Why inheritance tax planning needs Will power

Inheritance tax IHT is one of life's and death's unforutnate certainties. As you are no doubt aware, there are two certainties in life - death and taxes - but do you realise that even when you have departed this world, the tax man has not done with you. Without careful planning, more inheritance tax than necessary could be paid on your estate meaning that surviving loved ones miss out on the full benefit of your financial support after your death.

In the year to April 2005, the tax man captured £2.8 billion in inheritance tax, some of which could have been saved. Inheritance tax now kicks in on estates valued at more than £275,000 and the sting is, its set at 40% above this threshold.

Although IHT was originally a tax on the rich, today with the average house alone valued at £162,994 in July source: Halifax House Price Index, more and more of us are liable for IHT on the estates of deceased family members.

Where there's a Will

A will is the first step in estate planning followed by IHT planning. If you die intestate, that is without having written a will, and have no surviving family members, the government will take all your assets. If married, in English Law, the assets including property up to the value of £130,000 go the surviving partner plus belongings. Any other financial assets are divided between spouse and children. The whole process can take months and sorting it out is stressful for surviving relations. In general, most of us want to pass assets to a loved one yet so few write a will.

Research by Standard Life found that 57% of us do not have a will and of those who did have a will, around half had failed to update it to include a change in circumstances. By not updating your will, it means that in death an unintended person, such as an ex-spouse, could inherit your assets. If you move home, have a baby, get married or get divorced, you should update your will. Life assurance policies, too, form part of your estate, and if you don't have a will any benefits could go to the government.

The reason such a large percentage of us haven't written a will is that we don't seem to get around to it or we can't be bothered. You can arrange to write a will through your solicitor or will-writing service or could use a DIY will pack sold in the high street. The only problem with the DIY versions is that sometimes there may be ambiguities which can be difficult to sort out.

Although many of us resent inheritance tax, only around a quarter of us with estates of more than £275,000 obtain IHT advice, according to Alliance & Leicester. You don't have to be loaded to get IHT planning advice. All you need is an estate worth more than £275,000. There are a number of things you can do to avoid IHT such as gift money to family, give money to charity or set up a trust.

The other option is to take out a life assurance policy in trust, which would pay the IHT bill on your estate but wouldn't reduce your liability. Barclays calculates that on an estate worth £750,000 left to three children, the government would be the largest beneficiary if no IHT advice was taken, walking away with £194,800 and leaving the three kids with just £168,400 each!

Moneyextra.com recommends you take independent financial advice before acting on any article

2005-08-15 14:59:51 © Moneyextra.com