Q&A: How to minimise your IHT bill

* Danny Cox is a Chartered Financial Planner and Head of Advice at Hargreaves Lansdown, a leading provider of investment management products and services to private investors in the UK. Hargreaves Lansdown manages and administers around £14bn on behalf of over 280,000 clients.

** Peter is a Partner at Clarke Willmott LLP. Clarke Willmott is a top sixty law firm and undertakes after death inheritance tax negotiation and planning. In 2008 Clarke Willmott won the Legal Week private client and family team of the year award.

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Can you tell me whether a surviving spouse can change the will partially or totally and can beneficiaries give away their share to other beneficiaries within the wiil. U M Desai, Surbiton

Danny Cox: Each person has a Will that they can change at any time if they wish. It is quite possible that the survivor can alter the terms of their own Will. If you want to ensure that assets are left to the people you want to benefit from your estate nominate them directly as beneficiaries. If you want your surviving spouse to have some benefits then pass onto other beneficiaries, you should consider using a trust and take legal advice.

Peter Nellist: Under what is termed the deed of variation provisions, section 142 of the IHTA 1984 a beneficiary can re-direct all or any part of his or her inheritance but it must be done within two years of the death of the person who left the inheritance. Professional advice on this area would be a sensible step for you to take.

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Beneficiaries I nominate will receive a tax free lump sum of around £280,000 on my death from my employer. I have nominated my spouse, who will also receive a small pension and my share of the property we own. This share is worth around £200,000 with an outstanding 10 year mortgage on the property of around £180,000.

My son will also receive a small pension until he is 18 or completes full-time education. What is the best way to organise my affairs so that the lump sum grows in a tax efficient way delivering an income to pay off the mortgage, which is a tracker and at a very low rate today? Tony Fry, UK

DC: In my view your beneficiaries should use the death in service benefits from your employer to repay the mortgage straight away, leaving a balance of £100,000 in cash that can be invested or spent meeting your families needs. Repaying debt is one of the best investments they could ever make. You should consider whether this will be sufficient for them and if necessary take out further life insurance

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Are Potentially Exempt Transfers at risk as the government looks to maximise revenue? Rupert Fudge, UK

DC: There has been a lot of speculation about Potentially Exempt Transfers and they would seem to be an easy target to increase inheritance tax. However, abolishing PETs would not provide the Treasury with immediate revenue and therefore there could easily be other tax targets before this one. If you are worried, make your gifts sooner rather than later.

PN:I think all tax breaks are at risk; it would be a simple matter to increase the 7 year PET period to say 10 years. So if you have big gifts in mind make them as soon as possible. Consider to a trust for protection and control and hedging the possibility of death with life insurance.

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I’ve recently bought a house with my partner. We are only 30 years old but our family keeps suggesting that we write a Will. Do we need to? And if so can we just do it online? Henry Carrol, London

DC: If you have bought the house “joint tenancy” you own the property jointly and equally. In the event that either of you die, the house automatically reverts to the survivor’s ownership, regardless of how a Will may be written. If you own the property as “tenants in common” on death your share of the house will not automatically go to your partner. This is where a Will is important, as your share of the house might pass to a relative who will then own the property with your partner.

You should also consider whether you need life insurance to cover the mortgage so that on death it will be debt free.

Wills can be done easily online but have to be signed and witnessed correctly which cannot be done online, you print off the document and then sign in front of two witnesses, this is very important otherwise the Will is invalid.

PN: There are two things you need to do. Firstly ensure there is a formal agreement about the house and its proceeds and draw up wills. I suggest using an adviser search such as Unbiased.co.uk to find a local solicitor. Also consider putting in place lasting powers of attorney. Have you considered your protection needs e.g life insurance and permanent health insurance?

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What is the tax-free sum we can leave our family when we die? Kate Mills, London

DC: From an inheritance tax perspective the nil rate band or IHT threshold is £325,000 for the current tax year. If you are married, your combined nil rate bands can be used. So, in effect, the allowance is doubled. Money that you leave to charities is exempt from inheritance tax and any money you leave your spouse on the first death is also IHT free.

PN: I suspect you have in mind what is termed the nil rate band which is £325,000 for this current fiscal year rising to £350,000 – per person – from the 6th April 2010. It may be possible to exceed this figure by, for example, owning and leaving packaged (or not) assets which have IHT reliefs.

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Could you please clarify the position relating to investments in venture capital trusts insofar as inheritance tax is concerned. Brian Seadon, Shrewsbury

DC: The value of a Venture Capital Trust is treated like any other taxable asset in your estate. There is no inheritance tax exemption on VCTs like there is with other types of investment scheme like Enterprise Investment Schemes.

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In 1950, my hearing was damaged whilst on active service with the Kings African Rifles fighting Mau Mau, for which I received a pension. I believe my executors will be able to claim IHT exemption even if my death proves unrelated to my disability. This exemption is enshrined in current legislation - IHTA84/S154. The leading case in1979 involved the fourth Duke of Westminster. He was wounded in 1944, died of cancer in 1967 with full IHT exemption. I should be grateful for confirmation of my understanding of this law. Are there any steps now which I should take to assist my executors when the time comes to make a successful claim without recourse to the courts? Robyn Grant, Guildford

PN: We got £400,000 in IHT back for a late client using this relief two years ago. The law is complex but fundamentally you will not get the relief just because of hearing damage. The wound or disease contracted whilst on service effectively has to be related to an early and, would otherwise be the case, death. It would be worthwhile to fully explore and document media conditions and to brief your family and doctors on the full circumstances. In the Duke of Westminster case there was on appeal a link shown between the wound and the cancer – it would be worthwhile for you to read the case.

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I own a flat which is in my name. I am 71 years of age, married and have no children. As the transfers between spouses are free of any taxes, I am assuming that if I die first without making a will my wife will inherit every thing i.e. the flat and all my savings without being liable for any taxes.

Am I right in thinking that? Please note the sum total could be higher than the inheritance tax threshold.

Now consider the second situation, if my wife dies first without making a will, would I inherit all her savings even if they were over £55,000. She is British born and I am not. There are no children involved. I have been living here for over 40 years and have held British nationality for over 30 years. In this case will there be any complications regarding the rules of being domiciled or non domiciled? Please clarify, Khaja H.

DC: In theory, under the rules of intestacy, all your assets would pass to your wife on your death and vice versa. However, this is not a given. A Will has two important functions, firstly to ensure that the right people benefit from your estate and secondly, it makes life so much easier for those you leave behind. For the second reason alone you should both make Wills

PN: The inheritance tax rules and intestacy rules are different. The intestacy limits were raised in February this year. You say nothing about values. Under the intestacy rules wives do not automatically inherit everything – put a will in place now in favour of your wife.

For inheritance tax, £55,000 is the exemption limit for gifts to non domiciled spouses. Domicile is a technical concept – my guess is that you may both be domiciled here and that is not a problem but seek advice on giving more details of your circumstances.

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My wife and I had Wills drawn up several years ago by a solicitor and they are now a little out of date due to births and deaths in the family. Can we write our own codicils simply adding and removing beneficiaries until we can get a solicitor to draw up new Wills? Thank you, Regards, William Dunne

DC: I would recommend that you get a solicitor to draw up new Wills for you as soon as possible rather than attempting to write your own codicils. Legal advisers recommend that. Wills are updated every five years or every time there is a change in circumstances, as legal wording and practises change over time.

PN: Yes, but it is safer to have the wills professionally drawn firstly to ensure all the requisite legal formalities are properly observed and secondly to get some advice about whether you have any inheritance tax problems. A solicitor must give you cost information before he/she starts – I would not expect it to be expensive. You should also consider putting in place lasting power of attorney.

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My wife and I own property in England and Scotland, and we live in Bristol. However we have been told by local solicitors that we have to make a Scottish will, which will also be able to deal with the English property. It would be much more convenient for us to make a will in Bristol. Would this be possible? Paul Dimarco, Bristol

DC: There are differences between Scottish and English law though an English Will should suffice.  If you do opt for a Scottish Will this can be drawn up in Bristol.

PN: On the basis that you are both domiciled in England I would have thought an English will would cover the position but would want the input of a Scottish solicitor to check there are no complications.

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I have been a carer for my disabled and elderly parents for many years, and live in the family home. My father died three years ago and I and my sister received the nil-rate band amount from his estate, the rest of which passed to my mother who is now 89 years old. I would like to know what we can do to minimise the inheritance tax due on her death, and how much time we will have to sell and move out of the family home in order to pay it - and whether or not this time period can be extended. Many thanks. Samuel Chedzey , London

PN: There may be a helpful (reduced) valuation point based on a legal principle called proprietary estoppel – if your parents made a promise to you e.g “look after us and the house will be yours” and you, in reliance on that promise changed your position and suffered some meaningful financial detriment, that could reduce significantly the value of the family home for IHT purposes on your mother’s death. You do need some specialist advice. Otherwise look at all the basic steps of gifting using immediate IHT exemptions and the 2 year packaged products in so far as there is cash in your mother’s estate. Is there an enduring or lasting power of attorney for your mother – and indeed for you?

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Our situation is such: my husband is a German national and I am American. We are non-domiciled in London and have been for nearly 11 years.

We have a notarized German will registered at his birthplace to cover our world wide assets which was done nearly 20 years ago.

If something were to occur to either my husband or myself or both of us would the UK government issue us a probate on the basis of this German will?We have a separate will in Spain for our Spanish property and we have a separate agreement for our USA properties and bank accounts. We are worried about our UK assets and those of Switzerland--(where we need a probate issued by the British because we

reside in the UK.)

No one seems to give us a clear picture for our situation. We would appreciate answers or trustworthy feedback.Thank you very much, Rose Mamsch

PN: Assuming you are non domiciled as you state IHT generally attracts to assets situate here. The position is complicated by situs rules under the US / UK double tax agreement. I assume your assets total a significant sum – you really need some detailed expert advice.

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Our Will writing solicitor has recommended two trusts for us - Property and Flexible Life Interest Trusts. Are they the most suitable trusts for our situation? We have £1.5m in total split between cash and investment (£0.9m) and property (£0.6m); and we are approaching the retirement age. Also, what further steps can we take now to avoid/minimise IHT payment in the future? Thank you.Navin Kaushal, West London

DC: Setting up trusts as part of a Will no longer has the same inheritance tax savings benefits it used to.  Your inheritance tax thresholds, the nil rate band, are automatically transferred from one to another on the first death negating the need for a trust.  That said, trusts have other purposes.  In simple terms, there are two ways to save inheritance tax: spend or gift your capital; or spend or gift income. This reduces your estate and therefore the IHT you will pay.  Before you start gifting or spending, consider your long term income and capital needs – many people give away too much too quickly.  The other way to protect your estate from inheritance tax is to use an insurance policy, this aims to pay an amount on death that can be used to pay all or part of the tax.  Of course the cost here is the premiums.

PN: This depends on what you mean by ‘our situation’. Trusts are used to protect assets but they do have an ongoing cost- I would need more details to comment meaningfully but there is a lot you can do now about inheritance tax. There are generous exemptions for gifts, some of which have immediate effect and some dependent on surviving a 7 year period. There are also packaged products which are dependent on just surviving a 2 year period – and the law not changing before you die.

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