The Autumn Statement will have put another spring in the step of savers, as well as those planning to pass on their wealth, thanks to the abolition of the 55 per cent ‘death tax’ charge. Furthermore, the tax-free inheritance of ISAs will allow people to relax somewhat, knowing that this burden will be removed from spouses.

However, the fact remains that inheritance tax (IHT) is a growing source of revenue for the State, and in the six years from 2013-2018, the number of estates affected by IHT is estimated to more than double.

By adopting a few relatively simple, tried-and-tested methods, IHT can be significantly reduced or even removed from the equation altogether, and estates can be protected and distributed the way the Will-holder wants. So what are some of these methods and how to do they work?

• Properly drafted Will

Anecdotally, solicitors earn more from untangling poorly drafted Wills than actually writing them in the first place. Estates likely to be affected by Inheritance Tax really ought to be supported by a properly drafted Will, which clearly sets out the requirements of the individual and includes any bequests they wish to make. It is even possible to have a Trust incorporated into the Will. This has certain advantages in relation to care costs and ‘wayward’ members of the wider family.

• Plan ahead

Estate planning solutions can range from being effective after two, seven and even more than 20 years, so it is far better to start today and think carefully about which assets can be gifted immediately (from capital or income) and which assets people may require access to but can still be structured to leave the estate after a longer period of time.

• Pensions

The Chancellor’s announcement to abolish the current ‘tax on death’ for most pension funds from 6^th April 2015 introduces yet another useful tool in the individual’s armoury. In practice, this change in the rules will allow pension funds to be cascaded down the generations so long as certain criteria are met.

• Exemptions & Allowances

It is vital to be familiar with allowances which can be used each year and can pass assets immediately from ones estate – these include the Annual Allowance, Gifting from (excess) Income and making Small Gifts. These are all in addition to the best known exemption which is known as the ‘Nil Rate Band’ – currently, up to £325,000 per individual.

• Charitable Giving

While charitable giving has been with us for many years (assets gifted to registered charities are not subject to Inheritance Tax on death), what is not widely known since it was introduced back in 2012, is the gifting of at least 10 per cent of someone’s net Estate to a qualifying charity results in a 36 per cent IHT rate on the balance of the estate rather than the usual 40 per cent tax rate.

• Trust-based planning

There are several good trust-based solutions available which enable capital – typically of amounts up to the available Nil Rate Band – to be passed to beneficiaries either immediately or over a number of years. Some of these methods require the donor to give up access to the capital while some ‘keep the door open’ should there be a need for capital sums such as meeting long term care costs.

• Shorter life expectancy

Even where there is little time remaining to plan – for example, due to poor health and reduced life expectancy – the law permits certain investment in either AIM listed shares or in qualifying business structures to remove assets from one’s taxable estate after just 2 years (using Business Property Relief).

• Insuring the liability

A crucial part of planning ahead is to ensure all options are available before it’s too late. One such option is to simply insure against some or all of the likely tax bill by arranging a ‘Whole of Life’ policy written under trust that is guaranteed to pay out the sum assured whenever death occurs. However, to ensure the cost of such a plan is not prohibitive, it is important this solution is considered while they are still reasonably young and in good health.

• Lasting Power of Attorney

Speak to any good solicitor and they will want to discuss LPAs at the same time the Will is being drafted. While a Will ensures all assets are distributed in accordance with the Testator’s wishes, a Lasting Power of Attorney (previously available as an Enduring Power of Attorney) ensures financial affairs and ‘health and welfare’ are taken into account appropriately should capacity be lost or reduced. This avoids the unsatisfactory result of the Local Authority working with a Court-appointed Guardian making decisions on people’s future rather than their family.

Summary

Far too many individuals and couples still die intestate – often leaving a hefty tax bill for their heirs. Alternatively, existing Wills often need to be adjusted post-death using a Deed of Variation. Either way, the outcome is often unsatisfactory, leaving beneficiaries frustrated with ‘what could have been’ with just a little fore thought.