Make the most of today for heirs tomorrow

Make the most of today for heirs tomorrow

By Anthony Bailey

PRE-BUDGET speculation has begun early this year. The next Budget may not be until November, but there are already reports that the Chancellor is proposing to do something about inheritance tax because it is hitting middle-class voters.

But second-guessing the Chancellor is notoriously difficult. It may be unwise to assume there will not be an inheritance tax problem in future.

Inheritance tax starts to bite at a rate of 40 per cent on the value of estates in excess of £150,000 (£154,000 from 6 April). People with modest homes in comfortable suburbs and a variety of investments could easily cross the threshold.

But since they cannot save themselves tax - only their heirs benefit - they need to be careful not to lose control of their assets and leave themselves short.

The tax is a levy both on death and on gifts made within seven years of death. Transfers for those within the £150,000 band will not be taxed, and gifts of any amount made more than seven years before death fall out of the reckoning altogether.

That is one reason why people give away money or other assets well in advance of their intended demise. But there are pitfalls for the unwary. For example, it is not possible to give a home to a trusted son or daughter unless it is truly an outright gift without strings attached. And the gift of other assets, such as shares, could incur an immediate liability to capital gains tax. Serious inheritance tax planning - possibly involving the use of trusts - requires specialist advice.

Relying on family members to see that you will be all right does not allow for the unpredictable disputes that can break out in the most harmonious of families. And complications could certainly arise if offspring were to die first, or get divorced.

For those whose beneficiaries will be liable to inheritance tax, there is a useful exemption for gifts totalling up to £3,000 each tax year. So now could be a good time to look kindly on favoured children, grandchildren and friends. It is possible to exceed the limit if gifts under this exemption fell short of £3,000 in the previous tax year. And there will be no danger of tax on gifts over the limit once seven years have elapsed.

A separate exemption applies to small gifts of up to £250. It is possible to give any number of people gifts of this amount each tax year without fear of a subsequent tax bill.

Gifts between husband and wife living together are entirely outside the tax net.

Nor is there anything to worry about for those who intend to give everything away to charities and certain institutions, including the main political parties. Such gifts are tax-free.Main exemptions

Transfers to

UK domiciled spouse no limit

non-UK domiciled spouse (from UK domiciled person) £55,000

UK registered charities no limit

Lifetime transfers

Annual exemption per donor £3,000

Small gifts, annual amount per donee* £250

Regular gifts out of income varies

Wedding gifts

To child of donor £5,000

To grandchild (or remoter issue) or donor £2,500

To others £1,000

*Not available to cover part of a larger gift