Inheritance Tax Planning

If you wish to ensure that when you die everything you own goes where you want it to then you should plan your finances during your lifetime.

Making a will is the first step. If you do not, there are rules for sharing out your estate which could mean your money going to family members who may not need it, or your unmarried partner, or a partner with whom you are not in a civil partnership, receiving nothing at all.

If you leave everything to your spouse or civil partner there will be no Inheritance Tax to pay because they are classed as an exempt beneficiary.

You may decide to use your tax-free allowance (2007/08 £312,000) to give some of your estate to someone else, or to a family trust.

If you and your spouse or civil partner own your home as 'joint tenants' then the surviving spouse or civil partner automatically inherits all of the property.

If you are 'tenants in common' you each own a proportion (usually 50%/50%) of the property and can pass that half on as you want by your will or in accordance with the intestate rules where there is no will.

If you want to give your home away to your children while you are still alive, you might want to bear in mind that:

• gifts to your children are not exempt from Inheritance Tax unless you live for seven years after making them
• if you keep living there without paying a full market rent (which your children pay tax on) it will still treated as part of your estate, and so liable for Inheritance Tax when you die
• from 6 April 2005 onwards you may be liable to pay an Income Tax charge on the 'benefit' you get from having free or low cost use of property you formerly owned (or provided the funds to purchase)
• once you have given your home away your children own it, it becomes part of their assets; so if they become bankrupt or divorce, your home may have to be sold to pay creditors or to fund part of a divorce settlement
• if your children sell your home, and it is not their main home, they will have to pay Capital Gains Tax on any increase in its value

If you decide to downsize to a smaller property and give away the proceeds of the sale of the larger property, these gifts may qualify as:

• 'potentially exempt transfers' (PETs) so they would not be taxable unless you die within seven years
• part of your annual exemption of £3,000 each year

You may decide to use a trust to pass assets to beneficiaries, particularly those who are not immediately able to look after their own affairs.

If you do use a trust to give something away this removes it from your estate, provided you do not use it or get any benefit from it. But, bear in mind that gifts into trust may be liable to Inheritance Tax. Trusts are complicated.

Gregory Abrams Davidson LLP can be of assistance if you want to change the way you own your property, make a will or set up a trust.

Key contacts: Victor Welsh, Rob Wilkinson.