the new rules.

Leonie Kerswill, tax partner at PricewaterhouseCoopers, said:

“If you don’t understand the new rules, don’t be put off. There are many simple steps you can take to ensure you and your family pay the right amount of tax.”

Tips on making sure you manage your IHT arrangements effectively:

1. Make a will and if you have a will, review it
Although this won’t save IHT by itself, it will ensure that assets go where you want them to. Dying without a will may mean assets are passed in accordance with law and not your intentions. Therefore tax saving opportunities, such as using the deceased’s IHT-free allowance (currently £285,000), may be lost.

Trusts and wills mentioning trusts need to be reviewed following this year’s Budget changes. However, if you find a will didn’t get it quite right, your beneficiaries might still be able to change the provisions up to two years after the date of death.

2. Plan to use your IHT nil band rate on death
While leaving all your estate to your spouse normally means there will be no IHT to pay, this does ‘waste’ your IHT free allowance. By including a provision in your will that passes this allowance into a trust, from which the surviving spouse and other family members can benefit, you could ensure continuing financial security and save up to £114,000 of IHT.

3. Consider your home
If you own your home as joint tenants, it might be worth changing this to tenants in common. Under a joint tenancy arrangement the house goes automatically to the spouse on death, which may restrict your options to pass your share of the property to other family members.

If you own a home overseas, ensure you take local tax advice and remember that a foreign will might be necessary to cover your overseas property.

4. Look at your life insurance arrangements
Writing existing policies in trust for beneficiaries could take the proceeds out of your estate for IHT purposes. You should also consider insuring yourself to meet the IHT liability.

5. Consider whether your assets qualify for relief from IHT as business or agricultural property
At present, farmland and shares in some companies, for example family trading companies, fall outside the value of your estate for IHT once you have owned them for a certain number of years. If you do own assets that qualify for IHT relief and your spouse has been provided for, consider leaving these to other family members.

6. Does your income exceed your outgoings?
If so, then you could consider making regular gifts out of your surplus income which would then qualify for exemption from IHT.

7. Make use of the various IHT exemptions
All individuals have an annual exemption of £3,000 to use as they wish. There is also a small gifts exemption which means you can give up to £250 each year to any one individual, which is handy if you have lots of grandchildren. There are also some extra exemptions for gifts on marriage.

8. Do you want to gift a larger amount?
If so, then provided you survive seven years from the time of the gift, there will be no IHT to pay. Even if you don’t survive the full seven years after three years the amount of IHT due begins to fall.