You can't take it with you

But that's no reason for failing to put your financial affairs in order long before you plan to depart this world. The final part of our money-for-life series aims to ensure that your carefully made plans don't turn to ashes.
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The Independent Online

In this world nothing is certain but death and taxes, said Benjamin Franklin, a founding father of the United States. What is uncertain is when death will strike - so the only sensible action is to plan as if it could happen at any moment and ensure your financial affairs are in good order. If the planning is good enough, inheritance tax can actually be avoided.

In this world nothing is certain but death and taxes, said Benjamin Franklin, a founding father of the United States. What is uncertain is when death will strike - so the only sensible action is to plan as if it could happen at any moment and ensure your financial affairs are in good order. If the planning is good enough, inheritance tax can actually be avoided.

Indeed, inheritance tax is known as the most easily avoidable tax. But, even so, effective planning is needed because house prices in London and the South-east are now so high that even a moderate home can breach the inheritance tax threshold of £234,000. As the full rate of inheritance tax is 40 per cent, this could blow a big hole in your estate.

"People should think the unthinkable and realise they are not immortal. They should sit down and work out what assets they own and make a will, because otherwise these assets will be distributed under the statutory rules and there will be no inheritance tax planning at all," says Anne Redston, chartered tax advisor with Ernst & Young.

Individuals with sufficient assets should consider reducing their inheritance liability through careful use of gifting, she says. Any number of small gifts of up to £250 can be given away. Larger gifts count towards a maximum allowance of £3,000 per year, although higher amounts can be given to people getting married. Gifts above these limits made between three and seven years prior to death will attract inheritance tax on a sliding scale, depending on how long before death the gift was made. Those gifts made less than three years before death are subject to full inheritance tax.

"The thing is to plan early. If you make gifts more than seven years before you die, there is no inheritance tax due on it at all," says Ms Redston. "People should start thinking about this not when they are at death's door, but ahead of time. If people do nothing they are simply giving their money to the Chancellor. There are other things they may want to do with it, perhaps give it to their favourite charity."

High earners may want to consider special inheritance tax reliefs, such as through the transfer of businesses and agricultural properties. In some circumstances this might even justify a purchase as part of a long-term tax reduction plan, though only people with a legitimate interest in the business can obtain the relief.

Another piece of advice offered by Ms Redston is considering taking out a life insurance policy just to pay the inheritance tax. "One of the problems is that if you do have to pay inheritance tax on a bequest you have to pay this before the assets are released to you," she explains. "If you haven't the cash to pay it, you have to borrow the money. Life insurance makes this easier."

A further complication arises when a person has an offshore bank account, even if it is banked within the British Isles, such as in the Isle of Man. In such cases that jurisdiction's probate laws have to be satisfied, as well as those of Britain, making the job of the executor harder.

All is not lost if a person dies without maximising their inheritance tax planning. It may still be possible to take advantage of deeds of variation - if all the will's beneficiaries agree to this. This can make use of an individual's inheritance tax allowance, even if the individual did not. But, this loophole could be closed in a future budget, so it should not be relied on.

It is not only tax advisors who strongly suggest taking out a will - solicitors do, too. The Law Society provides basic advice on its web site - www.make-a-will.org.uk - and points out even your spouse or partner may not inherit everything if you die without making a will (intestate). Even more important than the question of money, is who should bring up your children if you leave a young family and have not made a will.

Solicitors also recommend clients to regularly update their wills - every five years or so, as well as after major life changes such as marriage, the birth of a child or grandchild, moving home or receiving a large bequest. The Law Society runs a phone line (0870 606 6575) which will put you in touch with local solicitors who will write wills.

While the Law Society strongly recommends using a solicitor to write a will, the Consumers' Association believes people can draw up simple wills themselves. It produces a book, Make Your Own Will (£10.99), which contains a pro forma will suitable for those living in England or Wales.

Before deciding what to leave in your will, it is wise to calculate your own worth (see chart on page 2). Many people will find their net worth is much higher than they would have assumed, mostly because of home values, but also through life assurance policies, cars and the various odds and ends of life that have been collected. You should also remember to check whether an outstanding mortgage will be paid off by a mortgage protection policy if you die and, if so, include the full value of the home in the assets to be bequeathed.

One of the other purposes of a will is to leave directions on funeral arrangements, including whether you want to be buried or cremated, what type of service to have, and where the service, burial and ashes distribution should take place. Some people will want a grave in their old village church, while others might want a green burial with a tree growing over their remains. Either way, it is sensible to take out a funeral plan to ensure the money is put away to pay for the funeral that you have decided on.

Funeral plans and advice are offered by the two main charities for the elderly - Age Concern (contact 0800 009966) and Help the Aged (write to information department (FP), St James's Walk, Clerkenwell Green, London, EC1R OBE, enclosing a stamped addressed envelope).

The country's largest funeral director, the Co-operative Wholesale Society, also offers funeral plans. Under these, you buy a bond to cover the cost of burial or cremation and the undertaker's charges, plus clergy and doctor's fees. But, only costs within the UK will be met, so anyone living or travelling abroad should take out a further policy - such as travel insurance - so that their body can be brought back to Britain for burial if this is desired.

Three styles of funeral are available under the CWS plans. The standard plan costs £1,090, a traditional plan providing a better coffin, lining and fitting, as well as a a limousine to accompany the hearse, costs £1,350, and the so-called sterling service offers an even better coffin and a second limousine, at £1,670. Age Concern's comparable plans cost £1,195, £1,440, and £1,870. While funeral costs rise, pre-payment through a funeral bond guarantees that the charges will be fully met without extra fees to be taken out of the estate.

As well as being the final opportunity to sort-out personal finances, a will also offers the opportunity to display a sense of humour beyond the grave or even to settle scores without the risk of retaliation. One Kent man wrote in his will: "To my first wife Sue, whom I always promised I would mention in my will - Hello Sue!" Meanwhile, John Bliss, an amateur actor in Somerset, said in his: "I leave my skull to the Crewkerne Players, in the hope that its appearance on stage during public performances may attract more favourable criticism than I did while appearing alive." And a Tyne & Wear man requested his cremation to be carried out to the Monty Python song 'Always look on the bright side of life'.

Even Benjamin Franklin displayed his feelings from a safe distance. In leaving his son William less land than the latter might have expected, he wrote: "The part he acted against me in the late war, which is of public notoriety, will account for my leaving him no more of an estate he endeavoured to deprive me of." But his ill-will was not widely spread around - he also left large sums of money to charitable causes. And his generous legacy is one of the things he continues to be remembered for.

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