Inheritance protection

It's not just the rich and famous who have to think about Inheritance Tax. If you haven't made the right arrangements, your family may currently pay 40% tax on the value of your estate over £325, 000 (the nil rate band) on your death.

Nowadays that's not an unrealistic amount to leave, particularly when you consider that the average house price has increased by 273% since 1959*. Add to that savings, investments, personal belongings and any life insurances not written in trust and you've got a sizeable estate often quite early on in your life.

*Source: Halifax House Price Index, The UK Housing Market over the past 50 years, January 2010.

	Value of Estate	Tax Liability
	Up to £325,000	0%
	Over £325,000	40%

How can you avoid inheritance tax?

Anything you leave to your spouse is normally free of Inheritance Tax. But as soon as it passes to children or anyone else who is not exempt, it could be subject to Inheritance Tax.

A change on 9th October 2007 could benefit married couples and civil partners. A widow, or widower, can now use any portion of the nil rate band that was not used by their spouse. For instance, if their spouse used none of the nil rate band, the survivor would have two nil rate bands available, currently £650,000. This change applies even if their spouse died before October 2007.

But even with this change, there could still be a substantial liability. How would your family foot the bill? Perhaps they'd have to sell the family home or dip into other investments. Not what you intended at all. But the good news is that with careful planning you can reduce or even avoid Inheritance Tax altogether.

Make the most of your inheritance tax exemptions

You can also take advantage of some of the Government exemptions to reduce your estate and thus lessen the amount of Inheritance Tax your loved ones will pay.

You can do any or all of the following:

	Give away up to £3,000 each tax year This takes advantage of your Annual Exemption, which allows you to give away £3,000 each tax year, exempt from Inheritance Tax. Plus you may also be able to utilise any unused allowance from the previous tax year.
	Give small gifts of up to £250 to a number of different people Using your Small Gifts Exemption allowance, you can gift up to £250 to any number of people each tax year.
	Give wedding gifts to your children The Marriage Gifts Exemption allows each parent to give wedding gifts of up to £5,000 to each of their children (grandparents can gift up to £2,500 to each grandchild). You can also gift as much as £1,000 as a wedding gift to anyone else.
	Give to charities Almost all donations to charity are considered exempt, and can help to reduce your inheritance tax liability.

Give gifts out of your income

If you make regular gifts (including birthday and Christmas presents) out of your after-tax income (not your capital), that does not impact on your normal standard of living, you may be able to avoid Inheritance Tax.

Use a potentially exempt transfer

Making gifts during your lifetime can be a very tax-efficient way of passing on your wealth. If you make a gift to another individual, and it is not covered by any available exemption, it is known as a 'potentially exempt transfer'. This transfer will be free of inheritance tax if you live for at least seven years after making it. If you die within seven years, the original gift will be included in your estate, but any growth in its value will not be included. If a 'potentially exempt transfer' becomes chargeable when you die within seven years of making it, depending on the size of the gift, taper relief may be available so that only part of the full tax has to be paid on the gift.

This information is based on NFU Mutual's understanding of current and proposed tax legislation which is subject to change.

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