How to beat Inheritance Tax

Published 12th Mar 2007

With Gordon Brown edging closer to Number 10, experts are advising people across the UK to reassess their wills to beat his stranglehold on Inheritance Tax (IHT).

Since entering into office nine years ago, the Chancellor has seen an 89 per cent increase in IHT income and is expected to pocket around £3.6 billion during the 2006-2007 financial year.

And despite his insistence that few people will be liable for IHT on their estates when they die, the number of estates liable for taxation has risen from 15,000 in 1997 to an expected 37,000 for this year.

Howard Burns, partner at national law firm Rowe Cohen, said: “A property boom has coincided with the Chancellor's time in office. Alongside this, there has been no balance between IHT thresholds and rises in inflation, which has caused the thresholds to get seriously left behind. In effect, people's wealth has increased, but no change to IHT allowances has been made for this.”

Over the past 10 years, house prices have risen by 179 per cent, while the IHT nil rate band threshold (the maximum amount you can leave before your estate becomes liable to tax) has risen by 89 per cent and currently stands at £285,000.

Burns said: “Although £285,000 sounds like a lot of money, many people do not realise how easy it is for their estate to quickly creep past this amount. Inheritance and life insurance payouts received upon the death of a spouse, civil partner or parent, rocketing house prices and forgotten savings can all push estates significantly into the 40% tax zone.”

Wills can protect or mitigate against unnecessary levels of IHT, but Burns explains Wills of this kind have to be carefully tailored to suit the individual's estate to properly utilise the nil rate band allowance.

“If your property is your main asset, an I.O.U Discretionary Will Trust should be considered - these remain unaffected by Brown's taxation of trusts announced in his last budget.

This allows you create a debt against your estate and with the agreement of the trustees, the surviving spouse or civil partner is allowed to have full use of the assets including the family home during their lifetime. Upon the second death, the value of the I.O.U is set-off against the estate of the second spouse or partner to die, and the nil rate band allowance applied, before IHT is calculated on the remainder. It is usually appropriate to change the ownership of the house from joint tenants to tenants in common.”

To mitigate IHT, Burns advises that people reassess their wills and the distribution of estate: He said: “A Deed of Variation can allow a deceased person's Will to be re-written so that the deceased's estate is redirected, as long as it's written within two years of death and agreed by all beneficiaries.”
By Jennifer Lowe

Source: ' Personal Finance & Savings '

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