Tax and your estate

84 Review your will regularly and particularly in the light of this year’s Budget changes. A will can quickly become out of date, or even invalid if you get married or divorced. A tax-efficient strategy is to pass the amount of the inheritance tax nil rate band, currently £285,000, directly to the next generation, after making sure that your surviving spouse/partner has enough to live on after you have died.

85 Rather than just living together as a couple, get married or set up a registered civil partnership. Otherwise your surviving partner will have to pay inheritance tax on anything inherited from you that exceeds the nil rate band, currently £285,000. Do not forget that there are some potential tax and other costs to weigh in the balance.

86 Make a will. If you die without making a will, your assets will be divided between your relatives according to the intestacy rules after inheritance tax is paid at 40% on any value above £285,000 that goes to relatives other than a spouse or civil partner. If you have no surviving relatives, the same tax will be paid but the Crown (ie the government) will claim the balance. To avoid this, if you have no relatives, make a will leaving your estate to the charities of your choice. Anything left to charity is free of inheritance tax.

87 You can usually rewrite someone’s will after they have died if their arrangements are not tax efficient. Not everyone leaves a tax-efficient will. Fortunately, any will can currently be varied within two years of the death if all the people who will benefit under the will agree and they are not minors. This way capital could be passed down to skip a generation and make use of the nil rate band for inheritance tax. You cannot count on this legal procedure continuing to be available, so it is far better to keep your will up to date.

88 Investing in AIM shares can save inheritance tax. Shares in unquoted companies (ie those not listed on a recognised stock exchange) qualify for relief from inheritance tax as business property, once you have held the shares for at least two years. Companies listed on the junior stock markets (AIM and Ofex) are counted as unquoted for this tax relief. AIM and Ofex companies are generally much smaller than those listed on the London Stock Exchange, so the risks are often much greater.

89 Invest in a furnished holiday letting property to save inheritance tax. Property that you let furnished for at least 70 days a year and which is not normally occupied by the same person for more than 31 days in the holiday season, may well qualify as a furnished holiday let. After two years’ ownership, and if you supply some services to the tenants, the value of the property will be free of inheritance tax when you die.

90 Make regular gifts out of your annual income to whomever you choose. As long as you establish a pattern of gifts that can be shown to be covered by your net income without reducing either your capital assets or your normal standard of living, those gifts are free of inheritance tax. The recipients of these gifts need not be the same people each year.

91 Make gifts totalling £3,000 each tax year from your capital resources. These gifts are free of inheritance tax, and if you forget to make your £3,000 gift one year, you can catch up in the next tax year by giving a total of £6,000. Remember both you and your spouse or civil partner can each give £3,000 every tax year in addition to gifts you make out of your regular income.

92 Give a share in your home to your daughter (or son), and allow her to move into the property to live in her share of the house. Unlike most such arrangements, the gift is effective for inheritance tax, but you should both pay your own share of the household expenses. Then, seven years after the date of the gift, the value of the part of the property you have given away will drop out of your taxable estate.

93 Use the inheritance tax marriage exemption for gifts. If your son or daughter is about to wed, then you and your spouse can each give them £5,000 inconsideration of the marriage, and the gift will be free of inheritance tax. This is in addition to any smaller gifts you make out of your regular income each year. The inheritance tax free gift you can make on the occasion of a grandchild’s wedding is £2,500. Civil partnerships attract the same exemptions.

94 Do not be caught by the pre-owned asset tax. If you give a large cash sum to your son or daughter to buy a big house where you can both live, you will be taxed on the benefit of living rent free in the property that your gift was used to purchase. But if your offspring uses your gift to add an extension to their current home, and you move into that extension, no tax is payable.

95 Do not boost the value of your taxable estate unnecessarily with life assurance benefits. Check to see if any of your life assurance policies or the death benefits under pension schemes should be put in trust, so that they will fall outside your estate. If the proceeds of the policy are paid to your estate on death (as policies taken out for mortgage protection commonly are), your family could end up paying inheritance tax at 40% on the value of your life assurance, when your dependants could receive the proceeds tax free.

96 Own your home as ‘tenants-in-common’ rather than as ‘joint tenants’ with your spouse or civil partner to help you save inheritance tax. You can then pass your share of the property to someone else when you die and make full use of the inheritance tax nil rate band, thereby potentially saving inheritance tax of £114,000 (ie 40% on the 2006/07 nil rate band of £285,000).

97 Generally keep probate values low. The lower the total probate value of an estate, the less inheritance tax will be payable. So when someone dies, try to make sure the deceased person’s assets are valued on an ‘as is basis’, which should normally give a lower probate value than the normal insurance ‘new-for-old’ basis. In some cases, it may be better to have higher probate values.