Recently described as the most feared and most misunderstood tax there is, inheritance tax (IHT) affects very few families. Around one in 20 estates pays it, but a lot of time is spent worrying about it by people whose heirs may never have to suffer it.
Do I need to put assets in a trust?
Many readers ask me if they should consider putting their assets into a trust to avoid IHT or, as they might put it, give their money to their children rather than the Chancellor. In almost every case my answer to that is, ‘No’.
Trusts were invented during the Crusades so that the assets of wealthy men who went abroad to fight were properly administered for their wives and families while they were away and, if they were killed, after their death. Of course, in the Middle Ages it could be many years before their fate became clear.
Trusts can still be useful for people to protect and manage assets for relatives who cannot make decisions for themselves due to their youth or mental disabilities. But their main use is for the very wealthy to keep estates intact from generation to generation.
Paul Lewis' guide to inheritance tax
There is still some tax to be paid when a trust is formed, then every ten years, and when it is closed. That tax and the cost of setting up the trust and running it means that for the vast majority of the population trusts are either unnecessary or too expensive to be useful.
That does not stop commercial organisations holding seminars in posh hotels to sell schemes to people in their fifties and sixties to tell them how to preserve their wealth or keep it in the family.
One such firm, Universal Wealth Preservation, went into liquidation earlier this year leaving thousands of people unsure about the safety of their property. It had encouraged people to put their homes into a trust and many added cash to that, too.
Although the homes should be safe, a legal process is needed to take Universal Wealth directors off the list of trustees. People who put cash into the trust have found it very difficult to track it down and many fear that the money has been lost. Suffolk Police have seized documents and are considering the case.
If you are a client of Universal Wealth Preservation, see ‘More information’ (below). My firm advice is never to consider a plan to avoid IHT that is sold at a promotional event, and never respond to an advert, email or phone call about them. You can spend thousands of pounds on a product that may not work – only your heirs will find that out – and it may put your property at risk.
Never consider a plan to avoid IHT that is sold at a promotional event, and never respond to an advert, email or phone call about them.
If you are wealthy enough to have a genuine concern about IHT, then you should take good, professional advice. The Society of Trust and Estate Practitioners (STEP) sets exams and qualifications that people must pass to be members. It also produces a useful guide to using trusts. Find a local practitioner and helpful information on its website – scroll down to ‘More information'.
Saga Possibilities members can benefit from great offers and exclusive events. Find out more
There are simpler ways than a trust to reduce the amount of IHT that is due. An estate is completely exempt from IHT if it passes to a spouse or civil partner. If you are in a long-term relationship but not married or civil partners, then getting married or entering a civil partnership is a good idea. It is particularly important if your home is itself worth substantially more than the IHT limits, as a bereaved unmarried partner may have to sell it to pay the tax.
If you are in a long-term relationship but not married or civil partners, then getting married or entering a civil partnership is a good idea.
No IHT is due on an estate of less than £325,000. That rises to £450,000 if the estate includes the family home and that home is being left to descendants – children, grandchildren, great grandchildren. That extra exemption does not apply to a home left to an unmarried partner. The estate of a person who is already a widow will usually be free of IHT up to twice those amounts.
Gifts you make are free of IHT if you live at least seven years after you make them. Each year you can give away a certain amount and it will be exempt from inheritance tax, even if you die within seven years of making the gift.
Paul Lewis on ways to reduce inheritance tax
How much can you give away?
You can give away a total of £3,000 each tax year (if not in cash, then get the items valued), without it counting towards the IHT arithmetic at all. If you give nothing away in one tax year then you can bring £3,000 forward from that year and give away £6,000 the next tax year without running the risk of IHT being due on it, even if you were to die tomorrow.
You can give up to £5,000 to a child of yours as a wedding gift – and up to £2,500 to a grandchild (or great-grandchild) or £1,000 to anyone else on their marriage.
In addition to these exemptions, you can give away any number of gifts up to £250 each to any number of separate people – but not if they have benefitted from any of the other gifts.
If you have an income that is more than adequate and can afford to give away part of it without reducing your own lifestyle, then that part is completely exempt if you give it to someone.
These amounts are all personal, so a couple can give away twice as much, even if one partner gives the other money to do that.
To find a STEP adviser, visit STEP and enter ‘UK’ and your town in the online search form. For inheritance tax trusts, or if you are a Universal Wealth client, visit Advising Families and enter the relevant term in the search box.
Subscribe today for just £12 for 12 issues...