Basic planning
For many people, a little Inheritance Tax planning now will substantially reduce the bill your loved ones will get when you die. Others may be able to avoid one altogether.
Step 1
The first thing is to work out realistically how much your estate might add up to. Add up everything you own, including your share of the things you own jointly with your partner, and subtract anything you owe. You need to look at ways you can get rid of any amount over the nil rate band (£325,000 for 2010-11) but, ideally still giving your money to the people you want it to go to.
Step 2
Think about where you want your assets to go – and make sure your will is up to date.
Step 3
You need to get as many assets outside your estate as possible. Make sure that any death benefits – perhaps there would be some from an employer’s pension or insurance scheme – are not included in the estate. You can do this by nominating who it should be paid to.
Step 4
Where possible, your best bet is to make use of the potentially exempt transfer rules. You could consider equalising your estate with your partner's (but unmarried couples need to watch out for other taxes, such as capital gains tax, when making gifts to each other) , or giving your heirs some of the money now. Remember that if you die within seven years, these gifts will be counted as part of your estate for Inheritance Tax purposes unless they count as tax-free gifts - the £3,000 annual exemption, gifts on a marriage, and expenditure out of income exemptions can let you give away some useful sums.
George and Harriet
When he dies, George’s assets add up to £340,000. He leaves it all to his partner Harriet, who has to pay £6,000 in Inheritance Tax. Harriet has assets of her own of £100,000, so when she dies their children get an Inheritance Tax bill of £43,600.
If George had left say £200,000 of his estate to his children and the rest to Harriet, there would still be £6,000 IHT on George’s death, but none on Harriet’s death, as her nil rate band would cover her estate. This would have saved the family £43,600 because the assets wouldn’t have been “double charged”. Of course, this would only be possible if George knew that Harriet would not need the assets during her lifetime.
Step 5
Ensure you make full use of the nil rate band that everyone has available (£325,000 for 2010-11).
Double charging and double standards
Married couples and civil partners are not double charged in this way, only unmarried couples. Rather than each partner having an allowance of £325,000 each (2010-2011), married couples and civil partners effectively have an allowance of £650,000 between them(2010-2011). They can put off using part or all of this joint allowance until the second of them dies. Unmarried couples do not have this flexibility - if they want to make full use of their allowances, they must use each allowance at the time of each death.
Of course, practicalities must be the first consideration – there may be no one else that George wants to give his money to, and Harriet may need all of George’s funds. In which case, it would have been a good idea to even up their estates before George died by giving Harriet some of his money.
Be careful - you can be liable for Capital Gains Tax, Pre-Owned Assets Tax and/or Stamp Duty on gifts between unmarried couples. Get advice.
Step 6
Consider paying regularly into a life insurance policy that is written to pay out on death to your partner (not your estate), so that they will have enough to pay any Inheritance Tax bill that does occur. The premiums (which count as gifts) will be exempt from Inheritance Tax if they fall within your regular gifts out of income exemption or £3,000 annual exemption.
Step 7
You could consider investing in business or agricultural property as well. However this can be risky. You should take expert advice.
It's not too late
If you don't manage to do any Inheritance Tax planning before your partner dies, all is not necessarily lost. You might still be able to reduce the overall Inheritance Tax bill by giving up part or all of whatever you are entitled to in favour of someone else. To do this, you'd need to enter into a 'deed of variation' (or, possibly, make a 'disclaimer') within two years of the death. You should speak to a specialist solicitor or tax adviser about this.
George and Harriet
By signing a 'deed of variation' on George's death, Harriet could have arranged for £200,000 of his estate to pass directly to their children in spite of what it said in George's will. This would have avoided the 'double charge'.
