Money

Sweet smarts

For the privilege of inheriting Pentillie Castle in Cornwall in 2007, Ted and Sarah Coryton paid six million pounds in inheritance tax.

For the privilege of inheriting Inveraray Castle, Ian Campbell, 13th Duke of Argyll, paid peanuts in IHT. Well, £50,000 is not exactly peanuts, but it is a great deal less than the eye-watering 7-digit sums shelled out for Pentillie Castle.

Why the discrepancy? The Duke of Argyll benefitted from trusts and other tax-shaving and tax-saving devices - in general, shrewd estate planning. Without it, IHT could have run to some £12 million.

The Campbells paid relatively little tax, and effectively retained the castle and many other assets. And down the road a bit, the 14th Duke of Argyll will likely enjoy similar tax relief.

Good cop, bad cop

You don't have to be a castle-owning nobleman or confectionery heiress to benefit from financial planning. Savings are available even for people with relatively modest estates.

Inheritance tax is payable on estates that are over the threshold (£325,000 to 2014-2015; £312,000 for 2008-2009), usually payable within six months of the death. This is a cold hard fact of HMRC life, although some tax bills can be paid in installments over many years.

On the other hand, the law allows people to make wills structured so that little, even no, tax at all is due.

"My problem lies in reconciling my gross habits with my net income."

Hollywood Actor Errol Flynn (1909-1959)

Furthermore, if a will is not tax efficient, the tax laws allow the beneficiaries to revise it after the testator has died, provided all of the beneficiaries agree.

And the craziness does not stop there. Just because someone has died without a will does not necessarily mean that they have no will. If inheritance tax is due, the beneficiaries can make a will retrospectively - and it is treated identically to a will made during the deceased's lifetime.

These concessions are in addition to a wide range of other measures to reduce tax.

What can we say after that except: 'thank you'

From shopkeepers to homeowners to...

Too poor to need a will? Probably not!

The vast majority of people have assets worth passing on in a will, even if they fall below, even well below, the inheritance-tax threshold (£325,000).

The average house price in England and Wales in January 2009 was about £160,000 - well below the IHT threshold. But the average for London was £317,000 - slightly above. Many other areas around the country also enjoyed above-average property values. In short, many people drifted into inheritance-tax territory solely because of the value of their homes. Today, most "middle-class" families hover near, or are above, the IHT threshold.

Professional advice: money well spent or wasted?

For not so obvious as well as obvious reasons, financial planning is better begun sooner rather than later, regardless of how young or poor you are.

Many people buy life insurance with themselves or a spouse as a beneficiary when the wiser move would have been for the benefits to go to a trustee.

Buying property with a spouse or civil partner or lover or simple housemate? Should you buy as joint tenants or tenants in common?

Buying a property overseas? Inheritance laws vary according to country, and in some nations, it is essential to organise the details of your purchase at the time of purchase. If you delay, you can lose certain benefits.

Tax laws are complicated, as are the various steps available for minimising inheritance tax. Unless you are a financial expert yourself, you almost certainly can not do it on your own - or do it as well as an expert.

The complexity intensifies with assets in a foreign country, where different rules and laws apply, and a foreign language makes things even more complicated.

Professional advisers don't come cheap, but the savings they can arrange should more than repay the fees you pay them.

Pensions

Pensions come in several flavours and affect an estate accordingly. Does the pension pay death benefits? Does it apply to a spouse/civil partner or children? Is it part of the deceased's estate under a self-employed pension scheme?

Further questions and complications arise from new rules. Beginning 6 April 2011, the obligation to take out an annuity by age 75 ceases. But tax and inheritance tax obligations differ depending on whether lump sums are taken before, or after, age 75.

The new rules are complicated - as were the old rules - and professional advice is strongly advised to determine the most tax-efficient strategies.

Discretionary Trusts

Under the old rules, where couples could not increase the nil rate band, a discretionary trust enabled couples to exploit the nil rate band instead of wasting it. The new rule has made this aspect of discretionary trusts mostly obsolete.

But discretionary trusts are still useful, notably for people in blended families (a family that contains children, step-children and/or adopted children can make for tricky inheritance scenarios), for those with assets likely to enjoy above-average appreciation, and to take advantage of business or agricultural property relief.

You die, they receive, who pays?

Tax is due on your estate, not per se on the beneficiaries. However, in your will you have various ways of determining how that tax will be paid. You can specify who pays, and how much they pay.

The testator can specify that tax is to be paid out of the residue, or that a specific beneficiary should pay their proportion of the tax on their specific legacy.

Beware hidden snags. For example, if you give someone a gift but don't survive for seven years, they may have to pay IHT on the gift.

Equity Release

Equity release plans give you cash in return for you giving away much, perhaps all, of the value of your home. And this ultimate reduction in the value of your estate obviously has inheritance consequences.

Equity release plans should be considered in tandem with long-term financial planning. The process will likely involve revising your current - most likely, making a new - will.

Links

For related information, see the tax and gifts sections.