Inheritance tax worries

The Conservative Party’s plans to raise the Inheritance Tax (IHT) threshold to £1m or £2m for couples are now looking uncertain.

A Tory Treasury spokesman admitted the changes were no longer a high priority and could take up to 5 years to implement if the Conservatives came into power.

So what does this mean?

The current IHT threshold is £312,000 for an individual and up to £624,000 for a couple, due to the change in the law regarding transferable nil rate bands. This is to increase to £325,000 per individual this tax year and £350,000 by the tax year 2010-2011. If you currently fall below these thresholds then your estate will not be liable to any IHT. However, if your estate falls close to the threshold it may still be useful to consider some estate planning.

Therefore, those estates which currently fall above the threshold but would fall under if the Tories came into power and implemented the change, have a difficult decision.

Should you commence estate planning now to reflect the current law, or do nothing and hope the proposed changes to the nil rate band take effect in the near future?

As there is no guarantee that the latter will happen, the only way to safeguard your assets is to consider some estate planning options now.

Here are some options to consider:

1.  Work out your IHT bill under the current threshold. IHT is charged at 40% on all assets over the threshold.

2. Take advantage of your annual tax free allowances. This may be by giving away gifts or shares in property that fall within your Tax allowance or by making use of the small gifts exemption.

3. Consider making PET’s (potentially exempt transfers) for as much as you like and it will be free of Inheritance Tax as long as you survive for seven years. The obvious drawback to making a PET is that the donor may die before the seven year qualifying period has elapsed.

4. Invest in the right assets. Investing in business premises or agricultural land can make use of certain IHT relief’s.

5. Consider purchasing life assurance, with a death benefit equal to the expected IHT bill. If planned in advance, this is a relatively inexpensive way to counterbalance the IHT costs.

If you have exhausted all estate planning options and your estate still falls above the tax threshold, then it is unfortunately a waiting game as to whether the proposed changes will come into effect. However, by undertaking effective tax planning now, you will have the reassurance that you have mitigated your Inheritance Tax liability, which could amount to a considerable saving.

If you are concerned about your estate and wish to discuss ways to minimise your potential tax liability, please contact me or respond to this blog.