The Daily Telegraph - Your Money - - Front Page - By Liz Phillips

YOU don’t need to wait for the politi­cians to make up their minds about whether in­her­i­tance tax should be scrapped – you can take ac­tion now to pro­tect your fam­ily’s wealth from the post­hu­mous grasp of HM Rev­enue & Cus­toms.

This tax, orig­i­nally in­tended for the se­ri­ously wealthy, now hits hard­est in mid­dle Eng­land where many home­own­ers’ prop­erty brings them within its scope – even if they are short of cash or other as­sets. They can­not give away their homes be­fore they die to bring their net wealth un­der the in­her­i­tance tax (IHT) thresh­old of £300,000.

As a re­sult in­creas­ing num­bers are be­ing hit by 40pc tax on ev­ery­thing they own over this amount when they die. Rev­enues are up by more than 50pc in the past five years as the Gov­ern­ment ex­pects to raise £4bn from death du­ties in this tax year.

The num­ber of homes val­ued above the IHT thresh­old has nearly dou­bled in five years, ac­cord­ing to the Hal­i­fax, with the av­er­age de­tached house in Lon­don, the South East and the South West worth more than £300,000.

Mark Hem­ing­way, from the Hal­i­fax, said: “We have al­ways said that IHT should be in­dex-linked in line with in­creases in house prices. Had IHT kept pace with house prices since 1995, the thresh­old would now be £490,000 – al­most two thirds above its cur­rent level. The fail­ure to in­dex-link the thresh­old is sim­ply forc­ing more and more peo­ple into pay­ing this tax.”

Last week, a Con­ser­va­tive think-tank pro­posed re­plac­ing IHT with cap­i­tal gains tax, so any­thing owned for more than 10 years be­fore death would be ex­empt from tax. How­ever, there is no cer­tainty that a Tory gov­ern­ment would en­act this pro­posal and ex­perts warned against the risks of de­lay.

Julie Hutchi­son from Stan­dard Life’s es­tate plan­ning de­part­ment said: “Peo­ple should not be un­der any mis­ap­pre­hen­sion that one’s es­tate on death would sud­denly and au­to­mat­i­cally be­come tax-free un­der th­ese pro­pos­als.

“It cer­tainly would not nec­es­sar­ily mean the end of trusts or life­time gift­ing. In­deed, it would be­come im­per­a­tive to con­sider life­time gift­ing ear­lier since the cur­rent seven-year clock for IHT could ef­fec­tively be­come a 10-year clock. And, just as now, as­sets might not be best handed over di­rectly to younger fam­ily mem­bers, so the use of trusts could con­tinue to be pru­dent.”

In the largest poll of Bri­tons aged over 50, Saga found this age group are alarmed about both the IHT bill they will have to pay when they in­herit from their par­ents as well as be­ing con­cerned about the amount of tax their heirs will pay.

Andrew Good­sell, chief ex­ec­u­tive of Saga, said: “To­day’s baby boomers – those aged over 50 – are all too aware of the dou­bleedged IHT sword threat­en­ing to cut into not only their in­her­i­tance, but also that which they leave to their loved ones. So, given that in­ac­tion is likely to in­crease tax bills, Your Money asked a panel of ex­perts what read­ers can do now to pro­tect their fam­ily wealth from IHT.


With­out a will, the State de­cides who re­ceives money and as­sets in your es­tate. When this hap­pens in Eng­land and Wales, your spouse takes the first £125,000 as well as your per­sonal pos­ses­sions and an in­ter­est for life in half the bal­ance. The rest goes in equal shares to your chil­dren.

By mak­ing a will you could, for ex­am­ple, trans­fer some of your as­sets to chil­dren, grand­chil­dren or oth­ers af­ter your death within the £300,000 nil-rate band which would mean th­ese be­quests were IHT-free. All trans­fers be­tween spouses are IHT-free but sim­ply pass­ing all as­sets to the sur­viv­ing spouse means the IHT al­lowance of the first spouse to die is wasted and an ex­tra £120,000 ex­tra tax may be paid when the sec­ond spouse dies.

You could also use your will to set up a fam­ily trust but re­cent le­gal changes may mean your will needs up­dat­ing. It is im­por­tant to re­vise your will when­ever your cir­cum­stances change – for ex­am­ple, when there is an ad­di­tion to the fam­ily.


Cou­ples usu­ally own their home jointly, mean­ing you both own the en­tire prop­erty. You should change own­er­ship to be­come ten­ants in com­mon so that you each own half of it.

David Rothen­berg of ac­coun­tants Blick Rothen­berg ex­plained: ‘If you own it jointly, the house au­to­mat­i­cally be­longs to the other per­son when you die.

“By sev­er­ing the joint ten­ancy you can give your share away to some­one else when you die.”

It is sim­ple and cheap to do. A lawyer should charge around £100 to do it. But it is very im­por­tant to con­sider the risk such a be­quest might present to the se­cu­rity of ten­ure of the sur­viv­ing spouse.


Equalise your es­tates. By hav­ing most of your cash, sav­ings and as­sets held jointly or in one name only, the other per­son will not be able to use up their IHT al­lowance in their will.

Ac­coun­tant Char­lotte Black of Brewin Dol­phin said: “If ev­ery­thing is held jointly it causes a prob­lem as there is noth­ing to pass on when the first per­son dies.”

Where hus­bands and wives or other mem­bers of civil part­ner­ships trust each other suf­fi­ciently to equalise as­sets, they may even achieve im­me­di­ate tax sav­ings through mak­ing more use of the per­sonal al­lowance for in­come tax – cur­rently £5,225 per per­son aged un­der 65 – and cap­i­tal gains tax – £9,200 per per­son dur­ing the tax year which ends on April 5, 2008.


You can give money and as­sets away be­fore you die but there are strict lim­its un­der the IHT regime. Each per­son can give away £250 a year to any num­ber of peo­ple as well as £3,000 in to­tal an­nu­ally to dif­fer­ent peo­ple.

If the £3,000 al­lowance wasn’t used last year you can give away an­other £3,000 this year. So, for ex­am­ple, cou­ples who have made no use of this gift al­lowance can give away £12,000 in to­tal this year.

There are no lim­its on the amount you can give away reg­u­larly out of your in­come, but it must not re­duce your lifestyle.

Mr Rothen­berg ex­plained: “The Rev­enue is get­ting quite tough on this – so it’s im­por­tant to keep records of your ex­pen­di­ture as your in­come has to re­main suf­fi­cient to cover your ex­penses. And record what you’ve given away.”


When you die your life in­sur­ance will au­to­mat­i­cally pay out to the ben­e­fi­cia­ries with­out hav­ing to go through the IHT regime if it is held in trust. The death ben­e­fit passes di­rectly to them with­out be­ing counted to­wards your es­tate. The life com­pany – or, for ex­am­ple, the in­surer which is­sued a with-prof­its en­dow­ment – will give you a form to com­plete to do this and it is usu­ally free.


Em­ploy­ers’ pen­sions are nor­mally writ­ten in trust mean­ing any death-in-ser­vice lump-sum pay­ment passes

di­rectly to whoever you nom­i­nate. Pen­sion ben­e­fits for a widow or wi­d­ower do not af­fect IHT though they will be sub­ject to in­come tax.

Per­sonal pen­sions should be writ­ten in trust, too, so that the pen­sion pot can pass taxfree to whoever you wish. This must be done be­fore you have to buy an an­nu­ity at 75 and can­not be done if you are in poor health – so it makes sense to con­sider ac­tion sooner rather than later. For ex­am­ple, as Mr Rothen­berg said: “You can’t change it if you are at death’s door.”


Sev­eral in­vest­ments are free of IHT af­ter they have been held for two years. Th­ese are shares quoted on the Al­ter­na­tive In­vest­ment Mar­ket (AIM), forestry land, farm­ing land – pro­vided you farm it, rather than rent it out – and part­ner­ships or shares in a private busi­ness.

How­ever, the favourable tax treat­ment should not blind you to the risks in th­ese in­vest­ments, par­tic­u­larly AIM shares. Small or re­cently formed com­pa­nies are of­ten more vul­ner­a­ble to set­backs in a par­tic­u­lar sec­tor and may have smaller re­serves to help them sur­vive dif­fi­cult con­di­tions. There is no point los­ing cap­i­tal to avoid tax. Forestry: P10


Po­ten­tially ex­empt trans­fers (PETs) are gifts of as­sets, cash or prop­erty you make be­fore you die but you have to sur­vive for seven years be­fore they be­come IHT-free.

Af­ter three years, the ben­e­fi­ciary may get some tax re­lief which can in­crease each year un­til the seven years is up. How­ever, if the gift is less than the nil-rate band the whole amount is added back into your es­tate when cal­cu­lat­ing how much you owe in death du­ties.

Mike War­bur­ton of ac­coun­tants Grant Thorn­ton ex­plained: “The tax re­lief is a dis­count on the tax, not the trans­fer it­self. A sin­gle gift of £300,000 six years be­fore the death of the donor will save noth­ing be­cause the gift would all be within the nil rate band. This is fre­quently mis­un­der­stood.”

You can’t give your house away and con­tinue to live there to di­min­ish IHT li­a­bil­i­ties, as the Rev­enue will re­gard it as re­main­ing in your es­tate. But you can give it to a child who lives with you, said John Lid­ding­ton of lawyers Speechly Bir­cham. He ex­plained: “The child must live in the prop­erty un­til you die or go in to a home and you must both con­trib­ute to the run­ning costs in or­der not to fall foul of tax rules.”


Th­ese are sin­gle pre­mium life poli­cies which pay you an in­come for life and you give the pol­icy it­self away. Be­cause it is pay­ing a fixed in­come, the value of the pol­icy is re­duced. The ac­tual dis­count is based on your age – the older you are the more valu­able it is – so you have to be un­der 90 years old to use this type of scheme. How­ever, it is im­por­tant to un­der­stand that HM Rev­enue & Cus­toms has pur­sued a strat­egy of chal­leng­ing tax avoid­ance schemes in the courts which may con­tinue in fu­ture.


Home­own­ers usu­ally have the ma­jor­ity of their wealth tied up in their prop­erty. With­out a trust, you can­not give away your share of the fam­ily home safely.

In this in­stance, the trust only comes into ex­is­tence when you die. You will your as­sets and share of your house (held as ten­ants in com­mon) to the trust up to the value of the nil-rate band, cur­rently £300,000 and due to rise to £350,000 by 2010.

Then the trustees sell the share of the house back to the sur­viv­ing spouse in re­turn for an IOU. When the sec­ond per­son dies, the loan is re­paid, thus us­ing up the first per­son’s nil-rate band.

It may sound sim­ple but trusts are com­pli­cated and need a spe­cial­ist to han­dle them. For ex­am­ple, ear­lier this year, the fam­ily of an Ox­ford don and his wife had to pay £60,000 in IHT when their trusts were con­sid­ered to fall foul of IHT rules.

The prob­lem was that Dr Pa­trick Phiza­ck­er­ley gave half his house to his wife, who then willed it to a trust on her death, and the trust lent him the share back un­til his death. How­ever, the Spe­cial Com­mis­sion­ers, who settle dis­putes be­tween tax­pay­ers and the HM Rev­enue, ruled the scheme did not ap­ply as Mary Phiza­ck­er­ley had no in­come and had not con­trib­uted to the house.

Mr Lid­ding­ton said: “Since he’d given her half the house and then loaned it back to him via the trust af­ter her death, he was con­sid­ered to have lent his gift back to him­self so the loan was not de­ductible for IHT.”

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