More Estates fall into the IHT Net
First the good news: the tax nil rate band - the amount of your estate that is inheritance tax (IHT) free - is to rise to £350,000.
Now the bad news: this change will not happen until 6 April 2010. In between times, the nil rate band is £300,000 in this tax year, £312,000 in 2008/09 and £325,000 in 2009/10.
Quite why the Chancellor chose to announce such a deferred tax change is a puzzle, but whatever the reason, by the time the increase arrives it is unlikely to pull many people out of the grasp of IHT.
200% price riseWhen Gordon Brown became Chancellor in May 1997, the nil rate band was £215,000 and the average house price was £58,196 (source: Nationwide Building Society). Since then average house prices have risen by over 200% to £177,083 in March 2007 and the nil rate band has increased by just 39.5%. Thus an increasing number of estates have become potentially liable to IHT.
The Chancellor has also regularly taken action to make it harder to avoid the tax. For example, in his latest Budget, in addition to inheritance tax, he levied an income tax charge of up to 70% on some death benefits under alternatively secured pensions (which allow you to draw income direct from your pension fund from age of 75).
Mitigate the impact
Fortunately all is not lost if you are concerned about inheritance tax on your estate (or your parents estate). There is a range of tried and tested methods that can help mitigate the impact of the tax on your family. The first and most basic is to make sure that your will is up to date. A properly drafted will could save your dependants up to £120,000.
After updating wills, you should try to take maximum advantage of the various IHT exemptions. For instance, regular gifts out of income are free of inheritance tax, provided these do not reduce your standard living.
Inheritance tax planning should be integrated into your overall financial planning: there is no point in minimizing inheritance tax if you suffer tax-efficient poverty as a consequence. For an initial discussion on your IHT plans, why not call us now?The FSA does not typically regulate IHT planning.