Your IndustryMay 16 2013

Inheritance tax if no provision is made

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The nil rate band, which is value of an estate that is not subject to inheritance tax, currently stands at £325,000. The government has now frozen it at that rate until 2019.

The Conservatives had initially intended to increase the IHT threshold to £1m by 2015, but in line with cost-cutting measures implemented since the coalition government came to power in 2010 - and in part to pay for a £75,000 cap on care costs that is being introduced by 2015 - the rate will remain unchanged until 2019. Even then, it will only increase to £329,000.

If an individual’s estate exceeds this level at the date of their death, any excess over this allowance is taxed at 40 per cent. This means if an individual had assets of £1m, 40 per cent tax would be payable on £675,000 of this, equating to a tax bill of £270,000.

If a person’s estate passes to their spouse, while there will be no IHT charged on this transfer, on the death of the surviving spouse IHT is potentially payable.

However, in such cases, there will be two inheritance tax nil rate band allowances to use following a change made by the then Labour government in 2007, which allows for the ‘transfer’ of IHT tax allowance between married partners.

Even at this effective £650,000 rate the 40 per cent tax on the remaining £350,000 using the above example would equate to a sizable tax bill of £140,000.

“The long-term rise in property values means that IHT is no longer an issue for the very wealthy,” cautions Jason Ashman, financial planning manager and chartered financial planner at Henwood Court Financial Planning.

“However, this needs to be balanced with the fact that individuals are now living longer and need access to capital to meet their day to day living costs and potential future care costs.”

Even without the help of a financial adviser, some simple provisions in a will can help go some way to reducing the burden of IHT. For example, if 10 per cent of a person’s net estate is left to charity a reduced rate of 36 per cent IHT is charged.

“Inheritance tax is sometimes called a ‘voluntary tax’ as there are so many ways to avoid it,” says Mr Ashman

“These include simple measures like using the available exemptions and giving away property during your lifetime. There are also other opportunities available, such as business property relief and deeds of variation.”

If a client does not go the minimum write a will, they will be subject to the intestacy rules, warns Jeremy Pearson, technical support manager at Canada Life. If someone dies intestate, there are strict rules that set out to whom estate will go, and in what order.

In England and Wale the relevant beneficiaries who may inherit the estate are divided into familial groups, beginning with spouse or civil partner and extending down to half aunts and uncles.