YOUR HANDY GUIDE TO

INHERITANCE
TAX


How to leave more to those who matter
– rather than the tax man
In the past, inheritance tax (IHT) was seen as something that
affected only the very wealthy. But with the rising standard...
YOUR WAY
    AROUND THE GUIDE
                                           UNDERSTANDING
                                   ...
DECISIONS TO MAKE                           AND FINALLY
                                     Page                         ...
1 INHERITANCE TAX (IHT) EXPLAINED
UNDERSTANDING INHERITANCE TAX


                                Inheritance tax is a tax...
1     INHERITANCE TAX (IHT) EXPLAINED




                                                                                ...
2 HOW RISING HOUSE PRICES CAN MAKE YOU
UNDERSTANDING INHERITANCE TAX

                                  LIABLE FOR INHERIT...
2




                                                                                                                    ...
3 HOW INHERITANCE TAX WORKS
UNDERSTANDING INHERITANCE TAX


                                The following example is desig...
3




                                                                                                                    ...
4 HOW TO CALCULATE YOUR INHERITANCE TAX
UNDERSTANDING INHERITANCE TAX


                                If the value of yo...
ESTATE/IHT CALCULATOR                                   OTHER ASSETS




                                                 ...
5 HOW YOUR DOMICILE MAY AFFECT INHERITANCE TAX
UNDERSTANDING INHERITANCE TAX


                                Your domici...
6 WHAT YOU CAN DO ABOUT




                                                                                              ...
7 FIVE EASY STEPS TO INHERITANCE TAX PLANNING
DECISIONS TO MAKE


                    Benjamin Franklin was wrong about al...
7




                                                                                                                  DE...
7
DECISIONS TO MAKE
                        FIVE EASY STEPS TO INHERITANCE TAX PLANNING                              conti...
7




                                                                                                                  DE...
DECISIONS TO MAKE
                    EXAMPLE: HENRY

                    This example is designed to represent a typical ...
7




                                                                                                                    ...
DECISIONS TO MAKE
                    EXAMPLE: WENDY

                    This example is designed to represent a typical ...
DECISIONS TO MAKE
IF WENDY DIES WITHIN SEVEN YEARS                             Under the inheritance tax rules, any gifts ...
7
DECISIONS TO MAKE
                          FIVE EASY STEPS TO INHERITANCE TAX PLANNING                           contin...
7




                                                                                                                 DEC...
7
DECISIONS TO MAKE
                        FIVE EASY STEPS TO INHERITANCE TAX PLANNING                               cont...
7




                                                                                                                    ...
8 HOW TO GET GOING
DECISIONS TO MAKE

                                                                      – A CHECKLIST
...
9     WHAT TO DO NOW




                                                                                                 ...
TECHNICAL TERMS EXPLAINED
AND FINALLY


                 Beneficiary                                                 Domic...
AND FINALLY
TECHNICAL TERMS EXPLAINED                        continued



   Inheritance tax threshold                    ...
www.pru.co.uk
Prudential representatives can only advise on Prudential products. Whilst Prudential uses reasonable efforts...
Prudential Inheritance
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Prudential Inheritance

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Prudential Inheritance

  1. 1. YOUR HANDY GUIDE TO INHERITANCE TAX How to leave more to those who matter – rather than the tax man
  2. 2. In the past, inheritance tax (IHT) was seen as something that affected only the very wealthy. But with the rising standard of living and the ever increasing cost of housing, you may be surprised at just how many people now fall into the inheritance tax band. The relatives of people who would never have considered themselves ‘rich’ are finding themselves with an unexpected tax bill that could have been avoided. With a little knowledge and advice you can help ensure that your own family will not have to face this problem. This handy guide from Prudential will give you a broad understanding of inheritance tax, and explain the sorts of things you can do to reduce your liability for it. We’ll also let you know where you can get further information and help. 3
  3. 3. YOUR WAY AROUND THE GUIDE UNDERSTANDING INHERITANCE TAX Page 1 Inheritance tax (IHT) explained 6 2 How rising house prices can make 8 you liable for inheritance tax 3 How inheritance tax works 10 4 How to calculate your 12 inheritance tax Information and examples in this 5 How your domicile may affect 14 handy guide are based on our inheritance tax understanding, as at May 2007, of current taxation, legislation and HM Revenue & Customs practice, all of which are liable to change without notice. 4
  4. 4. DECISIONS TO MAKE AND FINALLY Page Page 6 What you can do about your 15 Technical terms explained 30 inheritance tax liability 7 Five easy steps to inheritance 16 tax planning 8 How to get going – a checklist 28 TAKING ACTION Page 9 What to do now 29 5
  5. 5. 1 INHERITANCE TAX (IHT) EXPLAINED UNDERSTANDING INHERITANCE TAX Inheritance tax is a tax on the assets that belong This could include: to you when you die. ‘Assets’ include the total of property everything you own and a share of anything you own jointly. investments insurance policies (unless in an appropriate trust) payment from a pension plan or employee death benefit (unless in a trust) other assets e.g. cars, collections, jewellery, furniture gifts you have made but still benefit from, for example a house that you have given away but still live in certain gifts which you have made in the last seven years assets held in trust from which you receive some personal benefit, for example, an income. 6
  6. 6. 1 INHERITANCE TAX (IHT) EXPLAINED UNDERSTANDING INHERITANCE TAX continued For the tax year 2007/2008 no tax is charged Everything above that is taxed at 40%. on the value of your estate up to £300,000. For example, on an estate worth £400,000, the tax This is known as the nil rate band or the inheritance charge is calculated as: tax threshold. £400,000 – £300,000 = £100,000 x 40% = £40,000 This represents 10% of the whole estate value. Further examples are given below. HOW MUCH OF YOUR ESTATE WILL BE EN ROUTE TO THE TAX MAN Estate value Inheritance tax bill Proportion of the estate as IHT Less than £300,000 £0 0.00% £400,000 £ 40,000 10.00% £500,000 £ 80,000 16.00% £600,000 £ 120,000 20.00% What’s more, the £700,000 £ 160,000 22.86% inheritance tax bill £800,000 £ 200,000 25.00% must be paid before £900,000 £ 240,000 26.67% the rest of your estate £1,000,000 £ 280,000 28.00% can be released to your beneficiaries. PRUDENTIAL www.pru.co.uk 7
  7. 7. 2 HOW RISING HOUSE PRICES CAN MAKE YOU UNDERSTANDING INHERITANCE TAX LIABLE FOR INHERITANCE TAX The starting point for inheritance tax is currently When you add to the equity in your home your savings £300,000 (tax year 2007/2008). That may sound like accounts, PEPs, ISAs, TESSAs, life assurance plans not a lot of money, but Prudential believes that the main written in trust (including death in service benefits reason for the increasing number of people falling into provided by your employer), stocks and shares, jewellery, the inheritance tax band is rising house prices. If you your car and so on, the value of your assets can consider that the average house price in the UK is mount up very quickly indeed. £186,954*, it’s easy to see how more and more people are finding themselves liable for inheritance tax. THE RISE IN HOUSE PRICES, OVER THE PAST 5 YEARS, COMPARED WITH THE RISE IN THE IHT THRESHOLD Q4 2002 Q4 2003 Q4 2004 Q4 2005 Q4 2006 Average UK house price * £ 121,137 £ 140,687 £ 161,742 £ 170,043 £ 186,954 Percentage increase 16.1% 15.0% 5.1% 9.9% IHT threshold (nil rate band)** £ 250,000 £ 255,000 £ 263,000 £ 275,000 £ 285,000 Percentage increase 2.0% 3.1% 4.6% 3.6% Average UK house price 48.5% 55.2% 61.5% 61.8% 65.6% as % of the IHT threshold *Source: http://www.hbosplc.com/economy/HistoricalDataSpreadsheet.asp, **Applicable from 6 April each year. March 2007. The figure for tax year 2007/2008 is £300,000. Source: HM Revenue & Customs, March 2007. 8
  8. 8. 2 UNDERSTANDING INHERITANCE TAX HOW RISING HOUSE PRICES CAN MAKE YOU LIABLE FOR IHT continued Most people don’t like to think about what will happen As Benja min Fra when they die. Which is probably why we avoid making famous nklin ly said: a will or taking a serious look at our money and the “NOTH ING CAN financial impact our death will have on our families. TO BE BE SAID CERTA However, Prudential can help to make it easier to sort IN EXC DEATH EPT AND T out your affairs. We’ll show you how, with a little AXES” forward planning, you can save your family financial pain and ensure that they – and not HM Revenue & Customs – will benefit from your estate. WHAT YOU CAN DO ABOUT INHERITANCE TAX There are a range of options that can help reduce or remove the potential tax liability on your death. In this pocket planner we aim to give you a better understanding of some of the rules around inheritance tax and some information about possible solutions to your inheritance tax problem. However, individual circumstances vary and it is recommended that you seek personal advice from your Financial Adviser before taking any action. PRUDENTIAL www.pru.co.uk 9
  9. 9. 3 HOW INHERITANCE TAX WORKS UNDERSTANDING INHERITANCE TAX The following example is designed to represent a typical EXAMPLE: MARGARET situation and does not relate to any particular individual. You should not look upon this as financial advice or Aged 63 and a widow, Margaret died in April 2007 a recommendation of a particular course of action. when the inheritance tax threshold was £300,000. Margaret’s assets: Her house £ 250,000 Her car, household items, clothes, £ 36,000 jewellery, etc. Her investments £ 180,000 Total assets £ 466,000 Less: Her debts and funeral expenses – £ 9,000 Margaret’s estate £ 457,000 10
  10. 10. 3 UNDERSTANDING INHERITANCE TAX HOW INHERITANCE TAX WORKS continued WHEN INHERITANCE TAX IS PAYABLE Inheritance tax is normally payable within 6 months IHT at 0% (on the first £300,000) Nil from the end of the month in which death occurs IHT at 40% (on remaining £157,000) £ 62,800 and needs to be paid before your estate can be Inheritance tax bill £ 62,800 released to your beneficiaries. This means that there can be delays in the distribution of the estate. It might The tax bill of £62,800 represents a tax charge of 13.7% be necessary to take out a short-term bank loan to pay of the total value of Margaret’s estate. That means £1.37 the inheritance tax bill. In addition, interest is charged in every £10 of Margaret’s estate goes to the taxman. on any overdue tax – which can become an additional This bill will have to be paid in full before the estate can cost to the estate. be released to her two children. As Margaret’s children don’t have the money to pay it, they need to take out a short-term bank loan. PRUDENTIAL www.pru.co.uk 11
  11. 11. 4 HOW TO CALCULATE YOUR INHERITANCE TAX UNDERSTANDING INHERITANCE TAX If the value of your estate for inheritance tax Use the Estate Calculator opposite to work out purposes is more than the threshold (£300,000 your potential liability to inheritance tax. for tax year 2007/2008), inheritance tax will be due on death. Remember that your future circumstances may change your inheritance tax position. For example, you may become the beneficiary of someone else’s will, which may mean there will be an even higher bill for your beneficiaries to pay. You should review the situation whenever your financial circumstances change. 12
  12. 12. ESTATE/IHT CALCULATOR OTHER ASSETS UNDERSTANDING INHERITANCE TAX Gifts where you have retained a benefit £ Taxable gifts made within the last 7 years £ YOUR MAIN ASSETS Interests under trusts £ Current house value £ Total of other assets £ B Bank account £ YOUR LIABILITIES Savings account £ Outstanding mortgage £ ISAs (Individual Savings Accounts) £ Outstanding loans £ PEPs (Personal Equity Plans) £ Other outstanding liabilities £ Investment bonds £ Total liabilities £ C Stocks and shares £ Personal possessions £ Share of co-owned property £ YOUR INHERITANCE TAX (IHT) CALCULATION Car value £ Current estate value A+B–C £ D Pension benefits not under trust £ Less current IHT threshold – £ 300,000 E Death in service benefits not under trust £ Amount liable for IHT D–E £ F Other assets not listed above £ IHT payable F x 0.4 £ G Total of main assets £ A Beneficiaries would receive D–G £ H PRUDENTIAL www.pru.co.uk 13
  13. 13. 5 HOW YOUR DOMICILE MAY AFFECT INHERITANCE TAX UNDERSTANDING INHERITANCE TAX Your domicile is generally decided at birth and will It matters because, if you are UK domiciled, usually be the home country of your father. If your inheritance tax is payable on your worldwide assets. father was born in the UK and has always or mostly lived If you are non-UK domiciled inheritance tax is only there, you will be classed as UK domiciled. However, payable on your assets which are situated in the UK if you are non-UK domiciled but have lived in the UK (subject to certain exceptions). for 17 out of the last 20 years, you will be treated as If you or your spouse or civil partner is non-UK UK domiciled for inheritance tax purposes. domiciled, please speak to a Financial Adviser about the options available to you regarding inheritance tax. 14
  14. 14. 6 WHAT YOU CAN DO ABOUT DECISIONS TO MAKE YOUR INHERITANCE TAX LIABILITY A DO NOTHING B SPEND YOUR MONEY C INHERITANCE TAX PLANNING The danger here is that, if you do By spending your money you nothing, your estate may have an could have lots of fun but will Careful planning with a little inheritance tax bill on your death. have little or nothing to leave for help from Prudential can help This may mean that assets you your beneficiaries. It’s also difficult you ensure that your inheritance wish to leave to beneficiaries end to budget for, as you can’t be sure tax bill is either reduced or up being sold to pay inheritance exactly when you’re going to die. completely wiped out. Your estate tax (or even to repay a loan taken Buying assets won’t solve the will then pass to your beneficiaries out to pay the bill within the problem either, as your estate rather than to the tax man. deadline). It also means that HM would still be worth the same. What’s more, tax planning need Revenue & Customs could end up So some of the assets you not mean giving up access to all as one of the biggest beneficiaries were hoping to leave to your of your money. of your estate. beneficiaries may have to be sold to pay your inheritance tax bill instead (or the loan taken out to pay the bill). Once again, the Revenue could end up as one of your biggest beneficiaries. PRUDENTIAL www.pru.co.uk 15
  15. 15. 7 FIVE EASY STEPS TO INHERITANCE TAX PLANNING DECISIONS TO MAKE Benjamin Franklin was wrong about all taxes being B1 MAKE A WILL a certainty. There are five steps you could take to help reduce your liability to inheritance tax. 2 CONSIDER EXEMPTIONS 3 CONSIDER GIFTS 4 CONSIDER LIFE ASSURANCE 5 CONSIDER TRUSTS 16
  16. 16. 7 DECISIONS TO MAKE FIVE EASY STEPS TO INHERITANCE TAX PLANNING continued 1 MAKE A WILL 2 CONSIDER EXEMPTIONS The first step in inheritance tax planning is to make a There are a number of exemptions you can use to will. Without a will, your estate will be shared out reduce the value of your estate. Taking advantage under intestacy rules, which could mean that the of as many of them as you can is the most things you leave don’t go to the people you would efficient way to reduce an inheritance tax bill. have chosen. Also, more inheritance tax may be These exemptions include: payable than if you had made an efficient will. All assets transferred between spouses or civil The best way to make a will is to seek expert partners (for more information please read Spouse advice from a lawyer or will writing specialist. and Civil Partner Exemption on page 19). All you need do is decide to whom you wish to leave Up to £3,000 given away each tax year, which is items from your estate. known as your annual exemption allowance. A will can sometimes be altered once death has If you give away less than this one year, you can occurred, but only with the agreement of all the add the balance to the next year’s allowance, beneficiaries affected. This is a complex area and is but if you don’t use it then it will be lost. For not a substitute for tax planning. Professional legal example, if you didn’t make any gifts last year, advice would be necessary. your allowance this year would be £6,000. PRUDENTIAL www.pru.co.uk 17
  17. 17. 7 DECISIONS TO MAKE FIVE EASY STEPS TO INHERITANCE TAX PLANNING continued 2 CONSIDER EXEMPTIONS continued Gifts you make as part of normal expenditure Some of these exemptions can be combined. out of income, such as regular payments for a For example, you could give £8,000 to your child gifted life assurance policy. when they get married. £5,000 would be exempt Gifts on marriage or civil partnership: as a gift to your child on their wedding and the £5,000 to a child or to their spouse or civil additional £3,000 could be your annual exemption partner, allowance for that tax year. £2,500 to a grandchild or to their spouse Certain reliefs may be available for business related or civil partner, and property. £1,000 to anyone else. Payments for the maintenance of your spouse These include: or civil partner, ex-spouse or ex-civil partner, agricultural property relief dependent relatives and, usually, your children business property relief. if they are in full-time education or under 18. For more information on these reliefs please speak Gifts of up to £250 per person in any one to your Financial Adviser. tax year. Gifts to charities and political parties (including gifts made on death). 18
  18. 18. 7 DECISIONS TO MAKE FIVE EASY STEPS TO INHERITANCE TAX PLANNING continued SPOUSE AND CIVIL PARTNER EXEMPTION What’s more, because this solution doesn’t make best use of the inheritance tax threshold, If your spouse or civil partner is UK domiciled, this the eventual tax bill may be higher than it could exemption ensures that any assets that go to have been. them when you die will be free of inheritance tax. This exemption is very useful for most couples Making sure that you make effective use of the who are married or in a civil partnership. It means inheritance tax threshold is an important part of they can avoid inheritance tax on the first death by inheritance tax planning for married couples and passing all their assets to their spouse or civil partner civil partners and a matter on which you should through their will. consider taking further advice. But when the surviving spouse or partner dies, inheritance tax may then be payable on all the assets The example on the following page shows how that he or she inherited on the first death. So by Henry’s family could have avoided having to pay leaving everything to your spouse or civil partner, inheritance tax by taking account of inheritance you may only be delaying payment of inheritance tax thresholds and planning accordingly. tax, not avoiding it. PRUDENTIAL www.pru.co.uk 19
  19. 19. DECISIONS TO MAKE EXAMPLE: HENRY This example is designed to represent a typical BUT inheritance tax on the other £200,000 will be situation and does not relate to any particular at 40% = £80,000. individual. You should not look upon this as Based on these figures, when Jane dies, the financial advice or a recommendation of a inheritance tax bill on her assets totalling £500,000 particular course of action. will be £80,000 – ie. 16% of everything that Jane Henry died recently. His assets totalled £350,000. now owns. Her heirs, who are her children, will have This was more than the IHT threshold at that time. to pay this before getting any of their inheritance. Thanks to the spouse and civil partner exemption However, Henry and Jane could have obtained there was no inheritance tax bill for his wife Jane advice on how to make use of the inheritance tax to worry about when he died because Henry’s will threshold for each of them. For instance, if Henry’s gave all his assets to Jane. will had given £200,000 to his children, this would have been below the threshold, so there would have The problem now is that Jane already had assets been no inheritance tax to pay. Jane’s assets would of her own totalling £150,000 when Henry died. then have totalled £300,000 and this, too, would Jane’s assets now total £ 500,000 have been below the threshold. So their children Currently (in the tax year 2007/2008) inheritance tax would have avoided inheritance tax altogether. is payable at 40% on everything over £300,000, so there will be no inheritance tax on the first £300,000. 20
  20. 20. 7 DECISIONS TO MAKE FIVE EASY STEPS TO INHERITANCE TAX PLANNING continued 3 CONSIDER GIFTS If you can afford to give away some of the These rules are: assets you own, it may be possible to reduce Once you have gifted something away you the size of your estate, which could reduce your cannot benefit from it. For example, you potential inheritance tax bill. Any gifts you make that cannot gift your house to your children and fall within one of the exemptions listed on pages continue to live in it rent free. If you do, there 17–18 will immediately be outside your estate and may be an annual income tax charge on the value their value will not be subject to inheritance tax. of the benefit you enjoy or HMRC Capital Taxes It is possible to make other gifts to reduce the value will charge inheritance tax on the value of the gift of your estate. These gifts are known as potentially as though it had not been made. exempt transfers (PETs). There are strict rules that You must survive for seven years from the have to be followed when a potentially exempt date that you made the gift. transfer is made. But if they are followed, then seven years after the gift is made it won’t be considered The example on the following pages shows what part of your estate for inheritance tax purposes. Wendy’s inheritance tax bill would be on making a gift if she survives seven years, and also if she dies within seven years. PRUDENTIAL www.pru.co.uk 21
  21. 21. DECISIONS TO MAKE EXAMPLE: WENDY This example is designed to represent a typical IF WENDY SURVIVES SEVEN YEARS situation and does not relate to any particular individual. Wendy makes a gift of £306,000 to her son Sam You should not look upon this as financial advice or which he receives immediately. a recommendation of a particular course of action. You should consider your own circumstances fully. Once Wendy has survived seven years, all of the £306,000 gift to Sam will be exempt from inheritance Wendy is widowed and has total assets of £606,000. tax (because there is no inheritance tax liability This means that the inheritance tax bill if she dies after seven years). will be £122,400 – because there will be no tax on There will be no inheritance tax bill for Sam. £300,000 of her assets, but the other £306,000 will be taxed at 40%. Wendy makes a new will giving all her other assets to her daughter Daphne. That’s £300,000 for Daphne Currently Wendy’s will divides her assets equally when Wendy dies. between her son Sam and her daughter Daphne. So the inheritance tax bill will be divided between them Inheritance tax will only be assessed on Daphne’s – £61,200 each. £300,000 inheritance from Wendy. This will all be within Wendy’s inheritance tax Based on the current value of her assets and current threshold. (2007/2008) inheritance tax rates, there will be no There will be no inheritance tax bill for Daphne. IHT if Wendy gives away £306,000 and survives for seven years. 22
  22. 22. DECISIONS TO MAKE IF WENDY DIES WITHIN SEVEN YEARS Under the inheritance tax rules, any gifts made in the last seven years before Wendy’s death must be Wendy needs to remember that her gift to Sam will offset against the inheritance tax threshold before the not become exempt from inheritance tax until she has balance of her estate is taken into account. This means survived seven years. If she dies within seven years that the entire inheritance tax bill will fall on Daphne’s there will still be an inheritance tax bill on Sam’s gift. inheritance, as follows. £6,000 (£3,000 for this tax year and £3,000 for the The gift of £300,000 made to Sam will be offset previous tax year) of the £306,000 gift to Sam will be against Wendy’s inheritance tax threshold, meaning exempt from inheritance tax, thanks to Wendy’s annual that there will be no tax to pay on this. exemption allowance for the tax year when she The balance of Wendy’s estate, the £300,000 which made the gift. Thus inheritance tax will be is Daphne’s inheritance, will be taxed at 40%, potentially chargeable on the rest of the resulting in a tax bill of £120,000. gift to Sam (£300,000) and all of Daphne’s inheritance (£300,000). This example is based throughout on So the total sum assessed for inheritance the current (2007/2008) inheritance tax tax on Wendy’s death will be £600,000. threshold and rates. In practice, these may change in future. PRUDENTIAL www.pru.co.uk 23
  23. 23. 7 DECISIONS TO MAKE FIVE EASY STEPS TO INHERITANCE TAX PLANNING continued 3 CONSIDER GIFTS continued POTENTIALLY EXEMPT TRANSFERS So in Wendy’s example above, even if she dies six AND TAPER RELIEF years after making the gift, the tax bill on her estate will still be £120,000. This is because her gift to Sam If a person dies between three and seven years has used up the inheritance tax threshold first, leaving after making a gift, there may be some taper relief her estate, which is not eligible for taper relief. on the amount of tax to be paid. The table below shows how the percentage of tax payable decreases: One way to cover the inheritance tax bill on a gift is to take out a seven-year decreasing life After 3 to 4 years 80% of tax payable assurance plan, written under an appropriate trust, After 4 to 5 years 60% of tax payable to pay the inheritance tax liability if you should die After 5 to 6 years 40% of tax payable within seven years of making the gift. After 6 to 7 years 20% of tax payable CAPITAL GAINS TAX However, it is important to remember that this relief Making a gift of certain assets that have grown in is on the amount of tax payable. If the value of value since you acquired them may mean that you the gift falls within the inheritance tax threshold have to pay capital gains tax on them, as if you had when the estate value is calculated, there will be sold them. no benefit from taper relief. 24
  24. 24. 7 DECISIONS TO MAKE FIVE EASY STEPS TO INHERITANCE TAX PLANNING continued 4 CONSIDER LIFE ASSURANCE Remember that the person you have given the asset A life assurance plan, placed under trust, will not to may have to pay capital gains tax on any future lessen the inheritance tax bill but can be used to growth in value when they come to dispose of it. pay the bill on death. Provided the plan is placed under a suitable trust, it will not form part INCOME TAX of your estate and the money is available You risk a potential income tax bill if you benefit from immediately on death. The plan must be set up assets you have given away. This can occur if you carefully because, if you make a mistake, you could give away assets or buy them for someone else, but actually make the inheritance tax bill even bigger continue to use them free of charge or at a low cost. than it would have been without the plan. You Remember to take tax advice if you are considering should seek advice from a Financial Adviser. making a transfer of this type. Please also remember that any income from the asset you have gifted to someone will be subject to income tax and their income tax rate may be higher than yours. PRUDENTIAL www.pru.co.uk 25
  25. 25. 7 DECISIONS TO MAKE FIVE EASY STEPS TO INHERITANCE TAX PLANNING continued 5 CONSIDER TRUSTS A trust is a legal arrangement where you choose a Prudential offers a range of inheritance tax trusts, third party (called a Trustee) to hold some of your designed to help lower or prevent a bill on your death. assets for someone else (called a beneficiary). If These include: structured carefully, trusts can help to reduce a loan trust, which allows you free access to or even eliminate your inheritance tax liability. your capital, while investment growth goes to Some trusts involve making a gift, which will reduce your beneficiaries after your death the value of your estate. Like any other gift not a gift trust, which lets you make outright gifts covered by one of the exemptions mentioned, the to your beneficiaries assets placed into certain trusts are considered to be a discounted gift trust, which allows you to a potentially exempt transfer. If you survive for seven have regular payments from the trust while the years there will be no inheritance tax to pay on the balance goes to your beneficiaries after your value of the gift. With other trusts there may be death, and some tax to pay, but you can keep control of the an excluded property trust, which can protect asset that you want to gift. offshore investments for non-UK domiciled people. 26
  26. 26. 7 DECISIONS TO MAKE FIVE EASY STEPS TO INHERITANCE TAX PLANNING continued FINANCE ACT 2006 There may also be a periodic charge, every 10 years, of up to 6% and an exit charge, also of up to 6%, The Finance Act 2006 introduced new rules for the when money is distributed from the trust to taxation of trusts. These affect most types of flexible, beneficiaries. or discretionary, trusts, while the rules for absolute, or bare, trusts remain the same. With an absolute trust, there will be no inheritance tax as long as you survive for at least seven years The main difference between the two types of trust is after setting up the trust. Trusts are that with an absolute trust you cannot change the complicated and must be set up beneficiaries or their share of the trust fund, once the very carefully. You should speak trust has been set up. With a discretionary trust, to a Financial Adviser who will you can make changes if you wish. However, you pay advise you on what trust, if any, for that flexibility with potential inheritance tax charges. would be best for your needs. If the amount put into the trust is more than the nil rate band (or you have made previous chargeable transfers that, together with the money put into the trust, take you over the nil rate band), there may be an immediate charge of 20% when the trust is set up. PRUDENTIAL www.pru.co.uk 27
  27. 27. 8 HOW TO GET GOING DECISIONS TO MAKE – A CHECKLIST 1 SPEAK TO SOMEONE ABOUT WRITING Now you know a little about how to minimise your potential inheritance tax liability, and A WILL we hope you feel prompted to reduce it. It is vital that you think about this now to ensure 2 SPEAK TO A TAX SPECIALIST TO FIND that your good intentions are not wasted. A WAY TO AVOID INHERITANCE TAX Once you have your plans in place, we would also encourage you to review your position with your Financial Adviser from time to time. If there is a change in your financial position or you change your will you should review your inheritance tax liability to ensure that your plans remain right for you. 28
  28. 28. 9 WHAT TO DO NOW TAKING ACTION SPEAK TO AN EXPERT For help and advice on inheritance tax, Prudential Some Prudential products are only available through recommends you consult with a Financial Adviser. Financial Advisers as we believe they require specialist advice. A Financial Adviser will assess your individual needs and circumstances before recommending relevant products (not necessarily from Prudential). For information on Prudential products and services you can: visit us 24 hours a day at www.pru.co.uk Existing Prudential customers can: email us via PruMail – our secure email system – if you wish to contact us about an existing policy. Log on to Pru.co.uk for more information. 29
  29. 29. TECHNICAL TERMS EXPLAINED AND FINALLY Beneficiary Domicile A person who benefits from a will or a trust. In general terms, a domicile is the country which a person regards as their permanent home. Capital gains tax (CGT) You may have to pay capital gains tax on any profits Estate over a set allowance when you sell assets such as shares Everything you own. Your estate includes assets held in or property. You are allowed to make gains up to a your sole name, your share of jointly owned assets and certain amount each tax year which are exempt from the value of an alternatively secured pension fund (ASP). tax (£9,200 for the tax year 2007/2008). Everyone has their own individual allowance so it may be possible for Exemptions couples to make a combined gain before they have to Types of gift that are exempt from inheritance tax. pay tax – although each individual’s circumstances are Inheritance tax considered separately. A tax on certain assets that belong to you when you die. Some gains you make are exempt from capital gains tax. These include gains from the sale of your car, Personal Equity Plans and Individual Savings Accounts. Also, you do not have to pay capital gains tax when you sell your home provided certain conditions are met. 30
  30. 30. AND FINALLY TECHNICAL TERMS EXPLAINED continued Inheritance tax threshold Taper relief The amount up to which no inheritance tax is charged When the total value of all gifts made between three on your estate, sometimes called the nil rate band. and seven years before a death is more than the inheritance tax threshold at death, taper relief is due. Intestacy The relief increases the longer the time between the Dying without leaving a will. gift and death. It reduces the amount of tax payable, not the value of the gift itself. Life assurance A type of insurance policy that pays out when the Trusts insured person dies. A vehicle for holding funds or property for the benefit of others. It may reduce or avoid inheritance tax on death. Potentially exempt transfers (PETs) A PET is a gift which will become exempt from inheritance tax if the donor lives for seven years after the date of the gift. PRUDENTIAL www.pru.co.uk 31
  31. 31. www.pru.co.uk Prudential representatives can only advise on Prudential products. Whilst Prudential uses reasonable efforts to ensure that the information contained in this Handy Guide is current and accurate at the date of publication, no warranties are made, either expressed or implied, as to the reliability, accuracy or completeness of the information. Prudential accepts no liability for any loss arising directly or indirectly from the use of or action taken in reliance on such information. All the quotes in this Handy Guide remain the intellectual property of the persons referred to. Prudential does not assert any claims for copyright or other intellectual property rights with regard to these quotes. In quoting these individuals, Prudential does not in any way mean to imply that they endorse or approve of Prudential or its business. These documents should not be copied, reproduced or redistributed, in whole or in part. "Prudential" is a trading name of The Prudential Assurance Company Limited, which is registered in England and Wales. This name is also used by other companies within the Prudential Group, which between them provide a range of financial products including life assurance, pensions, savings and investment products. Registered Office at Laurence Pountney Hill, London EC4R 0HH. Registered number 15454. Authorised and regulated by the Financial Services Authority.

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