Inheritance Tax

It is important to remember that you don't have to be a millionaire or even slightly be rich for your estate to be eligible for Inheritance Tax. Currently IHT is levied on everything you leave over £312,000 for this tax year and this includes

• your home and car
• your furniture and personal effects
• your investments and savings
• the proceeds of your life insurance (unless under trust)

Gaining an inheritance
1 in 40 people in the UK inherit an average of £17,500 each year. The total after tax is £31 billion.

The average estate leaves £90,000 net of tax and the average amount received by each individual is £17,500, suggesting that, on average, people share out their bequests between five people. Some 10 per cent of beneficiaries receive £50,000 or more. A further 30 per cent receive £10,000 or more, enough to make a down-payment on a home or pay off a sizeable chunk of a mortgage.

However big or small your inheritance, there are a number of ways to put your money to good use. The ideal way, of course, is to invest at least some of it so it grows into a more substantial sum.

Top up your pension with your inheritance
With many people now spending as long in retirement as they do in their working lives, it’s wise to add to your pension. Especially when you consider that the state pension is currently only £90.70 a week for a single person and £145.05 for a couple (2008/2009). By making a one-off lump sum payment into your pension fund you can make a big difference to the quality of your retirement.

Invest it for the future
Another way to invest your inheritance is to place it in an Individual Savings Account (ISA). These are tax-free in the hands of an investor, and could be an ideal way to help save for a rainy day or to give you a more comfortable retirement. Other options to consider include Friendly Society accounts and National Savings and Investments.

Writing a will
For a lot of people, making a will is the most obvious way to plan for the future and the fairest way to provide for loved ones.

Yet, it’s a fact that an amazing 76% of the UK population do not have an up to date will. Dying without leaving a will is called “dying intestate” – which means that all your “wealth” is divided up between each surviving member of your family. If you haven’t any family or beneficiaries, it goes straight to the Crown.

Another drawback of intestacy is the fact that it doesn’t recognise unmarried partners, friends or charities and such like. All this heartache – and the inevitable delays – can be avoided if you make a will.

Your IFA may be able to help advise you on the content of your will, or alternatively recommend the services of a local solicitor. At a cost of around £100 writing a will could save your family many pounds – and much worry.

Inheritance Tax planning
There are a number of ways your IFA may be able to help you to reduce any possible Inheritance Tax.

Your IFA might, for example, advise you to make gifts now to intended beneficiaries as these gifts are free of Inheritance Tax, providing you live for 7 years or more following the gifts. There are several other tax-efficient ways of making annual gifts, both to individuals and organisations such as charities.

You could then leave a further £312,000 free of Inheritance Tax to them in your will. Gifts between married couples incidentally are not subject to any Inheritance Tax. You might like to think about setting up a trust. If you put part of your estate into a trust for your grandchildren, it could be decades before your cash is again under the eye of the taxman.

Another option you might like to consider is an insurance policy to pay the tax bill after you die.

How is an Estate Distributed?

Single Person
The entire estate is distributed in the following order: (If any relative is found at a level then the “search” stops and the entire estate is either distributed to that one relative or equally distributed to the relatives found).

• Children (but if deceased then their children, if any)
• Parents
• Brothers & Sisters (but if deceased then their children, if any)
• Half Brothers & Half Sisters,
• Grandparents
• Aunts & Uncles (but if deceased then their children, if any)
• If no Cousins then it goes to the Crown (the Government).

Living Together - (Heterosexual or Same Sex)
Regardless of how long a couple have lived together, or if there are children involved, under intestacy law they are currently classed as single. Their partners have no automatic inheritance rights.

Married or in Civil Partnership - No Children
For married couples with no children the entire estate is distributed as follows:

• The surviving spouse gets the first £200,000 plus goods and all personal chattels.
• They also get half of the remainder.
• The other half is distributed to the deceased’s parents, if none then to their brothers and sisters and, if any of the brothers and sisters have died, to their children.
• However if none of the above deceased’s family are alive to inherit, the surviving spouse gets everything.

Married or in Civil Partnership - With Children
For married couples with children the entire estate is distributed as follows:

• The surviving spouse gets the first £125,000 plus goods and all personal chattels.
• Half the rest goes to the deceased's children immediately (or on trust until they are 18.)
• The other half goes to the children but the surviving spouse gets a lifetime interest. Hence they can spend the income but not touch the capital.