Chartered Accountants of Poynton, Cheshire

On death, assets left by an individual could be liable to inheritance tax (IHT). The first £275,000 of assets are not subject to IHT; thereafter, the rate is 40%, assuming no gifts were made in the seven years before the individual's death.

The £275,000 limit is often referred to as the nil-rate band. This band is due to rise to £285,000 in the 2006/07 tax year.

So, for example, an estate of £800,000 would incur taxation of £210,000 [(£800,000 - £275,000) x 40%]. Paying this tax can significantly reduce the legacies received by the beneficiaries of the deceased, so careful planning is vital for all but the smallest estates.

An important point to note is that the family house is not exempt from IHT. This means that many estates will be subject to IHT on death by virtue of the private residence.

So, what can you do to minimise the IHT liability?

Husband and wife

Assets left to a spouse or civil partner will not normally be included in the estate.

Make gifts of assets before death

Gifts of most assets made more than seven years before death will be excluded from the estate. If the donor does not survive seven years from the date of the gift, the full rate of IHT is tapered and so can reduce the amount of the tax due.

Creating a trust

Trusts can be used to pass assets down the family generations. These trusts can be made before death or as a condition of a will.

Making gifts and creating trusts are both excellent ways to minimise IHT but, in passing the asset to another person, it means the donor no longer owns it. If the asset is needed to provide an income in retirement, it would not normally be available if it has been given away. So the most tax-efficient IHT saving option might not be the best solution.

Business property relief (BPR)

If an asset is used in a business then it may be eligible for this additional relief. The most common assets qualifying for BPR are shares in a qualifying company but it can also include properties used solely in a business. A qualifying asset might be eligible for 100% relief, although on occasions it might be reduced to 50%. Similar relief exists in agriculture and is known as agricultural property relief (APR).

Make a valid will

Many estates will be liable for unnecessary IHT because the deceased did not leave a valid will. It is recommended that everyone has a valid will, and that they review it every couple of years. This helps to ensure that any appropriate steps are taken to minimise IHT.

Appletons Accountants will be pleased to assist you with your IHT planning - give us a call!