Inheritance tax is payable when the value of an estate exceeds the nil rate band. The inheritance tax nil rate band has been £325,000 since 2009 and will remain frozen at this level until 5 April 2015. Inheritance tax is payable at a rate of 40% on the amount over the nil rate band.

Gifts left in a Will to UK charities have been exempt from inheritance tax for many years. However, on 6 April 2012 changes came into effect that reduces the rate of inheritance tax payable by an estate to 36% if at least 10% of the estate is left to charity.

Changes to the inheritance tax rate form part of the Government's 'Big Society' initiative to encourage charitable giving and the Legacy10 campaign launched in November 2011. The aim is to encourage more people to remember charities in their Wills.

In order to qualify for the reduced rate at least 10% of the net value of your estate must be left to a qualifying charity. The net value is the sum of your assets after deducting any debts, liabilities, reliefs, exemptions and the nil rate band. A qualifying charity is one that is recognised as a charity for tax purposes by HM Revenue and Customs (HMRC) and will have a unique charity reference number.

To work out whether the reduced rate applies, your estate and your assets are broken down into three components as follows:

• assets that you own jointly with someone else that pass by 'survivorship'
• assets in trust
• assets that you own outright or as tenants in common with someone else

The tax position for each component may be treated differently and it may be possible to merge one or more components to gain the maximum benefit from the reduced rate of inheritance tax.

You can work out the calculation using the steps detailed below but HMRC’s website has a useful “reduced rate calculator”.

Step 1 - work out which assets fall into each component - remember not all estates have all three components.

Step 2 - add up the assets then deduct any debts, liabilities, reliefs and exemptions that apply to each component.

Step 3 - apportion the Inheritance Tax nil rate band - including any transferable unused nil rate band from a spouse or civil partner - between the number of components being used and any assets classed as ‘gifts with reservation’.

Step 4 - deduct the apportioned value of the nil rate band from each component.

Step 5 - add back in the value of the donation to charity - this result is the 'baseline amount' for each component.

Step 6 - divide the baseline amount by 10.

Step 7 - work out whether the charitable donation is more than the result of the sum at step 6.

The benefit of the changes to a charity in practice will be four times greater than the cost to the estates beneficiary, as HMRC will shoulder the burden of 76 pence for every pound donated, whereas the estate pays only 24 pence. For example, if the gross value of the estate is £500,000 and you deduct the nil rate band of £325,000 that leaves a net value of £175,000 which would be subject to inheritance tax. If there were no charitable gifts left in the Will the total inheritance tax payable at 40% would be £70,000 leaving a final estate balance of £430,000. In the same circumstances, if a charitable gift of £17,500 (10% of the net value of the estate) was made in the Will the total inheritance tax payable under the current 40% rate would be £63,000 leaving a final estate balance of £419,500. However, under the new rate of 36% the total inheritance tax payable would be £56,700 leaving a final estate balance of £425,800. What this shows is that whilst your beneficiaries would receive £4,200 less, HMRC would get £13,300 less tax than before.

If you would like to discuss making changes to your Will in light of the new inheritance tax provisions then please contact Rebecca Goldsworthy on 029 20 222 685 or rg@freedandco.com who will be happy to discuss matters with you.

When a person dies Inheritance Tax (IHT) can become due on their estate. Some lifetime gifts can be treated as chargeable transfers and be included in their estate for the purposes of IHT.  However, most gifts are ignored providing the person made the gift over seven years before their death.

IHT is payable at the rate of 40% on death. For 2010/11 the first £325,000 is chargeable at 0% and this is known as the nil rate band. The coalition government have announced that the nil rate band will be frozen at £325,000 until 2014.

IHT payable on lifetime gifts

Lifetime gifts fall into one of three categories:
(1) a transfer to a company or a trust – in this case the gift is immediately chargeable
(2) gifts that are exempt - these will be ignored both at the date of the gift and also on the subsequent death of the donor. A donor can make exempt gifts totalling      £3,000 for each income tax year
(3) potentially exempt transfers (PETs) - IHT will only be due if the donor dies within seven years of the date of the gift.

IHT payable on death

The main IHT charge is likely to arise on death. IHT is charged on the net value of the estate. The net value of a deceased’s estate is the net value of all of the assets of the deceased after deducting all  outstanding debts owed by the deceased. The deceased’s estate will include:

· any interests in trust property where the deceased had a right to income from, or use of, the property;
· PETs made within seven years of the date of death
Furthermore, there may be an additional liability because of chargeable transfers made within the previous seven years.

How to I reduce my IHT liability?

The majority of successful estate planning involves making lifetime transfers to utilise exemptions and reliefs or to benefit from a lower rate of tax on lifetime transfers.  However, your estate planning must take into account all factors as a gift that saves you IHT may create a capital gains tax (CGT) or income tax (IT) liability.   Also the financial security of you and your family must be taken into account.  Gifting sums of money or property in order to save an IHT liability may lead to financial difficulties in the future.

Using gifts

Wherever possible gifts should be made as PETs rather than as chargeable transfers for example a gift to an individual of money would be a PET while a gift to a discretionary trust would be a chargeable transfer.  In the case of a PET, the gift will be exempt from IHT if the donor survives for seven years.

Exempt Gifts

Gifts between husband and wife

Gifts between husband and wife or civil partners (as long as they have a permanent home in the UK) are generally exempt. If assets are held unevenly between husband and wife, it may be wise to use the spouse exemption to transfer assets to ensure they are held more evenly and that both spouses can make full use of lifetime exemptions, the nil rate band and PETs.

Gifts that you give to your unmarried partner, or a partner that you're not in a registered civil partnership with, are not exempt.

Small gifts

You can make small gifts up to the value of £250 to as many people as you like in any one tax year. However, you can't give a larger sum and claim exemption for the first £250.  Also, you can't use your small gifts allowance together with any other exemption when giving to the same person.

Normal expenditure out of income

Any regular gifts you make out of your after-tax income, not including your capital, are exempt from Inheritance Tax. These gifts will only qualify if you have enough income left after making them to maintain your normal lifestyle.

These include:
· monthly or other regular payments to someone
· regular gifts for Christmas and birthdays, or wedding/civil partnership anniversaries regular premiums on a life insurance policy - for you or someone else

Wedding presents

Wedding or civil partnership ceremony gifts are exempt from Inheritance Tax, subject to certain limits provided that the gift (or a promise to make it) is made on or shortly before the date of the wedding or civil partnership ceremony.  If the ceremony does not go ahead, the exemption will not apply.
· parents can each give cash or gifts worth £5,000
· grandparents and great grandparents can each give cash or gifts worth £2,500
· anyone else can give cash or gifts worth £1,000

Gifts to charities

Gifts to registered charities are exempt provided that the gift becomes the property of the charity or is held for charitable purposes.

Annual exemption

You can give away gifts worth up to £3,000 in each tax year without IHT becoming payable when you die. You can carry forward any unused part of the £3,000 exemption to the following year, but if you don't use it in that year, the carried-over exemption expires.

The annual exemption is in addition to the other gift exemptions.

Nil Rate Band

Nil rate band and seven year cumulation

Chargeable transfers up to the nil rate band can be made without incurring any IHT liability. After seven years, the gift is no longer taken into account in determining IHT on subsequent transfers. Therefore every seven years a full nil rate band will be available to pass assets out of the estate.

Transferable nil rate band

Spouses and civil partners can now transfer the unused part of their nil rate band on the first death to the surviving spouse/partner for use on the death of the surviving spouse/partner. On that second death, their estate will be able to use their own nil rate band and in addition the same proportion of a second nil rate band that corresponds to the proportion unused on the first death effectively doubling the nil rate band to £650,000 available on the second death. The transferable nil rate band can apply as long as the second death happened after 9 October 2007 irrespective of the date of the first death.

Alternative methods

Trusts

Trusts can provide an effective means of transferring assets out of an estate whilst still allowing flexibility in the ultimate destination of the assets.  They can also allow the donor to retain some control over the assets. In order to be successful for IHT planning, the donor cannot obtain any benefit or enjoyment from the trust and the property has to be removed from the estate.

We can advise you on the type of trust which may be suitable for your circumstances.

Life assurance

Life assurance arrangements can be used as a means of removing funds from an estate whilst also providing a method of funding a potential IHT liability.

A policy can also be arranged to cover IHT due on death. It is particularly useful in providing funds to meet an IHT liability where the assets are not easily realised, eg family company shares.

The importance of making a Will
Making a will is the first step to ensuring that not only is your estate shared out exactly as you want it to be when you die but also that your estate planning is adquetely taken care of. At Freed & Co we provide a specialist will writiing service at a competitive price. The first interview for half an hour to discuss your will is free and we also make house visits if required.

By using a solicitor you have peace of mind as we are regulated by the Solicitors Regulation Authority.  Will writers are not normally regulated and do not have to carry professional indemnity cover.  At Freed & Co we have £2,000,000 of professional indemnnity insurance which provides our clients with further reassurance.

How Freed & Co, Solicitors can help
Whilst some generalisations can be made about IHT planning it is always necessary to tailor the strategy to fit your exact circumstances and your aspirations for the future.  The need to ensure the financial security of you and your family’s must be paramount. If you propose to make gifts the interaction of IHT with other taxes needs to be considered carefully.

However there can be scope for substantial savings which may be missed unless professional legal and financial advice is sought as to the appropriate course of action. We would welcome the opportunity to assist you in formulating a strategy suitable for your own requirements. Please do not hesitate to contact us. Please contact either Cherry Stuckey cs@freedandco.com or Jeffrey Freed jlf@freedandco.com for your half hour free consultation