We are increasingly asked about ways to mitigate inheritance tax (IHT) and from our discussions with clients it is apparent that the exemption available for Normal Expenditure Out of Income is not widely known.

Any income that is not required to maintain your usual standard of living, and is therefore accumulated, swells your estate and so will attract IHT. By the simple expedient of regularly giving away surplus income IHT will be avoided.

Gifts must be unconditional, made out of income not capital and leave you with sufficient income to maintain your normal standard of living.

A one off payment will not be exempt. The gifts must be regular. However, the first payment will be allowed if you can show a settled intention to give sums over a period of time.

Gifts qualifying for this exemption fall out of the IHT net immediately. It is not necessary for the donor to survive for seven years.

How can we help?

We obviously have accurate records of your income and we maintain a permanent record of transfers of capital. We have produced a pro-forma which you can use to record your household expenditure each year which we can maintain with our other permanent records. If you would like a copy, or any other IHT planning advice, please contact your usual partner.

FOR GENERAL INFORMATION ONLY

Please note that this Memorandum is not intended to give specific technical advice and it should not be construed as doing so. It is designed merely to alert clients to some of the issues. It is not intended to give exhaustive coverage of the topic.

Professional advice should always be sought before action is either taken or refrained from as a result of information contained herein.

INHERITANCE TAX AND WILLS
Inheritance tax (IHT) is charged on the value of all assets held by a person on their death, plus
gifts they have made in the previous seven years. The charge is subject to various
exemptions.

Download/View the PDF by clicking here.

The following memo will help you determine whether you need to complete a tax return. For more information and advice about your own specific needs - please call us.

Income Tax

You must complete a Tax Return each year if you:

·         Work for yourself – that is, you are self-employed or in a partnership

·         Are a company Director

·         Are a Name or member of Lloyd’s

·         Are a minister of religion (of any faith or denomination)

·         Have income from letting any property or land you own

·         Receive other untaxed income and the tax due on it cannot be collected through a PAYE tax code

·         Receive annually (or can be treated as receiving) income from a trust or settlement, or any income from the estate of a deceased person, and further tax is due on that income

·         Have taxable foreign income

Additionally, if you are an employee or pensioner you will need to complete a Tax Return if you:

·         Have annual income from savings or investments of £10,000 or more (before tax)

·         Have annual income of £100,000 or more

·         Have tax due at the year end that cannot be collected through your PAYE tax code for the following year

·         Have untaxed income of £2,500 or more annually (if tax cannot be collected through PAYE)

·         Have annual claims against tax for expenses or professional subscriptions of £2,500 or more

·         Are 65 and over and entitled to a higher personal allowance

Capital Gains

You must complete a Tax Return if you:

·         Have sold or given away chargeable assets worth more than four times the annual exempt amount.  For 2007/08 the annual exempt amount was £9,200 so that is £36,800, or

·         Deduct losses from your gains, but your gains before any losses or taper relief are more than the annual exempt amount, or

·         Do not deduct losses but your gains after taper relief are more than the annual exempt amount, or

·         Want to claim an allowable capital loss, or make any other capital gains claim or election for the year

Finally

The Inland Revenue may sometimes want a Tax Return for other reasons – perhaps to check if the correct tax has been paid overall.  You can ask for a Tax Return at any time – for example, if you want to claim a particular tax relief or exemption.

Benefits of a Trust

Trusts have traditionally been used as a tool in succession planning to avoid death duties. A private trust is most typically employed in the present era to detach property or assets from a wealthy estate owner so that his or her estate is reduced with the consequence that the extent of inheritance tax on eventual death is reduced. The distinct benefits of employing a trust, as opposed to the direct transmission of property to beneficiaries, can be summarised, as follows:

• fiduciary control over assets and voting rights
• benefiting the younger generation without exposing assets to ‘youthful folly’
• income tax benefits for adult children
• income tax benefits for infants where the settlor is not a parent and the money effectively belongs to the child (often referred to as a ‘bare trust’)
• some measure of protection from creditors and estranged spouses

Possible disadvantages of trusts

The key issue for a potential settlor who is concerned with inheritance tax mitigation is, can he or she afford it? You should be sure that you have sufficient assets and pension funding to sustain your lifestyle, bearing in mind increasing life expectancy and the financial impact that low interest rates or continuing inflation may have.