INHERITANCE TAX

Inheritance Tax is currently charged at a flat rate of 40% on (a) your estate as at the date of death and (b) any gifts made by you in the seven years prior to your death.

This general position is subject to the following exemptions:

1. Any gifts made by you or transfers of your estate on your death, up to the total 'lifetime exemption' (technically known as the 'nil rate band').
   
2. Any gifts made by you more than seven years before your death.
   
3. Any gifts to your spouse.
   
4. Any gifts to charities.
   
5. Any gift of up to £5,000 to a child in contemplation of his or her marriage or up to £2,500 to a grandchild in contemplation of his or her marriage.
   
6. Any gifts made by you up to £3,000 in total value each financial year.
   
7. Any 'small gifts' of up to £250 each given by you to different beneficiaries in respect of Christmas, birthdays, etc.
   
8. Any gifts made by you which are classified as 'normal expenditure out of income'. You need to be able to demonstrate that you were able to afford to make these gifts out of surplus income (rather than coming from your capital) and that there is a pattern of such expenditure, for example by your making an annual commitment towards the premium on a life policy, or a termly commitment towards a grandchild's school fees. In many cases it is prudent, not only to demonstrate the pattern but also to ensure continuity of the benefit of your gifts, for a provision in your Will to confirm the continuity of the gift, for example the payment of a life premium for a remaining period of years, or the continuity of a termly contribution towards school fees up to the end of, say, secondary education of the beneficiary in question.

For a gift to be effective, you cannot retain any benefit in it. Thus, for example, were you to make a gift of a valuable painting to one of your children, the gift would not be effective for Inheritance Tax purposes if it remains on your wall rather than being physically handed over to the recipient. Likewise, if you endeavour to make a gift of part or all of your house to one or more of your children, you could not do so if you were going to continue living in the house, unless you were to pay an open market rent to the children.

If you are going to make any gifts in terms of any one or more of the above list, it is essential that you maintain an accurate record of the date on which the gift is made, what the gift comprises, to whom it has been made and, if it is not in cash, what its value is and how that value has been ascertained. It is usually sensible also to obtain a written receipt from the person receiving the gift, dated and signed by them, to confirm their actual receipt of the gift. You should maintain these records carefully, or better still hand them to us as and when such gifts are made. This is because it is increasingly common now for the Inland Revenue, after someone's death, to require full evidence of any gifts made.

It is also possible for you to take out a Life Policy, notwithstanding your current age (especially if under 75), whereby you use the annual exemption of £3,000 (referred to at item 6 above) to pay the annual premium on a Life Policy. The Life Policy is either written in trust by you in favour of your children, or otherwise is taken out by them on your life. In either event, the value of your assets would be reduced by the annual premium of £3,000 which you would pay, whilst the lump sum payable from the Life Policy on your death would not form part of your Estates but would belong tax-free to your children. In this way, a reasonable fund can be transferred tax-free to them on your death and the cash may well be handy to them to enable them to put towards any Inheritance Tax bill chargeable at that time.