Inheritance Tax – Keeping it Simple

Some of the best ways of avoiding Inheritance Tax are the easiest and having the right will is central to the issue. The first essential is to have a will and to keep it up to date by reviewing it every few years or if your financial circumstances change significantly. If you do not have a will and especially if you have net assets in six figures, you have a problem, it makes sense to address the issue.

The main tactic to adopt in Inheritance Tax planning is to make sure the estate which is subject to Inheritance Tax (the exemption is currently £275,000) is minimised and to make sure that the number of times any wealth falls into the Inheritance Tax pot is also minimised.

A simple technique is to write life insurance policies in trust, so that they are not included in the estate. The proceeds of the policy will then not be subject to Inheritance Tax. This can also be done for pension policies, which normally pay the whole of the fund as a lump sum (which will be added to your taxable estate), unless written in trust for your spouse.

Discretionary Trusts

Another technique is to arrange for assets equal to the ‘nil’ band for Inheritance Tax to be passed into a discretionary trust on the death of the first spouse, so they remain outside the estate.

Consider taking out a life insurance policy to cover the expected Inheritance Tax payment – but don't forget to make the policy payable to a family member, not be written on 'own life' terms, or it will be included in your estate.

Many people are surprised how easy it is to mitigate Inheritance Tax by doing some straightforward financial and will planning. The steps outlined above are simple and straightforward. Much more can be accomplished with a more sophisticated approach. However, the cardinal rule is to think through the issues and to design a solution that is practical and works for the family.

Inheritance tax threshold increased

The Inheritance Tax (IHT) threshold is being raised in stages from the 2004/5 figure of £263,000 to £300,000 over three years. This will remove the burden of IHT for some families whose estates became taxable as a result of rising house prices. The new inheritance tax limits will be: 2005/6 - £275,000; 2006/7 - £285,000; and 2007/8 - £300,000.