Leader magazineASCL - Association of School and College Leaders

The 100K diet

Inheritance tax is affecting more and more ASCL members, but with careful planning this burden can be minimised.

Inheritance tax (IHT), once known as the wealthy person's tax, is affecting significantly more people than it did a few years ago. In fact, experts have calculated that one in three families who live in a detached home could now fall into the death duty tax trap.

For the 2006-07 tax year, the nil rate band (the amount that you can leave to your beneficiaries without having to pay any IHT) has been set at 285,000. If your total wealth, including such assets as your house, savings, investments and cars, exceeds this amount, the excess is potentially taxable at 40 per cent, the highest rate currently of UK personal tax.

However, there are some simple but effective measures which can be taken to reduce or eliminate IHT.

The late Lord Jenkins of Hillhead said that inheritance tax is "essentially a voluntary levy paid by those who distrust their relatives more than they dislike the Inland Revenue". He isn't far off. With proper planning, the tax can be largely reduced.

For example, you can take advantage of exempt gifts to pass assets on to others without IHT. But remember, to get a full overview it is important to consult a professional financial adviser.

Inter-spouse transfers: This commonly used exemption allows gifts between spouses and registered civil partners to be made generally free of IHT.

Annual allowance: You can give away up to 3,000 in each tax year without paying IHT. Any unused allowance can be added to the next year's allowance only.

Small gifts allowance: Furthermore, you can make gifts of 250 each year to as many different individuals as you like - but not recipients of your 3,000 annual allowance.

Gifts on consideration of marriage: When children marry, each parent can give 5,000 IHT free whilst grandparents can give 2,500 each and other people 1,000. This is on top of the annual allowance.

Potentially Exempt Transfers (PETs): Gifts that are made between individuals and are not covered by exemptions will be PETs. They are initially exempt from IHT and will become fully exempt if you survive for seven years after making them. However, only outright gifts count. For example, if you give your house to your children and carry on living there without paying them a full commercial rent, the value of the house will still be liable for IHT.

Chargeable Lifetime Transfer: Since 22 March 2006, gifts to most trusts are now chargeable transfers and carry an immediate charge to IHT (at 20 per cent in 2006-07) but only if the total value, including similar gifts in the last seven years, exceeds the nil rate band. Trusts play an important role in IHT planning since they allow assets to be gifted now but without handing them to the beneficiary. Together with your trustees, you control how the gift is eventually distributed.

How to save over 100k

The simplest way for a married couple or registered civil partnership to reduce their IHT is to make a tax efficient will.

In many cases, couples leave all their estate to the surviving spouse/civil partner, thereby wasting their own IHT allowance. As transfers between spouses/civil partners are exempt from IHT, when the first one dies there is no tax to pay if all the assets are left to the survivor. However, on the death of the survivor the combined estate is subject to tax, with only one nil rate band taken into account.

A discretionary will trust allows full use to be made of each allowance. In effect, up to the 285,000 nil rate band passes into trust on the first death on terms that enable the surviving spouse/civil partner to access income or capital of the trust, but it is not regarded as part of his or her estate. Children and grandchildren could also be potential beneficiaries of the trust. (The trust only comes into effect after the first death).

This information is provided by Frizzell, an ASCL preferred provider. For more information, call Frizzell on 0800 982 289 quoting ASCL member code: WAMP.

For textphone: first dial 18001. Lines open 8am - 8pm Monday to Friday and 9am - 1pm Saturday. To help improve customer service, calls may be monitored and/or recorded. Frizzell is a trading style of the Liverpool Victoria group of companies. Advice is provided by Liverpool Victoria Financial Advice Services Limited, registered in England No. 3027145, authorised and regulated by the Financial Services Authority and entered on the Financial Services Authority Register, No. 186890. Registered address: County Gates, Bournemouth BH2 2NF

So, without using the trust, beneficiaries receive a total of 474,000. Using the trust they receive a total of 588,000 (285,000 + 303,000), a saving of 114,000 in inheritance tax.

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