Inheritance Tax (or “IHT” as it is commonly known) is a topic that is on everyone’s minds and close to both their hearts and wallets. The current position is that the value of any assets that you own over £312,000.00 (the “nil-rate band” for 2008-2009 following last month’s Budget) will be subject to tax at 40%.

The current Chancellor took steps to placate an electorate disenchanted with the Inheritance Tax regime in October last year. At the time he was reported in the tabloid press as having doubled the nil-rate band. In truth, the reforms simply allow a surviving spouse or civil partner to appropriate the unused portion of the nil-rate band of their deceased partner to reduce any tax liability arising on their estate. This concession applies to deaths occurring after 9 October 2007 but is retrospective in that a widow could employ the nil-rate band of her deceased husband who died prior to October 2007 for example. It is consequently possible in some instances to simplify the terms of many previously complex Wills by removing nil-rate band discretionary trust provisions thereby making Wills simpler for both the testator and his Executors to understand.

An example of the new provisions:-

Alan died in August 2007 leaving £150,000 to his only son and the remaining £150,000 to his wife, Julie. Julie dies in May 2008. Her individual nil-rate band is £312,000. However, as Alan has only used 50% of his nil-rate band (£300,000 for 2007-2008) the remaining 50% can be added to Julie’s tax-free exemption giving her Estate a total nil-rate band of £468,000 (her own nil-rate band of £312,000 plus 50% of Alan’s nil-rate band calculated at the date of Julie’s death).

In addition to utilising the new nil-rate band provisions there are a number of other methods available to reduce or even eliminate your liability to Inheritance Tax:-

• Lifetime Gifts- Any gifts between a husband and wife are exempt from tax but bear in mind that the beneficiary of the gift may have to pay tax on the gift when they die. A useful tax exemption allows you to make gifts of up to £3,000 per year from capital to your chosen beneficiary. You can also make gifts of up to £250 a year to any number of recipients but these reliefs cannot be used to benefit the same person. Any gifts from income.

• Potentially Exempt Transfers- Affectionately known as “PETS”,  gifts of any value can be made during your lifetime and will be exempt from IHT provided that you live for a further 7 years after making the gift.

• Charitable Gifts- All gifts to UK-registered charities are exempt from tax. This also applies to gifts to national museums, universities and various other bodies.

• Discretionary Trusts- These trusts may still be useful if you wish to provide not only for your spouse/civil partner but also for children or some other beneficiary as the trustees can distribute trust funds as they see fit. Additionally, it is conceivable that well-invested funds could ensure that capital growth exceeds any increase in the nil-rate band during the survivor’s lifetime.

• Life Insurance- A life insurance policy can be purchased to cover your tax burden. You must ensure that it is put into trust for the person who you wish to benefit in order to avoid the proceeds falling within your Estate.

Given the recent reforms to the tax regime it is now possible for many couples to simplify their existing discretionary trust Wills and it may be prudent to review your position. At Milne Moser we have a highly skilled team of fully-qualified Solicitors who will be more than happy to discuss your IHT position with you.

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