With property
prices continuing to rise, more and more of us face the prospect
of leaving our loved ones with an inheritance tax (IHT) bill. And,
at 40 per cent of everything over the IHT threshold (£285,000 in
2006/07), this can be a lasting legacy.
One and a half million properties in the UK, roughly 8 per cent of all owner-occupied homes, are now worth more than the £285,000 threshold according to the Halifax. With the threshold failing to keep pace with property price inflation, this figure is set to increase to 4.6 million properties by 2020.
The announcement regarding changes to the tax treatment of trusts in the Budget has complicated matters further. Further details were announced in the Finance Bill 2006 in April, and there is likely to be ongoing debate before the final legislation comes into force in the summer.
Broadly though, the changes mean that assets put into trust will face higher tax charges.
Any assets placed in trust out side of a will over the IHT threshold will be subject to an immediate tax charge of 20 per cent, followed by a periodic tax charge of 6 per cent every 10 years and a final exit charge of up to 6 per cent when the assets are taken out of trust. Additionally, any transfer into a trust will be regarded as a potentially exempt transfer and take seven years to pass out of your estate for IHT purposes. ‘This is the most radical change to inheritance tax planning since it was introduced,’ says Clive Macintosh, a partner at PricewaterhouseCoopers. ‘I don’t think it’s been thought through properly but it does indicate what the government thinks about trusts.’
But few of us want to pass our wealth on to the government rather than our loved ones. ‘Unfortunately where the main asset is the family home it can be very difficult to reduce a future inheritance tax liability,’ says Maggie Gonzalez, tax director for inheritance tax at BDO Stoy Hayward. ‘You could leave half of your property to your children, for example, but unless it’s written in trust, there could be all sorts of problems if they fall out with your surviving spouse or they divorce, as their share of the home could become part of the divorce settlement.’
However
there are still planning strategies available.
INHERITANCE TAX ALLOWANCE
Married couples and civil partners can take advantage of nil rate band planning in their wills to use both persons’ IHT allowances.
Typically assets pass between married couples and civil partners are IHT free, but, while this means there is no IHT to pay on the first death, when the second person dies, IHT will be charged on the whole estate with just one allowance taken into account.
‘Nil rate band planning ensures that assets up to the value of the nil rate band are passed to other people, generally children on the first death,’ says Allan Holmes, head of private client tax department at law firm Dickinson Dees. ‘This saves inheritance tax on the second death, so if someone dies this year with a nil rate band of £285,000 it could save as much as £114,000 (40 per cent of £285,000) on the second death.’
This is easiest to achieve where there are surplus liquid assets, but with some additional planning it is still possible where a property is involved. First, you would need to change the ownership of the property from joint tenants to tenants in common. This can be done by a solicitor and costs roughly £100.
Next, for a fee of around £550, you would
need to have your wills written to include provision for a trust on the first
death. ‘Your
will needs to create
a trust on the first death that will accept an
IOU for an amount equivalent
to up to the nil rate band,’ explains Gonzalez. ‘Then,
on the second death, the IOU will be satisfied by the
proceeds of the estate, effectively reducing the estate by that
amount.’
REDUCING YOUR PROPERTY VALUE