Reducing the inheritance tax burden

The subject of inheritance tax (IHT) has spent a significant amount of time in the headlines in recent months, being described at one point as one of the 'least popular' taxes in the UK.

This may seem surprising, considering the fact that a relatively small proportion of the population is liable to pay the tax. However, with increases in the threshold failing to keep up with the speed of house price growth, increasing numbers of people have found that the rising value of their home has taken them over the IHT threshold.

IHT is currently payable at 40% on assets exceeding £300,000 during 2007/08 (or £312,000 2008/09), so if you own your own home, and have some savings and other assets such as shares and securities, your estate could be liable. This makes early IHT planning essential.

So how can you minimise your liability to IHT?

IHT reliefs

There are a number of reliefs available - perhaps most importantly relief on business and agricultural property, which effectively takes most of such property outside the IHT net. Subject to the two-year

minimum holding period, business property will generally attract 100% property relief.

Transfers between spouses

Transfers of assets between two UK-domiciled spouses are exempt from IHT, regardless of whether they are made during a person's lifetime or on their death.

Gifting strategies

Introducing a programme of lifetime gifts can also significantly reduce the IHT liability on your estate and make use of available lifetime exemptions. This has the advantage of allowing you to witness the benefits they bring to your family members, while also escaping IHT as long as you survive the gift by seven years and no longer continue to benefit from the gift yourself. A discount can also apply where lifetime gifts were made between three and seven years before death (note that the discount applies not to the gift, but to the tax on the gift). Gifts to charity are generally exempt from IHT.

Trusts

Trusts can be used to help maintain a degree of control over the assets being gifted, for example in the case of younger recipients. Including a nil rate discretionary trust in your Will can create the opportunity for assets worth up to £300,000 to pass to beneficiaries other than your spouse. This can still be of benefit in some cases, despite the recently announced proposal for transferability of the unused portion of the nil rate band to the surviving spouse. Life assurance policies can be written into trust in order that the proceeds will not form part of the estate on your death. Talk to us about using trusts to suit your planning needs.

Considering the family home

Despite announced changes to the IHT regime, some people may still choose to sell their house and buy a smaller property in order to release cash, which can then be used to fund their living expenses in retirement. In cases where the children may wish to retain the family home, raising the funds to pay the IHT due on the death of the parents may now prove less of an issue, following the Government's recent proposal to allow transferability of unused nil rate bands between spouses. Talk to us about the up-to-date position.

Finally, a word of caution: when considering strategies to reduce your IHT liability, it is important to ensure that you retain sufficient funds for your own needs in retirement. Talk to us about putting in place a tax-efficient IHT strategy which suits your individual circumstances.