How can you protect yourself against Inheritance Tax?

Hugh Williams, founder of H M Williams Chartered Accountants and author of 'How to Save Inheritance Tax' and '101 Ways to Pay Less Tax', outlines the simplest ways of how you can dodge the taxman after your death.

Part of the problem with inheritance tax, or IHT as it's also called, is that we all tend to put it off. After all, it doesn't tend to be us that pay the tax – it's our survivors who are left with the bill – and this may be why we tend to put the problem to one side.

But this isn't the right attitude. It's particularly not the right attitude for the following reasons:

• Now that house prices have risen so much, roughly one in four of us will be left with an IHT bill when we die.
• IHT can usually be avoided - in many ways it's a voluntary tax.
• It starts and stays at 40 per cent. That's a huge and penal rate of tax. It's not as if, once you start paying IHT, that you pay it at (say) 10 per cent. We think 40 per cent is an outrageous rate and we do all we can to help our clients save IHT.

So you really should think of doing something about IHT. But what can you do?

1. Make a Will

If you don't make a Will, chances are that your assets on your death will not be distributed according to your wishes. However, before you make a Will, it would be a good idea to attend to item 2 so that, when you visit your solicitor, you can 'hit the ground running' and, at the outset, tell him or her what you want your Will to say.

2. List your assets and decide who you would like them to go to

List all your assets and their values, and you might start thinking how they should be distributed on your death. If you've done nothing else, this would be a very good place to start. (A useful form can be found in our book 'Tax Answers at a Glance'.)

3. Calculate the IHT due

You need to total the value of all of your assets, take off your liabilities, take off the IHT threshold (currently £300,000), and see what you have left. If you have a negative figure, then you don't have an IHT problem. If you have a positive figure, then the Chancellor will want 40 per cent of that positive figure.

4. Decide how seriously you view the impact of any IHT payable

If you can live (or should we say 'die') with any impact that IHT may be going to make on both your estate and your successors, then, so long as you have made a Will, you can probably rest at ease. However, having said 'probably', do keep in mind that IHT at 40 per cent can make a serious dent in your estate. In addition and assuming you are not a tax expert, you might possibly be overlooking something and the situation might not be as lenient as you may be supposing - or it might be better. Accordingly, you might well be advised to at least take professional advice and get your IHT calculation checked.

5. Choose an adviser

If you have an IHT problem, then consult a suitably qualified adviser on how to lessen the charge. The best professional advice on IHT mitigation is to be gained from someone who specialises in IHT mitigation and not necessarily from a high street accountant, financial adviser or solicitor. So choose your IHT adviser very carefully.

6. Take some elementary steps to reduce tax

If you do nothing else, please at least consider the following possible courses of action to reduce the impact of IHT:

• Make a Will.
  
• If you are married, everything you leave to your spouse passes to her on your death free of IHT. So, while this isn't necessarily the best possible tax planning, by leaving everything to your spouse, you are probably reducing the bill on your death to £NIL. On the other hand, if you're currently unmarried and facing an IHT bill on your death, then we strongly suggest you follow steps 1 to 4.
  
• No matter what your marital status is, if your estate is likely to attract a substantial IHT liability on your death, you can probably get the tax covered by a suitable Term Life Assurance policy, and, if this is written in trust, the proceeds will not form part of your estate and, of itself, increase the sum of IHT payable. The premiums on policies like this can be extremely reasonable and we never ignore this possibility when advising our clients. However, please note that these policies don't reduce the tax bill - they simply pass the tax bill (or part of the IHT bill) to an insurance company. So this route, while pragmatic, doesn't necessarily reduce the impact of IHT.
  
• Married couples are normally advised to leave a sum equal to the nil-rate band (£300,000) to a discretionary trust for the benefit of their children. This means that the nil-rate band isn't wasted when the first person dies. Why this works is because, when the second person dies, this trust doesn't form part of their estate. This neat idea could save you over £100,000 in IHT. However, HM Revenue & Customs has been known to attack such trusts, so you need to proceed with caution and expert counsel.
  
• Your own home should be owned as tenants in common, not a joint ownership. Tenants in common means that the house is owned in unequal shares and should protect the house from creditors.
  
• When it comes to passing substantial assets, such as homes and investment portfolios, to your children, there are a number of excellent arrangements and financial products which we have seen used to very good effect. One of the beauties of these schemes is that, while ensuring that the capital passes to the next generation in a tax efficient way, they can also (and usually do) increase your annual spending money. Ask a local expert for more details.
  
• Finally, as part of your IHT planning, try to ensure that your survivors will have enough to live on.