September 28, 2007
Inheritance Tax - Hot Topics Q&A
Q. My estate is valued at approximately £2m. I'm aware that there would be Inheritance Tax to pay upon the death of both me and my spouse. What action can we take to mitigate this tax?
A. The point to make is that when the first of you dies there would be no IHT to pay as you will receive the spouse exemption meaning all assets pass to the survivor free of IHT.
However, this in itself can cause a problem as the deceased spouse's Nil Rate Band allowance (which is the allowance you have where the first £300,000 of your estate is charged at 0% tax) would die with them so you would not benefit from using the allowance. The survivor would still have their allowance so the first £300K of their (now larger) estate would be taxed at 0%. This saves £120K IHT.
There are NUMEROUS options available to help mitigate IHT, too many to mention here, but let's look at a couple:
- you can set up what is known as a Discretionary Will Trust, which will enable you to utilise the allowance of the deceased spouse, potentially saving £120K IHT.
- you can gift money to family members (or others if you choose) and providing you live for a further 7 years the value of the gift will fall outside of your estate.
The key is to get specialist advice in this area as the rules do change frequently (for example the change to trusts in the March 2006 Budget). Deal with a solicitor AND Financial Planner who can work side by side with you so that you can create the most effective IHT mitigation strategy for your particular situation.
Filed under Q&A, Tax by Ray Prince
