AS Benjamin Franklin famously said: In this world, nothing is certain but death and taxes. And on death, the incidence of Inheritance Tax can be a significant loss of wealth from the deceaseds estate.
An individuals estate is normally comprised of assets such as the value of their home, savings and investments assets like quoted shares as well as personal possession such as jewellery. Amounts owed by an individual at the date of their death are taken into account to determine the value of their net estate.
Where an individuals net estate exceeds the nil rate band of £325,000 (£650,000 for married couples) on death, IHT of 40% is levied on that excess.
The current nil rate band will continue to apply until 2015 and even with the recent economic woes the lack of any increase in this IHT exemption could potentially expose individuals who may previously have thought this form of tax was the domain of only the very wealthy.
For those with modest assets, but not significant pension income there is often not much that can be done to mitigate the IHT cost for the next generation.
If you need the assets for security of income in your retirement you cannot also give them away to mitigate IHT. There are some insurance company products available to partly achieve this but should only be used with great care and with complete understanding.
For those who have built up good pensions and are less reliant on capital, gifts could be made during their lifetime to children or grandchildren to save tax in the future.
Gifts of up to £3,000 per individual can be made annually and are completely ignored for IHT purposes. If the £3,000 annual exemption has not been used in the year it can be carried forward to be used in the following year, potentially giving scope for up to £12,000 to be gifted, for married couples.
Where individuals have surplus income, after taking account of all domestic expenditure, they could make annual gifts out of this surplus which could be exempt from IHT, as long as the gifts do not affect your current lifestyle. ê
This may be of benefit to say grandparents wishing to help their grandchildren who are faced with increasing educational costs whilst at the same time helping to mitigate their own IHT liability.
This type of gift must be intended to be made on a regular basis and a good way of demonstrating this would be to set up a regular standing order payment from you to the recipient.
You do not need to commit yourself for a fixed period of time but your intention must be to make more than one gift.
Lifetime gifts in excess of these exemptions will be free of tax provided the donor survives seven years thereafter.
For those contemplating making sizeable gifts, the use of nil rate discretionary trusts via their wills can still play an important role where taxation issues are not the only ones for instance where individuals are concerned about protecting their assets from young or inexperienced beneficiaries.