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Get your house in order - reduce your inheritance tax!

As the saying goes, there are only two certainties in life: death and taxes. Sadly, with inheritance tax (IHT) both come at the same time – a cruel double whammy for many.
Joining us now is Anne Young, tax expert from Scottish Widows to answer all your questions about IHT including what it is, who’s likely to be liable and how people avoid it.

Host: Hello everyone and thanks for joining us today. Anne is with us and settling in ready for all your questions.
Anne Young: Hello everybody

Fiona McNally: Can you explain to me the 7 year rule about giving money as a gift.
Anne Young: When you make a gift, that gift will remain in your estate for 7 years after which time it will fall out of account. That's why making a lifetime gift is a very good way of reducing your potential inheritance tax bill. Remember too that some exemptions may reduce the gift absolutely, such as your annual exemption which is currently £3,000. For example if you make a lifetime gift of £10,000 your annual exemption will reduce that to £7,000 and that £7,000 will stay in your estate for 7 years but after that time it will completely fall out of that account for inheritance tax purposes.

Ric: Anne - What do you think will happen to the IHT threshold going forward
Anne Young: The Chancellor announced the IHT threshold for the next couple of years in last year's budget. We therefore know that the threshold this year is £275,000 and for 2006-07 will be £285,000 and for 2007-8 will be £300,000.

Tom Ryan: Hi there Anne, My wife is 59 and I am 62. We have 3 children, 35, 34, 23. We own a property valued about £275000. We intend leaving all to our children when we died, how do we avoid paying inheritance tax. regards Tom
Anne Young: First of all when you say that you're leaving everything to your children when you die. I suspect you mean that you are leaving everything to each other when the first of you dies, and then to the children on second death. If that is the case then you may want to consider leaving a legacy to the children or possibily to a trust when the first of you dies. You may need to change the ownership of your house into what is known as Tennants In Common and consider leaving a half share of the house into a trust on first death. Given the current value of the house, this would potentially save £55,000 in inheritance tax on second death. However, I would strongly advise that you take advice on this subject.

Malcolm Williams: Is it true that you have to make a will,as in husband and wife (even) or does your spouse automatically get 100% if one partner dies.
Anne Young: If you haven't got a will, then your estate passes under the rules of intestacy. Even if haven't got any children the only amount that will pass to your spouse absolutely will be all your personal chattels, £200,000 and one-half of the residue - if there is any. If you do have children, then your spouse will be entitled to even less. It is therefore important to make a will.

Dave Murphy: Do you need to live in the UK to pay inheritence tax?
Anne Young: The major issue as regards inheritance tax, is not residence in the UK but something called your domicile. You are born generally with the domicile of your father and it is very difficult to change your domicile from UK to any other. If you are UK domiciled you are assessable to UK inheritance tax on your worldwide assets. Even if you are not UK domiciled you are potentially assessable to UK inheritance tax on any UK assets.

Gordon Patrick: Is it correct that couples who own property as tenants in common reduce any liability?
Anne Young: Just changing the ownership of a property to tennants in common does not in itself mean that you reduce your inheritance tax bill. What it does mean is that each of you own assets in your own right which will allow you to make a legacy on first death, thereby using the inheritance tax nil rate band and reducing your IHT bill.

B Swan: I have a close relative whose total estate is worth£675,000, are there any easy ways to avoid inhertance tax,he is 80 years old
Anne Young: The potential IHT on this estate is about £160,000. The way to potentially reduce this through lifetime gifts. The trouble is that your relative needs to be able to not only afford to give them but also survive for seven years beyond making the gift(s) for them to avoid any IHT bill. He should ideally take financial advice on this so as to avoid any potential capital gains tax charge.

Woody: Hi Ann wave so i know this isnt a wind up...Woody x
Anne Young: I'll wave now and hope the camera picks it up!

Manda: What are the top three areas of advice you would give to me - home owner, late 70's and thinking aout moving into a smaller flat. I have 4 children and 12 Grandchildren and my husand is also in this early 70's.
Anne Young: Firstly, make a will or review your existing will. Consider using the nill rate band on first death in your will. Number two, consider using your annual exemptions and another exemption called the normal expediture out of income exemption to make lifetime gifts on a regular basis. Three, consider if you can afford it, making more substantial gifts, there are plans on the market which will allow you to make gifts but still retain the right to fixed payments for life. This may allow you to consider these more substantial types of gifts - again, take advice.

Saka: If my partner and I are not married, do I still have to pay inheritance tax on our house if he dies?
Anne Young: Absolutely, for IHT purposes it makes much better sense, in fact, to get married. The Inland Revenue do not recognise the concept of common law marriages. Should one of you die, the value of that person's estate will be assessable to IHT.

Woody: permission to put your hand down now...LOL
Anne Young: thank you!

Baz: Hi Anne, if I gift my working son (31yrs) £3000 will he have to pay tax on the gift?
Anne Young: If yuo give your son £3000, that should be totally exempt as we all have got an annual exemption of £3000 every year.

Bob Danson: What does the term "Nil Rate Band" mean as regards IHT
Regards
BobDanson
Anne Young: Your total estate is assessable to IHT, however there is a band which is assessable at 0%. The balance is assessable at 40%. The bit assessable at 0% is the nil rate band.

Bryan Rown: I have a client who is about 80yrs old, has around £500,000 investments made from his own home and shares. Is there anyway he can move this into trust to avoid IHT for his children and then subsequently their children
Anne Young: Absolutely! Provided that he or she can afford it - i.e. can afford to afford to live on the remaining assets that they have - and in doing so doesn't actually trigger a capital gains tax (CGT). Again, bear in mind the seven year rule about gifts which equally applies with gifts into trusts.

BRIDE TO BE: We are gettitng married next year. Someone entioned we could use the money given to us by our parents as part of an inheritence allowence which is tax free - is this true?
Anne Young: Yes, parents can make an exempt gift, in the event of their children getting married, up to £5,000. As a matter of interest, grandaprents can make exempt wedding gifts up to £2,500, and you may want to let your other guests know that they can make other exempt gifts of up to £1,000 - you should be so lucky!

Ray: So £3k max amount you can give in 1 year to avoid IHT. Regardless of how you split this up?
Anne Young: Yes - although if you don't use this exemption in any one year, you can carry it forward for one year, so in theory you could make a gift of £6,000 this year if you didn't make a gft last year.

Chris: I sell my house and buy another that is owned by the family. I live there and pay market rent. Problem?
Anne Young: No problem, provided that you pay a market rent. Bear in mind however, that the family will be assessable to income tax on the rent and also any capital gains they make on the house will be assessable to CGT.

David Salmon: Good afternoon - I have become aware of some rather radical methods of avoiding IHT by making use of Jersey based Purpose Trusts. Have you any knowledge of these, how they might operate & if they are as effective as indicated??
Anne Young: It's difficult for me to comment on specific tax planning schemes without full details of that scheme. I would strongly advise that with any scheme you plan to enter into, you consult in greater depth - than we really can do here and now - with a professional who is competent in that area of tax planning before going ahead.

Cathy: How do you change ownership of your house to tenants in common?
Anne Young: You go and see your solicitor. It is a simple procedure.

Ray: Are you forced to sell your inherited home if you cannot afford the IHT, because there the IHT is made up entirely of captial assests?
Anne Young: IHT on your estate is generally payable within 9 months of your death. Your estate cannot be realised to your beneficiaries until the tax has been paid. It may be that your executers need to release some of your assets in order to pay the tax bil. Alternatively, they may borrow the money. An added bonus as regards IHT on property is that it can be paid in installments, however, interest continues to accrue. It may be therefore that the house may have to be sold.

Grace: what exactly, in laymans terms, is iht
Anne Young: For most people IHT is a tax that is levied on your total estate when you die.

Andy: I haven't prepared a will yet and was wondering whether you had any guidance about how to go about it?
Anne Young: You can draft your own will with kits that can be purchased, but I would strongly advise consulting a solicitor on this. The important thing is to make a will.

Ramo: i have made a will leaving every thing to my 6 year old son, about £170,000 will it be taxed
Anne Young: Potentially your estate is assessable to inheritance tax, however as it is within the current nil rate band of £275,000 it looks likely as though no tax will be payable.

Host: That's all we have time for today - thank you to everyone for your questions. You can find out more about the subject via www.leavemore.com - the inheritance tax section of the Scottish Widows site.
Anne Young: Thanks everyone for taking the time to send me questions. There have been so many questions on a wide range of topics, so I hope it has been helpful even I didn't get a chance to answer your exact question. I will take all the questions away with me, and you can see not only the ones I have answered here now, but also some new answers to0 at the Scottish Widows website. Please do check it over the coming next few days. Thank you again everyone, it's been fun!

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