BENNETTS - Inheritance Tax : Trusts Compared

Inheritance Tax

Firstly, some basic rules about Inheritance Tax and how to avoid it

1. Apart from exemption for bequests to your spouse, if she or he survives you, or to charity, estate on your death exceeding the nil rate band1 is generally taxed at 40%, as is most of any capital you give away in the seven years before your death. However, married couples have the chance to add their bands together so that, for example, the nil rate band might be used by the first to die to give away, say £100,000 to the next generation. The survivor's nil rate band would then be the total for both less the £100,000 already used.

2. There are certain exemptions : for example,
a. unlimited gifts or bequests to your spouse , provided he or she is domiciled in the UK (if not, the limit is £55,000)
b. gifts or bequests to a registered charity , a political party or certain government institutions.
c. gifts of up to £3000 per year
d. gifts out of your surplus income on a regular basis ("normal expenditure")
e. maintenance or education of your child until he or she ceases full-time education or training
f. maintenance of a dependant parent who is incapacitated by old age
g. all gifts to the same person in the same year not exceeding £250
h. as parent, up to £5000, as grandparent, £2500, and in any other case up to £1000 as a gift on marriage

3. You are not liable in respect of assets held abroad if you are not domiciled in the UK .

4.If you give away assets during your lifetime , and survive 7 years, a direct gift to a beneficiary is not taxed. (There is taper relief after three years on gifts which exceed the nil-rate band).

5. Agricultural and business assets, if actively managed , attract 100% relief after being held for two years. Tenanted farmland attracts 50% relief. There are schemes under which a taxpayer's limited company can join a partnership in (housing, public houses, forestry), with the management provided. Shares in such a company can qualify for 100% business relief from Inheritance Tax. Shares in the Alternative Investment Market (AIM) also qualify for Business Property Relief and are becoming popular. Further information is available on request.

6. If you give away an asset but retain the right to use it, either exclusively or on a shared basis, the gift may not be effective for tax purposes and the asset might still be counted as part of your estate on your death. Alternatively, you may find you are charged income tax on the benefit you get from it. You can effectively give away your home so long as the new owners, e.g your children, live in it (with or without you) or, if not, you then pay them a commercial rent. If you bequeath your part of your home to someone other than your spouse, he or she cannot prevent it being sold subsequently.

7. You can give away assets under a discounted gift scheme , under which you have to take a fixed income of, say, 5% per annum. For older clients this can mean a big reduction in the value of such a gift from "Day One", but if you survive for some time you may find that the money is effectively paid back to you, negating the immediate effect.

1 £300,000, £312,000 from 6th April 2008, £325,000 in 2009, £350,000 in 2010

How trusts can be used to limit Inheritance Tax