Review wills carefully to avoid paying tax beyond the grave

Published on Friday 20 November 2009 18:36

AS A nation we are now one of the most heavily taxed in Europe. We will shortly pay 50 per cent tax on any income in excess of £150,000 plus allowances, a further 40 per cent top rate of capital gains tax on profits made from investing surplus income, and then yet another top rate of 40 per cent on death.

So what can be done about it, and what steps should be taken to ensure that you are not sending cheques to Gordon Brown from beyond the grave?

The classic way of providing for children used to be through a simple "accumulation and maintenance" trust. The benefit of such trusts was that the trustees – usually the parents or grandparents – could exercise control over the capital and income whilst gaining the advantage that the capital gifted into the trust would be out of their estates providing they survived for seven years following the date of gift.

Thanks to the recent budget changes however, you must now pay inheritance tax (IHT) on 20 per cent of the value of the gift above the current threshold of 325,000. To add insult to injury, the trusts assets are also subject to a 6 per cent tax charge every ten years. However if gifts into trust are below 325,000 you can escape the 20 per cent charge.

Better still, for those who can afford it, is that another gift into trust of the then IHT-free threshold may be made every seven years. Given that it is open to both spouses to make such a gift, thereby doubling the exemption, a considerable amount of otherwise taxable wealth can be removed from their estates over a period of years.

This does involve planning early, however. Each spouse has a separate IHT-exempt threshold and inter-spouse transactions are tax exempt. Thanks to recent changes in the IHT rules, if the first spouse to die does not use their exemption on death this passes to the surviving spouse and is effectively doubled up on their death.

Life insurance policies also have a valid role to play still. Parents frequently write life policies into trusts for their children so that the payout is not subject to IHT on death. Existing policies written in trust for children will not be hit by the new trust tax rules, but new policies above the 325,000 threshold are likely to be hit with a 6 per cent tax charge on the tenth anniversary of the trust. This problem can be avoided by writing the policy into what is know as a "bare" trust, a simple form of trust where children inherit at age 18.

The downside is that these trusts are very inflexible.

There are a number of other alternative strategies available to reduce IHT, although it is important to dust off your existing will, review its terms, take stock of your current financial situation and then take advice. Wills should be reviewed every five years or so if you are to avoid paying tax from beyond the grave.

&#149 Ronnie Ludwig is a partner in Saffery Champness Chartered Accountants. Listen to his podcast at www.saffery.com.