Page last updated at 13:58 GMT, Wednesday, 6 April 2005 14:58 UK

Introduction to inheritance planning

granny
Inheritance planning has become a bit easier for many people.

The chancellor Alistair Darling changed the rules from October 2007.

In effect, he doubled to 624,000 the potential capital gains tax allowance of a widow or widower, or someone who has been in a civil partnership.

Even so, a bit of planning ahead may still be a good idea even if you're still decades off retirement, particularly when you consider that if you don't make any alternative provision for your assets, the government could get the lot.

Even if you do plan, there is a chance that your assets will be taxed - but only above a certain level.

Death duty

Inheritance tax (IHT) is basically a kind of death duty - it's a tax levied on your assets when you die - and paid by those who inherit.

The current threshold for IHT is 312,000 per person, so if your assets exceed this when you die, a tax of 40% will be levied on everything above that level.

The new change means that if a husband or wife's IHT allowance is unused, or only partly used, when they die then their surviving partner can add it to their own allowance when they subsequently die too.

Thus up to 624,000 worth of assets can be passed on before the inheritance tax is levied on the rest.

The basic 312,000 threshold once sounded a lot - but not once you included the value of any properties which, until recently, have been soaring in value.

The average price of a house in the UK is around 200,000 (and much higher in London) which does not leave much space to get in under the IHT threshold.

Transfers between husband and wife are not liable to inheritance tax, but when the surviving partner dies, the tax kicks in at the 40% rate.

Strategies for beating the taxman

The first thing to think about is to write a will.

Having a will does not in itself make any difference for tax purposes, but it does ensure that whoever you want to get your assets will get them.

If you want to leave money to your favourite charity, you should say so in your will. Otherwise no one will know what your wishes are.

You can pick up a DIY 'will kit' in most high street stationery shops. These can cost as little as 10 but you get what you pay for, the kits are basic and if you make a mistake it could prove serious later on.

If you have more complex affairs you should seek appropriate advice. Most solicitors provide will-writing services and for around 100 you get complete piece of mind.

Potentially exempt transfers

You don't have to wait until your death before your friends and relatives can benefit.

Gifts made during a person's lifetime are known as Potentially Exempt Transfers (PETs).

Most gifts are exempt from inheritance tax as long as they are made to individuals more than seven years before your death.

Beware that if you want to give something away in terms of ownership but carry on using it, this may not be considered as a gift for IHT purposes and it will be taxed after your death as though it hadn't been given away at all.

It is important to seek advice from the Revenue, a qualified accountant or other professional agent.

Further information can be obtained from leaflet IHT14 and in the Guidance Notes IHT2, both which are available on the Inheritance Tax area of the Revenue's website.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.

SEE ALSO
Understanding inheritance tax
14 Oct 02 |  Working Lunch
Homeowners caught in tax trap
08 Nov 02 |  Business

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