Money: You can't take it with you, so why not give it away now?

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The Independent Online
"Nothing is certain about taxes on death...." Not exactly as Benjamin Franklin said it, but an accurate description, perhaps, of inheritance tax.

A quick visit to your trusty financial adviser and your nearest and dearest can inherit all your worldly millions without handing a penny to the taxman?

Well not quite - and with property values what they are, many of us will fall into the IHT net which starts at pounds 215,000 this coming tax year.

It must be emphasised that inheritance tax (IHT) is not actually a tax on death - transferring all your assets while the priest waits to read your last rites won't get rid of an IHT bill. It is safer to call it a tax on transfers.

The basic calculation is to add up the value of the estate on death, including the family home, deduct the pounds 215,000 allowance (a nil rate band everyone is entitled to) and charge the rest to tax at 40 per cent. But, as with all things in life and taxation, it is not that simple.

Some transfers within the past seven years are included, along with some tax allowances for transfers you made at least three years ago.

The key way of escaping IHT is to give assets away. As well as the seven- year rule, there are a number of exemptions. You have a small gifts allowance of pounds 250 per person per year plus a general pounds 3,000 annual gift allowance. There are exemptions for gifts on marriage - up to pounds 5,000 from each parent (as if the wedding wasn't expensive enough). Most significantly, transfers between spouses are exempt.

One under used, but quirky, clause exempts "normal transfers out of income". If you can convince the taxman that gifts were habitual and made out of your income without diminishing your standard of living, those gifts will be outside IHT. So if you have the capacity to make reasonably large gifts, over a period of time a lot of value can pass out of the estate. It could, for example, flow into an insurance policy for the benefit of heirs to cover IHT.

Even if you die with a considerable estate, there are exemptions. Again there is the spouse exemption: no tax on what is left to the surviving husband/wife.

But bear in mind that if each spouse has some assets that are passed to others, probably the children, that can cut the eventual tax bill as each uses up some or all of his or her pounds 215,000 exemption.

Agricultural and business property get generous reliefs at all times. They don't cover shares in quoted companies though, unless you are lucky enough to control a plc. But gifts to charities and even political parties are usually out of the IHT net.

Careful planning can thus reduce an IHT bill. However, for those who have just the family house, savings and a pension, there is no easy way to pass on the house and avoid IHT, as the surviving spouse will normally want to live in it. Severing the tenancy so that each can pass on their own half of the house is possible, but a route to think carefully about.

One of the most simple and fundamental planning measures is to make a will: under the laws of intestacy, antagonistic children and a large house may mean the surviving spouse doesn't even get to retain the family home.

A will can be made on the back of an envelope (though that is not something I would recommend) as long as it is witnessed by two non-beneficiaries. If you have death benefits under an employer's pension or insurance policy, look into passing any lump sums direct to the children, or a trust for the children, with a "letter of wishes" lodged with the fund trustees.

John Major is committed to abolishing IHT and letting wealth "cascade down the generations". But this financial waterfall is likely hit some rocks if Labour or the Liberal Democrats come to power: both are committed to corking up what they see as considerable leaks within the system. For the moment, there remains a lot that can be done about the burden of the tax, though never forget that you will (hopefully) have to live a long time with your actions.

John Whiting is a tax partner at Price Waterhouse

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