Avoiding Inheritance Tax

Summary: When it comes to Inheritance Tax the rules are fairly straightforward and if you are domiciled or deemed domiciled in the UK then your entire worldwide estate will be liable to UK IHT upon your death so what can be done to avoid the most unfair tax of all?

When it comes to Inheritance Tax the rules are fairly straightforward and if you are domiciled or deemed domiciled in the UK then your entire worldwide estate will be liable to UK IHT upon your death.

Therefore when it comes to the avoidance of death duties you have to seriously consider this question of ‘domicile’.

If there is no getting away from the domicile question, and let’s face it for many of us there is no question of giving up our domicile of origin, what else can be done to avoid the most unfair tax of all?

Currently the percentage amount of your estate the tax man will be able to claim is 0% on the first £300,000 (tax year 2007 - 2008) of your estate and 40% of everything over that amount. 

Note, the first £300,000 is not exempt - this is often referred to as your ‘nil rate band’ and it is simply taxed at 0%, meaning that the tax man can change this to be a positive percentage amount at any time in the future.

This nil rate band has not increased with inflation...with house prices up by about 60% over the past five years the nil rate band has only increased by 16%.  This means that more and more people are going to be caught out by IHT in the future.

So what can be done? 

When it comes to offshore asset protection, Shelter Offshore may have the information and solutions you’re looking for.

We have many articles on the theme on this site, but if you don’t find what you’re looking for or you have a specific information request tell us your requirements and we’ll get back to you with the information or solutions you’re after wherever possible.

Wills

When writing a will, particularly if you reside outside the UK or you have assets in different locations throughout the world, you really should consider getting professional assistance to make sure your will is

a) tax efficient and
b) legal across the board.

Without professional assistance you could miss out on some simple but very effective ways of protecting your loved ones from IHT, and if you have a complicated estate, legal advice may well be necessary when it comes to the laws of inheritance and forced heirship in the different countries in which you hold assets.

Any assets left to a spouse will pass IHT free as spouses don’t have to pay tax on any assets passed over to them by their partners.  But if you or your spouse die and the estate is simply passed to the remaining spouse, you effectively wipe out one lot of nil rate band advantage. 

Why? 

Because when the remaining spouse dies the entire estate is rolled into one and your children or other beneficiaries can only benefit from one nil rate band exemption of £300,000.

If you and your spouse were to state in your wills that you wish to leave an amount equivalent to the nil rate band operating in the year of your death to your children or beneficiaries, thereby making use of your nil rate band when the first partner dies rather than waiting until you have both expired, you can save your children or beneficiaries IHT because when the second partner dies, the beneficiaries get a second nil rate band exemption.

Nil Rate Band Discretionary Will Trusts

When writing wills, it is important for couples to try and divide ownership of assets as equally as possible because it is not possible to say which partner will die first.  By splitting assets as equally as possible you are working as IHT efficiently as possible.

In addition to this equal split, a ‘Nil Rate Band Discretionary Will Trust’ can be established by each partner.  This arrangement works as follows: -

Say a couple have assets of £600,000 which they divide equally.  They insert nil rate band trusts into their wills and when one dies, £300,000 is left to the nil rate band discretionary trust.  This arrangement allows the surviving spouse to borrow back assets from the trust in the form of an interest-free loan.  When the surviving spouse then dies their estate is effectively reduced by the £300,000 debt to the trust.

These will trusts are not restricted to married couples, they can be used by single people and unmarried couples as well, and even if people are unsure as to whether their estate will be subject to IHT, they can enter a nil rate band discretionary trust provision into their will together with a special clause allowing it to be ignored if deemed not applicable.

Potentially Exempt Transfers

By giving away and gifting assets during your lifetime you are making potentially exempt transfers for the purposes of inheritance tax planning.  What you give away will remain IHT free so long as you survive for more than seven years after giving it away. 

If you unfortunately die within this seven year period, the recipients of the transfer will be taxed on a sliding scale depending on which year after the transfer you died in.  If you unfortunately die within three years of making the transfer the recipient will have to pay the full 40 per cent of anything above the nil rate band and after the three years the tax payable reduces.

With potentially exempt transfers you have to determine how much you can afford to give away during your life time without depriving yourself of a decent lifestyle. 

Trusts

Two out of every three trust deed written is used to reduce IHT liabilities.

A trust is a legal entity into which you can pass ownership and control of assets, once passed you must understand that you no longer own or necessarily control the assets.  The assets within the trust are managed by a neutral third party called a trustee.  The trustee does not hold the assets within the trust for their own use or personal benefit, rather they are bound in equity to administer the trust and its assets for the benefit of the beneficiaries.

As you no longer have access to assets within a trust, you must think carefully about what you can safely afford to dispose of in this way when it comes to IHT planning.

Whether an onshore or an offshore trust is your best decision and whether an ‘Interest in Possession’, ‘Life Interest’, ‘Discretionary’ or ‘Accumulation & Maintenance’ trust is best for you will be up to you and a professional adviser to ascertain.  Each type of trust is very different and the applicability of each one to your own personal set of circumstances and requirements will require the advice of a professional financial expert.

Other ways to avoid IHT

It is essential to first get to grips with the complexities of estate planning.  In order to protect your family, your estate and your own wishes I would recommend you seek professional advice.

Initially you need to establish your potential IHT liability and then you need to find the solutions to reduce and negate that liability. 

The first step on the road to IHT avoidance is to have a full financial review and from there you can discuss your options with an expert.

If you are not UK domiciled and/or you would like to find out more about inheritance or estate taxation in your country of domicile and ways to legally avoid it please contact us with your requirements.

SHARE: del.icio.us   Digg   Facebook   Google   Mixx   NewsVine   StumbleUpon   Technorati   YahooMyWeb