Inheritance Tax Planning

Around 37,000 estates are subject to Inheritance tax a year giving a total of around £3.5bn to the Treasury.



More and more families have to pay this unpopular tax nowadays where once it was considered a tax aimed at the very wealthy. The threshold is just £300,000, a tax of 40% is paid on assets above this figure and most of UK properties are fast catching up with this figure. Small rises have been announced moving the threshold up to £312,000 in 2008-2009, £325,000 for 2009-2010 and £350,000 for 2010-2011.

Those domiciled in the UK are also taxed on worldwide assets so Inheritance tax would be payable on overseas properties even if taxes on death were not due in the country where they are held. Non-UK domiciles are subject to inheritance tax on their UK assets.

For inheritance tax purposes people are consider to be a UK domicile if:-

They were domiciled on or after 10 December 1974 and within three years preceding the transfer.

They were resident in UK on or after 10 December 1974 and were resident at least 17 of the 20 tax years up to and including the transfer year. All transfers between UK domiciled spouses or civil partners are free from Inheritance Tax whether made on death or before but not those cohabitating such as a mother and carer daughter.

It is very important that wills are made. It is also essential that both partners in a marriage or civil partnership both take advantage of their Inheritance Tax threshold.

Gifts of assets including property can be given free of Inheritance Tax provided the donor gives this at least seven years before death. But of course not everyone is able or willing to do this.

One way of reducing the Inheritance Tax likely to be due on a property is to opt for a loan trust. This will allow them still to have access to their capital as and when required or to take regular payments as income. Of course a lump sum or investments such as share must be available. Any rise in the value of the investment belongs to the trust, is outside the estate for Inheritance Tax purposes and goes to the beneficiaries of the trust.

By taking an income, usually around 5% annually, the outstanding loan will reduce. The loan holder must spend the money to remove their value from the estate.

By using a loan agreement the money lent to the trust is interest free and payable on demand. It is possible that if the loan was to be repaid early not all may be payable due to early surrender charges and/or investment performances.

There is no financial loss to an estate because of a loan trust and this amount should be from the onset for Inheritance Tax purposes. Loan trusts will continue to be advantageous by

Giving client immediate access to the outstanding loan when required.

Allowing client to receive income of up to 5% annually of amount of Initial loan for up to 20 years with no liability to income tax.

Making sure there is no charge to Inheritance Tax on starting the trust

Keep all future investment growth value outside the client’s estate

Giving trustees the opportunity to change beneficiaries.

Please seek professional advice as our information is only an outline and may include inaccuracies.