Inheritance tax is something most people do not worry, because it is perceived as a rich persons tax. However, given the way house prices have risen recently, they should.
The Inheritance Tax threshold is set by the Chancellor and in the 2009-2010 tax year it has been set at £325,000, which means that any inheritance you leave over and above this amount will be taxed at 40%.
Inheritance Tax is often referred to as a voluntary tax, as there are many things that with careful planning can be done to avoid or minimise it.
If you already have a Will it is important to review it regularly. It may be your circumstances have not changed but the law or tax regime may have.
For instance it was common practice for all wills made between husband and wife to have what is known as a survivorship clause included in it. The reason for this was that under the old regime the nil rate band (the sum you can leave without your beneficiaries paying tax) had to be used on the first death or it would be lost. However, for some time it has been possible to transfer any unused part of their nil rate band (currently £325,000) between husband and wife. It therefore may no longer be desirable for your will to contain such a clause as instead of saving your beneficiaries money it may actually be costly. To give you an example:
John and Sally have two children Ben & Sam, they own a property which has equity of £300,000. John has life insurance of £300,000 and Sally has life insurance of £50,000. They have mirror wills leaving their estate to each other and in the event of their spouse predeceasing them to Ben & Sam.
If they were both to die as result of a car accident, assuming John died first and their will contained a survivorship clause John will die leaving an estate of £450,000 from which you can deduct his nil rate band of £325,000, leaving a residue of £125,000 upon which £50,000 tax is payable. Sally would die leaving an estate of £200,000, although there would be no tax to pay she will have wasted £125,000 of her nil rate band.
Alternatively, if their will had not contained a survivorship clause, again assuming John died first his estate would pass to Sally in its entirety. Sally would then die leaving an estate of £650,000 from which both their nil rate bands (£325k + £325k) of £650,000 could be deducted, meaning there would be no tax to pay.
Please contact us to discuss Inheritance Tax Planning.
