Guide to Inheritance Tax

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					Guide to Inheritance Tax
By Margaret Stone

Margaret Stone
is a distinguished personal finance
                                           You can’t take it
journalist. She launched the personal
finance section of The Times followed by
                                           with you when you go….
that of the Daily Express before taking
over Money Mail, the personal finance
section of the Daily Mail. She now deals                Whether you keep your
with readers’ financial problems in her                 money in that mythical tin
‘Dear Margaret’ column which appears                    box under the bed or in
every Wednesday in Money Mail.                          the most sophisticated of
                                                        electronic bank accounts,
                                                        the one certain fact, after
                                                        death itself, is that you will
                                                        have to leave your money
                                                        and all your worldly wealth
                                                        to someone when you die.

                                                   Great expectations
                                                        Your nearest and dearest
                                                        are not the only ones
                                                        who rightly expect to
                                                        benefit when your assets
                                                        – money and belongings –
                                                        are distributed. The state
                                                        also has its eye on your
                                                        estate and will expect its
                                                        share. The question is:
                                                        how big is that share?

This booklet from Friends Provident                Be prepared
is designed to help you come to
grips with inheritance tax (IHT).                       It is entirely up to you.
                                                        The less you do to plan
What it is.
                                                        for the Government’s
How it will affect you.                                 final tax bill, the more
How it operates.                                        the state will benefit from
                                                        your death. It’s as simple
What you can do to reduce its impact.                   as that. If only inheritance
Where to find the solutions.                            tax itself were that

What is inheritance tax?
    Governments have often          The current position for tax year              But given that there are now
    seized the opportunity that     2005/06 is that each person can                an estimated 2.4 million
    the death of wealthy citizens   leave up to £275,000 (the nil                  houses in the country worth
    provided to replenish the       rate band) without incurring                   over £275,000*, it is very
    state coffers. In the United    IHT. Anything else is subject                  clear that IHT is no longer a
    Kingdom, estate duty was        to tax at 40%, with the                        tax which need concern only
    introduced in 1894, to be       significant exemption that gifts               the very wealthy. In 2002/03
    replaced by capital transfer    or bequests to a spouse or                     only four deaths in 100
    tax in 1975 which in turn       civil partner are outside the                  resulted in death duties.
    was replaced in 1986 by our     tax net.*                                      This year it is expected to
    present inheritance tax.        *There is a limit of £55,000 where the donor   be six in a 100 despite the
                                     is UK domiciled and the recipient is not.     increase in IHT threshold.
                                     There are other, mainly modest, exemptions.
                                                                                   * NOP World

                                                                                   The starting point for IHT
                                                                                   rises each year in line with
                                                                                   the increase in the Retail Price
                                                                                   Index, although the Chancellor
                                                                                   of the Exchequer may fix a
                                                                                   different level if he chooses.
                                                                                   In the March 2005 Budget,
                                                                                   Chancellor Gordon Brown
                                                                                   pledged that the threshold
                                                                                   would rise to £285,000 in tax
                                                                                   year 2006/07 and to £300,000
                                                                                   in 2007/08.

                                                                                   Few tax experts believe these
                                                                                   planned increases in the nil
                                                                                   rate band will be sufficient to
                                                                                   prevent increasing numbers of
                                                                                   people falling into the IHT net.
                                                                                   Indeed one firm of financial
                                                                                   advisers * has forecast that
                                                                                   in less than 12 years time
                                                                                   the average UK homeowner
                                                                                   will be liable to this ever-
                                                                                   enveloping tax.
                                                                                   *Key Retirement Solutions

Will I be affected by inheritance tax?
    Do you know how much             Basically, it means sitting          •   death claim value of life
    you are worth?                   down with a pencil and paper             insurance policies, unless
    A surprising number of           and listing the value of virtually       written in trust – this
    people don’t. Yet without        everything you own, including            includes term or protection
    this basic information, you      assets you thought you had               insurance as well those
    cannot assess your potential     given away – and the debts               policies held for investment,
    liability, if any, to IHT; nor   that reduce your net worth.
                                     For anything you own jointly,        •   pension plans – company
    can you take sensible steps
                                     you should only include your             pension schemes and most
    to minimise the taxman’s
                                     personal share of its value.             independent arrangements
    take from your estate.
                                     The total should include:                such as personal pension
                                                                              plans need not be included,
                                     •   your home – less any
                                         mortgage or other loan           •   second home (including
                                         against it,                          time share) – even if abroad,

                                     •   its contents – don’t use         •   gifts made less than
                                         their insurance ‘new for old’        seven years ago – must
                                         replacement value,                   be counted in full, unless
                                                                              immediately exempt (see
                                     •   your car – current second-           page 10),
                                         hand value,
                                                                          •   debts, including credit
                                     •   your bank and building               card balances – certainly
                                         society accounts,                    not part of your worth,
                                         Premium Bonds and
                                         other National Savings –         •   anticipated funeral costs
                                         any Premium Bond                     – a liability you won’t have
                                         winnings within 12 months            thought about!
                                         of your death will be            If your total assets less the
                                         included in your estate,         liabilities are more than the
                                                                          nil rate band of £275,000,
                                     •   your chattels –
                                         blanket term covering            then you have a potential
                                         all possessions such as          IHT liability which needs
                                         jewellery, cameras, sports       addressing as the figures
                                         equipment etc,                   below show.

                                     •   investments – although           Value of estate IHT payable
                                         IHT concessions apply to
                                                                          £275,000           Nil
                                         certain types of smaller
                                         company investments,             £300,000           £10,000

                                                                          £400,000           £50,000

                                                                          £500,000           £90,000

                                                                          £600,000           £130,000

                                                                          £700,000           £170,000

                                                                          £800,000           £210,000

                                                                          £900,000           £250,000

                                                                          £1,000,000         £290,000

Your home and inheritance tax
    Homeowners are delighted         Most people are aware of          The scale of the problem
    to be comfortably positioned     the difficulties that young       cannot be over-estimated.
    on the housing ladder and        people, as a result, are facing   While the average price of a
    we’ve all been known to          in getting into the housing       home in the UK is £166,074,
    boast about how valuable         market. Another, less             in certain regions it is much
    our house has become.            considered, side effect, is       higher. *
    But there are drawbacks to       that when parents have a
    the massive house price          high value house it can raise
                                                                       •   Greater London, £247,926.

    inflation of recent years.       their children’s expectations     •   South East, £215,854.
                                     of a windfall and possibly
                                     lull them into a false sense      •   South West, £182,295.
                                     of security.                      •   East Anglia, £161,904.
                                     Without planning for IHT,         •   West Midlands, £159,458.
                                     several million families whose
                                     homes are currently worth         •   Wales, £149,464.
                                     more than £275,000 (and           •   North, £137,094.
                                     those whose other assets
                                     tip them above this figure)       •   East Midlands, £145,728.
                                     will find that 40% of anything
                                                                       •   North West, £135,909.
                                     over that amount goes to the
                                     taxman. It will be a blow to      •   Yorkshire & Humberside,
                                     their children, many of whom          £128,079.
                                     will be counting on that
                                                                       •   Northern Ireland, £129,312.
                                     money to help pursue their
                                     own property dreams.              •   Scotland, £106,392.
                                                                       * HBOS regional summary 15.11.05

How does inheritance tax operate?
    It is sensible and wise to       If you have made a will, it is    really did belong to you and
    make and keep up-to-date         your executor, as your legal      can be distributed to your
    your will, a powerful tool in    personal representative, who      beneficiaries.
    IHT planning. But regardless     will attend to the details; if
                                                                       But the Probate Registry, a
    of whether you have made a       you haven’t made a will your
                                                                       division of the Department
    will or die intestate, the IHT   legal personal representative
                                                                       for Constitutional Affairs, will
    provisions, where relevant,      will be the administrator of
                                                                       also want confirmation that
    remain the same.                 your estate.
                                                                       any IHT, if due, has been paid.
                                     The executor/administrator has If your taxable estate is under
                                     to compile a complete list of all the £275,000 threshold, no
                                     your assets and liabilities (see  IHT will be payable; above
                                     page 4) and obtain grant of       that figure, IHT must be paid –
                                     probate/letters of administration and paid before anyone else
                                     from the Probate Registry. This gets a penny.
                                     confirms that all your assets

Who pays inheritance tax and when?
   The timetable for paying IHT     On the other, it can create       A concession was won a few
   is tight. On one hand, this      serious financial problems        years ago that certain types
   is no bad thing; it acts as a    for executors who may be          of assets, such as National
   goad to keep the process         members of the family or          Savings and Government
   moving and makes sure that       personal friends. In addition,    stock can be used to pay
   beneficiaries do not have to     it can also reduce the final      the pending IHT bill before
   wait too long to receive their   amount of money available         probate is granted. More
   inheritances.                    to your beneficiaries.            recently an arrangement has
                                                                      been introduced allowing bank
                                    Normally IHT must be paid
                                                                      and building society accounts
                                    within 6 months of death.
                                                                      to be used in this way.
                                    After that, interest, currently
                                    at the rate of 4% a year, is      But what if this is not enough?
                                    charged. Some assets are          In this case, the executors
                                    acknowledged to be more           will have to pay the IHT and
                                    difficult to value until a sale   raise the money themselves
                                    has been negotiated.              either from their pocket or by
                                                                      borrowing it. All executors,
                                    So in the case of land,
                                                                      whether personal or a
                                    property, certain business
                                                                      professional, such as a
                                    assets and sometimes the
                                                                      solicitor, are entitled to be
                                    deceased’s home, the IHT bill
                                                                      reimbursed for costs incurred.
                                    may be paid in instalments
                                                                      So, the interest on such a loan
                                    over 10 years (or until sold,
                                                                      would further deplete the
                                    when full settlement is due).
                                                                      amount available from your
                                    But it is not a free facility;
                                                                      estate to distribute to the
                                    interest at the same rate of
                                    4% a year is added to the
                                    outstanding bill.                 You may have already taken
                                                                      steps to minimise IHT by
                                                                      giving some assets away. But
                                                                      if you fail to survive the seven
                                                                      years that would take the gift
                                                                      out of the tax net altogether
                                                                      (see page 9), then it will be
                                                                      the recipient of the gift, not
                                                                      the executors, who have to
                                                                      pay any tax due on it.

                                                                      This has implications for the
                                                                      executors. In most cases the
                                                                      past gift will absorb the first
                                                                      tranche of the nil rate band,
                                                                      reducing the amount of nil
                                                                      rate band available for your
                                                                      estate on death – thus leaving
                                                                      the executors more to find to
                                                                      meet the IHT bill.

How can I reduce my inheritance tax liability?
    IHT has frequently been         And here’s another description      There are several sensible
    referred to as a ‘voluntary     which should make you think         and practical measures to take
    tax’, a description which       harder still. Lord Jenkins, a       which will minimise your IHT
    should make you stop in         former Chancellor of the            liability without warranting a
    your tracks and think hard      Exchequer, said IHT was a           closer inspection by the
    about your own plans –          ‘voluntary levy paid by those       Inland Revenue suspecting
    or perhaps lack of them?        who distrust their heirs more       tax evasion. The steps tend
                                    than they dislike the Inland        to interact with each other.
                                    Revenue.’                           For example, your will should
                                                                        make use of the some of the
                                    The very rich, with stately
                                    homes and treasures to keep
                                                                        IHT preventive action starts
                                    in the family, have always
                                    sought to limit the impact of
                                    death duties. So too have the       •   Make a will, drafted by a
                                    merely wealthy. Today most              professional, with IHT in
                                    of us, whatever our means,              mind.
                                    should be taking precautions
                                                                        •   Make use of IHT
                                    to ensure that IHT is not going
                                    to hurt our families too much.
                                                                        •   Make lifetime gifts.

                                                                        •   Make sure your heirs have
                                                                            sufficient funds to pay the
                                                                            IHT bill that remains.

The importance of your will
    Making a tax-efficient will     If you die without making a will,   Another IHT-specific advantage
    is vitally important. Failure   then it is the law of intestacy,    of making a will is that it
    to make a will, apart from      not you, which decides where        enables you to use
    possibly having the ‘wrong’     your money will go. If you have     discretionary trusts (if you
    people benefiting, could,       children your spouse or civil       haven’t done in your lifetime).
    unwittingly, result in a        partner will only be entitled to
                                                                     Even if you left it too late
    greater IHT liability. Both     £125,000 outright. The children
                                                                     to set up your will with IHT
    could be considered as          are immediately entitled to half
                                                                     planning in mind, it is possible
    cheating on the family.         the balance; your spouse or
                                                                     to vary the terms of a will
                                    civil partner will have a life
                                                                     after your death if it then
                                    interest in the other half which
                                                                     proves that a more favourable
                                    reverts to the children on
                                                                     IHT liability could be achieved.
                                    his/her death.
                                                                     It will require the consent of
                                    The intestacy rules restrict     everyone whose benefit under
                                    your ability to use together the the will is being reduced.
                                    spouse exemption and the nil     The deed varying the will
                                    rate band to minimise IHT.       (which the Inland Revenue will
                                                                     expect to see) must include a
                                                                     statement that it is to take
                                                                     effect for IHT. (An intestacy
                                                                     can be similarly varied.)

Exemptions from inheritance tax
    There are a clutch of              Married couples, civil                          Why? By leaving everything
    exemptions and reliefs from        partners and IHT                                to your spouse or civil partner
    IHT. For most people easily                                                        you are, in effect, increasing
                                       ‘What’s yours is mine, and
    the two most important                                                             the size of his or her future
                                       what’s mine is yours,’ is
    which must be at the                                                               IHT liability. Had you originally
                                       certainly a saying approved
    forefront of any tax                                                               made use of the £275,000
                                       by the Inland Revenue as
    planning are:                                                                      nil rate band by giving that
                                       far as married couples or civil
                                                                                       amount to other beneficiaries,
    •   spouse exemption –             partners are concerned. When
        gifts between, and                                                             leaving the rest to your
                                       any gift passes between
        inheritance from, spouses                                                      spouse or civil partner, his/her
                                       spouses or civil partners,
        or civil partners are exempt                                                   total estate, would be that
                                       regardless of the date it was
        from IHT,                                                                      much smaller. As a result,
                                       made – regardless of its size,
                                                                                       at the second death, any IHT
                                       it will be exempt from IHT.*
    •   potentially exempt                                                             due, would also be that much
                                       *Subject to the non-domicide limit on page 3.
        lifetime gifts –                                                               smaller – and your other
        provided the donor survives    But, beware…                                    beneficiaries potentially better
        seven years, the gifts drop    The automatic conclusion is                     off by a massive £110,000
        out of IHT.                    that the obvious solution to IHT                (i.e. 40% of £275,000).
                                       is to leave everything to your
                                                                                       Of course, your own
                                       spouse or civil partner so that
                                                                                       circumstances need to be
                                       there is no IHT at all to pay. If
                                                                                       taken into account. If your
                                       yours is a truly nuclear family
                                                                                       assets largely comprise your
                                       with no children, relatives or
                                                                                       house and you are the joint
                                       friends to consider, this might,
                                                                                       owners, then your house will
                                       indeed, be the solution.
                                                                                       pass automatically to your
                                       Many of us, however, have                       spouse or your civil partner
                                       children (or other close                        on your death. (But remember
                                       relatives) to whom we would                     that this may only defer the
                                       like to leave as much as                        IHT bill which could arise
                                       possible. In this situation,                    when they die.) In this case,
                                       leaving your all to your spouse                 it is the non-house assets
                                       or civil partner is not the                     that, within reason, you should
                                       answer, particularly if your                    consider passing to other
                                       estate is substantial. Basically,               beneficiaries, possibly in a
                                       you are failing to make use of                  trust, to use up as much as
                                       the first £275,000 of your                      possible of the nil rate band.
                                       estate which falls into the nil
                                       rate band on which no IHT is

Non-married couples               Potentially exempt                3-4 years          80% of IHT
                                                                    after the gift     applicable
If you and your partner are not lifetime gifts and
married or in a civil partnership inheritance tax                   4-5 years          60% of IHT
then the spouse exemption for You don’t have to concentrate
IHT does not apply.                                                 5-6 years          40% of IHT
                              on your death to plan for IHT.
                              Making gifts while you are            6-7 years          20% of IHT
At the moment, anyone in
                              alive is another way of cutting
this position is effectively                                        Other than your own personal
                              down the future bill. In
treated as a single person in                                       resources and wish to transfer
                              addition to the modest range
respect of IHT. In this case,                                       assets, there is no limit to the
                              of permitted gifts which are
tax planning to reduce IHT                                          amount that you can gift this
                              free from the outset, there is
largely revolves around a                                           way. There are four points to
                              the potentially exempt gift,
carefully crafted will making                                       bear in mind.
                              popularly known as a PET.
optimum use of the nil rate
band, lifetime gifts and      A PET is a serious addition to        •   If you give away your family
providing sufficient funds to                                           home and continue to live
                              the IHT planning repertoire as
help meet the tax liability                                             there without paying a
                              it enables significant sums of
should it arise.                                                        proper rent, it will still be
                              money or large scale assets
                                                                        included in your estate for
                                  to be transferred to another,
                                                                        IHT purposes – the Inland
                                  often your children, without
                                                                        Revenue considers it a gift
                                  paying IHT – provided you
                                                                        with reservation, not a PET.
                                  survive seven years after
                                  making the gift.                  •   You will be giving away
                                                                        assets irrevocably –
                               If you die before then, the
                                                                        consider using a trust
                               gift is caught in the IHT net
                                                                        which enables you to gift
Although there has been        and included in your estate.
                                                                        the assets without losing
frequent discussion that the   Because the PET takes first
                                                                        control of how the money
spouse exemption should        bite out of your nil rate band,
                                                                        is used and how it is
be extended to long-term       it reduces the amount of nil
                                                                        eventually distributed
partners who have not married rate band available to offset
or are not registered as civil against your estate on death.        •   Capital gains tax – gifts of
partners (and even elderly     The effect is that the amount            money won’t attract capital
siblings who have always       on which 40% IHT is charged              gains tax, but where other
shared a home together),       can increase by up to the                assets, such as shares or
this does not seem to be       amount of the PET. If the PET            property are concerned,
on the current agenda.         itself is larger than the nil rate       you may be faced with a
                               band, the excess will be                 capital gains tax bill.
                               subject to IHT.
                                                                    •   Can you afford the gift?
                                  There is a taper relief, but in       – your own needs must
                                  effect this is only of benefit        come first. Don’t give away
                                  where lifetime gifts, made            money or assets that you
                                  between 3-7 years before              rely on for income, security
                                  death, exceed the nil rate            and to maintain your quality
                                  band. In this case, the tax is        of life.
                                  reduced on the following scale
                                  on death:

Gifts immediately exempt           Special occasions                  Normal expenditure
from inheritance tax               As the parents of someone          from income
There is a range of modest         who is either getting married      If you make regular gifts from
lifetime gifts which you can       of forming a civil partnership,    any surplus taxable income
make today and which are           you are entitled to give your      and still have enough to
immediately exempt from            offspring £5,000 as an IHT gift.   maintain your usual standard
IHT. The levels actually           If it is a grandchild who is       of living, these gifts will also
pre-date IHT, introduced in        getting married, then the gift     be exempt from IHT. This is an
1986, so their value today is      is halved to £2,500. For any       important exemption, not least
not as high as it once was.        other person, the exemption        because it can be used to
However, that’s no reason          limit is £1,000.                   provide the regular premiums
for ignoring them.                                                    required to fund the important
                                   Charitable gifts and those         life insurance policies which
Annual exemption                   to political parties               can provide funds free of IHT.
Each year you can make gifts       It is to be welcomed that
of £3,000, completely free of      gifts to charities and gifts for
IHT. If you forget to use the      what is known as ‘national
exemption or don’t give away       purpose’, which encompasses
the full £3,000 in any one         museums, art galleries and
tax year then you can carry        the like, can be made without
forward any unused balance         incurring IHT. If you leave
to the next, provided you have     donations to such
already given away the current     organisations until you die,       Inheritance tax relief
tax year’s £3,000. You cannot      those bequests are also free       on investments
hold on to the carry forward       of IHT. On the same principle,
                                                                      Certain types of business
indefinitely; it must be used in   so are donations and bequests
                                                                      and agricultural assets benefit
the next tax year or not at all.   made to a main political party.
                                                                      from IHT relief. So too do
                                   Gifts for education                shares in unquoted or smaller
Small gift exemption
                                                                      companies listed in the AIM
You can make any number of         and maintenance
                                                                      (Alternative Investment
IHT-free gifts of £250 a year to   IHT regulations recognise          Market) provided they have
any number of people (other        the importance of education.       been held for two years.
than someone who received          Payments for the education,        Shares in enterprise
a gift within the £3,000 annual    training or maintenance of         investment schemes (EIS) also
exemption). It’s useful for        your own child are exempt          have to be held for two years
those with hordes of               from IHT. As university costs      to become exempt, but you
grandchildren and godchildren.     in particular continue to rise,    must continue to hold those,
                                   these exemptions may begin         or a successor share, until
                                   to acquire a more prominent        your death when the relief is
                                   role in IHT tax planning. Gifts    deducted from your estate in
                                   made to a former spouse or         order to calculate IHT liability.
                                   civil partner for the same
                                   purposes are similarly exempt.

Financial help for your heirs to face
inheritance tax

    IHT is going to become a        But the reality is that may     Life insurance came into
    fact of life and death for      not be totally avoidable,       being, well before death
    an increasing number            particularly in the case of     duties were invented.
    of people. With careful         families which recognise that   Nonetheless it still has a role
    planning, it will be possible   they are likely to incur IHT,   in combating them. In fact,
    to minimise the impact that     but do not see how they can     whole of life policies could
    your IHT liability will have    mitigate its effect without     have been designed with IHT
    on your spouse or civil         creating financial hardship     in mind. Although they can be
    partner and a younger           for themselves.                 cashed in early, such policies
    generation.                                                     are devised to pay out on the
                                    In this case, the best you do
                                                                    death of the policyholder.
                                    is to make sure that you can
                                    leave your heirs sufficient     The policies should be
                                    funds to offset against IHT.    written in trust. This way the
                                                                    proceeds are tax free and
                                                                    pass straight to the trustees –
                                                                    legally by-passing inclusion for
                                                                    probate certification and IHT.
                                                                    It means that the IHT bill can
                                                                    be paid immediately without
                                                                    recourse to loans.

                                                                    But note, the older and possibly
                                                                    less healthy you are, the higher
                                                                    the premiums will be.

Solutions for inheritance tax
    Accountants and lawyers          The 2004 Finance Act               Concerns that the children
    work to find ways in which       clamped down on IHT                could force a sale, or indeed
    their clients can avoid IHT.     solutions involving ‘pre-owned     may need to, (for example
    Some schemes have been           assets’. The new rules stop        if their half share became
    successful – until found         people giving away assets in       included in a settlement on
    ineffective by the courts        order to escape IHT, but           divorce or a dissolution of a
    or made so by legislation.       continuing to enjoy the benefit    civil partner) have to be taken
    This is the risk that esoteric   of them during their lifetime      into account, although the
    and sophisticated IHT            by subjecting those benefits       reality is the courts are
    avoidance plans run.             to income tax.                     unlikely to accede to an
                                                                        eviction order.
                                     There are, however, some tried
                                     and trusted solutions to help      A side benefit of owning your
                                     minimise the bite of IHT even      home as tenants in common is
                                     if they cannot draw its teeth.     that it can also prove beneficial
                                     None of the proposals below        if the surviving spouse or civil
                                     are affected by the new rules      partner should subsequently
                                     relating to pre-owned assets.      need to go into a nursing
                                     Make use of your house
                                     For partners with children,        Put your trust in trusts
                                     one option is to change the        In addition to their insurance-
                                     way you own your house.            linked role in providing funds to
                                     Most spouses or civil partners     meet your IHT bill, trusts are an
                                     choose to own homes jointly.       established vehicle to help you
                                     This makes the property            cope with other aspects of IHT
                                     indivisible; when one spouse       planning. With proper advice,
                                     or civil partner dies, the other   they are neither difficult nor
                                     automatically inherits it,         expensive to set up.
                                     increasing the survivor’s
                                     estate and potential               Discretionary trust
                                     IHT liability.                     This enables you to give away
                                     If the technical form of           assets now without actually
                                     ownership is changed to            handing them over to the
                                     ‘tenants in common’ then each      beneficiaries. As a trustee you
                                     spouse or civil partner owns       will retain control of how the
                                     their own share separately and     money is invested and have
                                     that share can be bequeathed       some input (but not absolute
                                     to anyone, usually an offspring    authority) as to how your gift
                                     – with the effect that there is    will be eventually distributed.
                                     no corresponding increase in       There is no immediate IHT
                                     the surviving spouse’s or civil    liability on gifts to the trust
                                     partner’s estate. This is          which fall into the nil rate band
                                     important if the overall value     of £275,000 but if you die
                                     of the home exceeds the            within 7 years these gifts will
                                     IHT threshold of £275,000.         reduce the amount of nil rate
                                                                        band available to offset against
                                                                        your remaining estate.

IHT at 20% is charged               Loan Trust Plan                   If you require further
immediately on gifts in             This is another way of            information about
excess of the nil rate band.        harnessing insurance policies,    how these individual
It is known as a chargeable         indirectly, to your IHT needs.    trusts work please
lifetime transfer. Further IHT      With this type of arrangement,    consult your
may be due on the chargeable        the trust is created first and    financial adviser.
transfer should you die within      the policy is then taken out      If you do not have
the ensuing 5 years – another       by the trustees.                  a financial adviser,
20% in the first 3 years, 12%
in year 4 or 4% in year 5.      Under the loan trust plan             please ring the
                                arrangement you make a                IFA Hotline on
Discretionary will trust        loan to the trustees which            0117 971 1177
                                they invest on behalf of the          or visit the website
While it makes IHT sense for a
spouse or civil partner each to
                                beneficiaries. The loan is  
                                gradually repaid leaving the
leave the children assets up
                                underlying insurance
the £275,000 nil rate band,
                                investment product to grow            Disclaimer. Certain
and the remainder to each
                                in value. You are not allowed         aspects of property
other, it can create problems.
                                to benefit from the trust’s           law are different in
• The children could be         growth. Any part of the loan          Scotland.
   minors or you might          that has not been repaid
   consider them incapable      forms part of your estate
   of managing the money.       for IHT purposes.                     This booklet is
                                                                      designed to provide
•   Once the £275,000 has
                                    Discounted Gift Trust Plan        an overview of IHT
    been paid out, the surviving
                                    This enables you to make an
                                                                      and the importance
    spouse or civil partner might
                                    investment in an investment       of planning for it,
    not have enough to live on.
                                    bond from which you can take      but cannot cover
An answer is for each               regular withdrawals at a fixed    every detail of this
to make a will setting up a         rate (specified at the outset),   complex subject.
discretionary trust with the        with the value remaining in
other spouse or civil partner       the bond on your death
as one of the possible              passing to the other
                                                                      Although care has
beneficiaries. After one            beneficiaries of the trust.       been taken to ensure
spouse or civil partner has         If you survive for seven          the accuracy of
died, the other as beneficiary      years, the gift escapes IHT.      content, Friends
can, if their financial                                               Provident accepts no
circumstances require, be           Even if you do not survive
                                                                      liability for loss of
given access to either the          this long, but were in good
                                                                      any kind incurred as
trust’s capital or income.          health when the plan was
                                                                      a result of reliance
For example, if at some later       taken out, the value of the
                                                                      on the information
stage, the surviving spouse         gift for IHT purposes may be
                                    substantially less than the
or civil partner were to suffer
hardship, then it would be          amount invested. Regular
possible for the trustees to        withdrawals of up to 5% a
                                                                      Friends Provident
exercise their discretion to        year can be taken for up to
                                                                      is able to offer IHT
provide financial assistance        20 years without immediate
                                                                      protection from its
from the trust.                     income tax liability.
                                                                      own range of Trust
                                                                      and Investment

Friends Provident Life Assurance Limited is a member of the Friends Provident Marketing Group

Registered and Head Office: Pixham End, Dorking, Surrey RH4 1QA. Telephone 0870 608 3678
Incorporated company limited by shares and registered in England number 782698

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