Do You Pay Tax Three Times on the Same Money?

Did you know that currently, for every £1 left in an estate in excess of £263,000, only 60p will end up in the pockets of your intended beneficiaries? In fact, your money is likely to be taxed three times before it passes to your beneficiaries, with Income Tax charged on earnings, Income Tax / Capital Gains Tax charged on investments, and Inheritance Tax (IHT) on your estate when you die.

In a series of articles Nunn Hayward will direct you towards the reduction of the IHT element of this triple taxation cycle, starting here with the consideration of some conventional IHT planning opportunities which are often overlooked. If you expect to leave an estate valued in excess of the nil rate band (currently £263,000), read on.

The certain way of reducing your IHT liability is to reduce the amount of your estate's value in excess of the nil rate band. Inevitably, this is not a simple matter of gifting cash / assets during your lifetime, for it is generally necessary to survive 7 years after making a gift out of one's estate before it falls out of the IHT "net" completely. However, there are various types of gifts which can be made quite simply during one's lifetime which are not caught by the 7 year rule, and which can indeed serve to reduce the IHT liability.

• The annual exemption entitles each individual to make gifts each year up to the value of £3,000. Where part or all of the exemption for one year is unused, the unused proportion can be carried forward one year.
  
  
• You can celebrate the marriage of family and friends without having to worry about IHT. Parents of the bride or groom can give wedding gifts to the value of £5,000 (per parent); grandparents and great-grandparents can each give £2,500; the limit for any other person is £1,000.
  
  
• Small gifts of up to £250 per year to any one person are IHT exempt, regardless of the number of recipients.
  
  
• Gifts made out of "normal income" are also exempt. There is no limit on the sums, just a requirement to show that they are out of surplus income and intended to be on a regular basis.

In employing these basic IHT planning methods with some forethought and planning it is possible to significantly reduce the value of your estate over a number of years.

It is also worth noting that transfers between spouses are IHT exempt both during lifetime and at death. However, where the two members of a married couple have wills leaving everything to the surviving spouse, one of their nil rate bands is effectively wasted, meaning that at 2004/05 rates potentially £105,200 of extra tax is paid to the Chancellor and not the family. For example, no IHT is normally charged when a husband dies and leaves everything to his wife. However, upon the death of the wife the value of her total estate (including the inheritance from her husband) in excess of her nil rate band will be subject to IHT. Thus the husband's nil rate band is lost. The planning point here is to ensure that both nil rate bands are utilised, which generally requires more sophisticated tax planning. We will turn our attention to this in the next article in the series.

We would be pleased to answer your questions on the points raised above, or indeed on any aspect of Inheritance Tax planning. Should you have any queries, please call Steve Cook (Tax Partner) on 01753 888211.