Money & Tax

Sweet smarts

Ted and Sarah Coryton inherited Pentillie Castle in Cornwall in 2007 and paid an eye-watering six million pounds in inheritance tax.

When Ian Campbell, 13th Duke of Argyll, inherited Inveraray Castle on the death of his father, Ian Campbell, 12th Duke of Argyll, a similarly hefty tax also loomed. But the estate paid less than £50,000, thanks to shrewd estate planning. Without trusts and other devices, IHT could have run to some £12 million. The family paid relatively little tax, and they effectively retained the castle and many other assets.

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 for 2009-2010; £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...

A few years ago, the media exhorted 'ordinary' people to re-consider how much they thought they were worth. These urgings were driven mostly by skyrocketing property values. Suddenly, a great many 'ordinary' households were in territory they never thought they would enter - above the inheritance-tax threshold. Even with the sudden and deep fall in prices occasioned by the 2008 credit crisis, many people still face steep IHT bills due solely to their property assets.

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. And many other communities - in and around major provincial cities throughout the country, in counties such as Devon, Dorset and Cornwall, and in many suburbs in the southeast - similarly enjoy generous property values.

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?

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 the old - most likely, making a new - will.

Links

For related information, see the tax and gifts sections.