Taxman waits at Pearly Gates

Posted on January 22, 2013

A little internet research suggests that death duties first came to the UK in 1796, some years after US founding father Benjamin Franklin first talked about death and taxes being the only two certainties we all face. Those death duties brought an even stronger link between the two dreads in Franklin’s words; and what we now call Inheritance Tax (IHT) still combines a loved-one’s departure with a potentially large tax bill payable from the deceased’s estate before probate can be granted and distributions made to beneficiaries.

IHT is levied at 40% on estates valued above a certain figure, though only on the amount above the threshold – in simplified terms, £325,000 for a single person and £650,000 for married couples and civil partners. This includes property; so, many people whose estates suffer IHT are not immensely wealthy. It is only natural to want your successors to gain maximum benefit from your estate and there are various legitimate ways to plan for and to mitigate the impact of IHT.

Offspring and IHT mitigation
A relatively simple way to reduce the size of your estate, and thus any IHT liability, is by giving assets to younger generations during your lifetime, perhaps when they most need it. There are possible snags to weigh up against the advantages. IHT may still be payable if you die within seven years of making such ‘potentially exempt transfers’ (PETs) in excess of the prescribed limits for outright IHT exemption. Other issues surround whether the recipient might fritter their windfall and whether you should retain your wealth for possible care fees.

If you decided to divest yourself of a very large sum but did not survive for seven years, a resulting IHT liability could have been covered by a ‘gift inter vivos plan’, a decreasing term assurance policy (held in trust) to cover the gradually decreasing potential IHT liability. Sometimes, despite carefully considered giveaways, an IHT bill may be inevitable and it is sensible to plan for this. IHT being payable before probate is granted can be awkward for your heirs if the estate is locked into property and other illiquid assets, so they could need a loan to pay the taxman.

Accessible money to pay IHT can be released from a whole of life policy. A sole or ‘joint life second death’ policy, according to circumstances, placed in trust for the beneficiaries and thus excluding its proceeds from the deceased’s estate, can provide the cash required. The premiums paid on this policy naturally reduce the estate. Cover may depend on health and other things, whilst premiums may sometimes be regarded as PETs or as chargeable lifetime transfers, so do discuss matters with your professional adviser to identify the best course for you.

Inheritance Tax Planning, taxation and trust advice are not regulated by the Financial Conduct Authority.

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