It is sometimes said that death & taxes are unavoidable. With Inheritance Tax (IHT) these issues are combined which does, perhaps, explain why it is such an unpopular tax.
It is also a tax that has been rising steadily in real terms for the last four years and the Government announced in March that this would continue for at least the next six years.
IHT is charged on death at a single rate of 40% over a threshold of £325,000 (£650,000 for married couples). Gifts made within the previous seven years are also taken into account together with some property held in trust; the proceeds of life insurance policies payable on the death can also sometimes be included.
This threshold has been frozen since April 2009 and, according to the Chancellor, is intended to stay at the same level until April 2019. Unfortunately prices have been far from frozen and so the likely fall of the threshold in real terms is likely to be of about one third by the time it is allowed to rise again!
Some years ago, it was thought that the threshold might be put up to £1 million but that seems a distant prospect now given the state of the public finances.
What this means is that planning to reduce potential IHT liabilities should be delayed no further. All that would mean was that any gifts made would be less likely to be more than seven years prior to death.
In fact, however, there are plenty of options in addition to just passing assets on the next generation now and some of these allow the original owner of the asset to continue to have some benefit from or enjoyment of the asset.
There is also the question of having some Inheritance Tax planning in the Will.
Prior to October 2007, many married couples were advised to set up discretionary trusts in their Wills in order to make use of the IHT threshold or nil rate band on both deaths. The trust structure ensured that the assets remained available for the survivor’s benefit or use but were not subject to tax on the second death. The introduction of transferable nil rate bands rather changed that and made life much easier enabling both spouses to use their threshold in full. Many couples rewrote their Wills to remove the trusts.
Simplicity is not always perfection, however. If you expect the value of the assets belonging to the first spouse to die to increase more quickly than the IHT threshold then you should probably retain this nil rate band trust structure. The value of the trust assets would then exceed the extra nil rate band that would otherwise be available.
With the threshold frozen for at least six more years, it seems probable that nil rate band trusts should be coming back into fashion.
The truth of the matter is of course that we are all different. There is no one size fits all solution for Inheritance Tax.
