News

Take steps to minimise potential inheritance tax

A solicitor recently advised my wife and I to review our wills as we are considerably over the inheritance tax threshold (IHT) of £325,000. We are keen to ensure that our two children will not have to sell the family home when we die in order to pay the tax bill. Would it help if we gifted some assets to our children now while we are in good health? Also, are we liable to tax on valuable personal items we own such as jewellery and artwork, or is IHT levied only on large assets such as property?

WHEN you die, generally IHT is levied on your total personal wealth which exceeds the nil rate band of £325,000 together with all or a proportion of any gifts you have made in the preceding seven years. This includes all your personally owned assets and would include items such as jewellery and artwork. The full rate of tax is 40 per cent. If IHT is payable on a gift the full rate is reduced on a sliding scale if the gift is made between three and seven years before your death.

Also, IHT is charged at only 36 per cent where at least 10 per cent of your estate is given to a charity. Inheritance tax cost families and individuals more than £3 billion in 2012/13, according to figures from the Office for National Statistics (ONS). The decision to freeze the inheritance tax threshold at £325,000, where it has been since April 2009, has also helped boost the amount collected.

However, forward planning can often protect family assets and wealth for future generations by minimising the potential IHT payable when a parent dies. To enable long-term objectives to be set, it is necessary to make decisions about your finances and your family. It is possible to transfer unused nil-rate band allowances between spouses or civil partners. These rules apply to allow a claim to be made to transfer any unused IHT nil-rate band on a person's death from the estate of their deceased spouse/civil partner, so that, in effect, they have a combined nil-rate band of £650,000. The amount of the nil rate-band potentially available for transfer will be based on the proportion of the nil-rate band unused when the first spouse or civil partner died.

If your combined estate is worth more than £650,000 you might also want to consider making gifts during your lifetime or creating trusts. Most gifts will be entirely exempt from IHT if you live for seven years after making the gift.

Also, creating an appropriate trust now can be an effective way to ensure that valuable assets, such as artwork, are not exposed to IHT on your death. Before amending your will it is necessary to consider the value of your assets now, and to consider how these values may change as time goes by. Before gifting assets or transferring assets into trust it is also necessary to consider your own financial security and your family's future needs. You need to make sure that you and your spouse are properly provided for, particularly in retirement. It would not make sense to give assets to your children only to find that in later life you need to ask for some or all of them back.

You need to think about what degree of control you would want your children to have over any assets you may transfer to them. You also need to work out how much your spouse would need if you were to die first.

This would, of course, have to be reflected in your will. It may also be advisable to cover substantial gifts by insurance against death within seven years. Professional advice should be sought to ensure that any changes to your will or gifts you decide to make now reduce future potential IHT costs but also provide future financial security for both you and your wife/husband.

? Feargal McCormack (f.mccormack@fpmca.com) is managing partner of FPM Chartered Accountants (www.fpmca.com). The advice in this column is specific to the facts surrounding the question posed. Neither The Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.