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When George Osborne was the shadow Chancellor, he talked of raising the IHT nil rate band threshold (the amount that is charged to 0% for IHT) to £1m. He has, of course, done anything but and confirmed in the Budget that the threshold would remain frozen at £325,000 until April 2018. In light of the freeze, many more people are looking at ways to legitimately mitigate and plan for their IHT liability. Here we present five of them...


1. Make a will One of the best IHT planning tools is a will. Not only can it mitigate IHT but it is also crucial for anyone wanting to protect their family from a huge headache after they die. If you do not draw up a proper will, you risk depriving your spouse or partner of their home, increasing the IHT burden and leaving parts of your estate in the wrong hands. Even if you have made a will, it can pay to ensure that it is up-to-date. A well structured will enables your executors to pass assets to your family in a flexible and tax-efficient manner.


2. Lifetime gifts Te simplest way of reducing an individual’s potential to IHT is for them to give assets away directly. Tis can be achieved by making the most of the annual exemptions and making regular gifts out of surplus income under the ‘normal expenditure out of income’ rule. For example, you can gift up to £3,000 a year, which can be divided between as many people as you like.


3. Potentially exempt transfers Gifts not covered by these exemptions are usually considered Potentially Exempt Transfers (PETs) for IHT purposes, which revolve around the


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‘seven-year rule’. After seven years the value of the gift usually falls outside the donor’s estate and any growth is outside their estate from the date of the gift. Tere is no restriction on the level of gifts. If you die within this seven-year period, IHT is charged on any assets over the unused element of the £325,000 threshold on a sliding scale.


4. Discretionary trust Trusts are legal arrangements that enable you to give away assets but restrict or direct how and when they are used. One popular use of a trust is to hold assets on behalf of children or grandchildren until they are old enough to look after their own money. In these circumstances it may be appropriate to consider a discretionary trust. Tis type of gift is considered a ‘chargeable lifetime transfer’ for IHT purposes and as such an individual may only want to transfer assets up to a value of £325,000, or any qualifying exempt assets, to such a trust every seven years. If these limits are exceeded an immediate charge to IHT arises.


5. Discounted gift schemes Tese are popular IHT planning schemes utilising gifts into insurance plans held under


trust. Tey are particularly useful for those who wish to divest themselves of capital but are unable to do so because they need an income from that capital. In making a gift of capital into a scheme the donor retains a right to a fixed income for life. Tis right to income is similar to a lifetime annuity and has a capital value, which reduces (discounts) the value of the immediate gift for IHT purposes. Tis discount means that there should be an immediate IHT saving even if death should occur within seven years of the date of the gift.


Andrew Christie Head of Coutts in the North West


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