Topic: Uncategorized

Investors get more tax savvy with their money

Posted on July 1, 2013 by - Uncategorized

Strategies to save tax and invest more tax-efficiently in 2013/14

Taxation can be a complicated area of personal finance and you can easily miss opportunities to reduce the amount of tax you pay, or save and invest tax-efficiently. Your job, your savings and your familyís circumstances can all have an impact on the amount of income tax you pay each year.

A s taxation rules change it’s important to take professional advice to ensure you do not pay more than you have to, so that you can enjoy more money as a family.

Individual Savings Accounts (ISAs)
This 2013/14 tax year you can invest up to £11,520 in Cash and Stocks & Shares ISAs (the tax year runs from 6 April 2013 to 5 April 2014). You can invest the full amount (up to £11,520) in a Stocks & Shares ISA or up to £5,760 in a Cash ISA with the balance (within your overall limit) in a Stocks & Shares ISA.

There is no capital gains tax and no further income tax to pay within an ISA. If you are married (or in a registered civil partnership), ensure that you both consider using your ISA allowances. Even if one of you is a non-taxpayer it still often makes sense to make use of this spouse’s ISA.

Junior ISA
For eligible children, this tax year you can invest up to £3,720 in a Cash or Stocks & Shares Junior ISA (the tax year runs from 6 April 2013 to 5 April 2014). Those children with a Child Trust Fund (born 1 September 2002 to 2 January 2011) are not eligible for a Junior ISA and these accounts can also be topped up to £3,720 a year (a Child Trust Fund year runs from the child’s birthday, not the tax year).

Pensions
There has been a considerable simplification of the contribution rules in recent years. The Annual Allowance, the upper cap on total contributions that can be made to your pensions in one year and benefit from tax relief, is £50,000 for 2013/14 and will reduce to £40,000 from April 2014.

Personal contributions also have to be within 100 per cent of your relevant UK earnings (broadly, earnings from employment or self-employment) to obtain tax relief. Non-earners can still contribute and benefit from tax relief up to a maximum limit of £3,600 gross per annum. Tax relief on personal contributions is available at the basic rate (20 per cent) for all investors and at the highest marginal rate for higher rate and additional rate taxpayers.

It’s important to make the full use of your pension allowance. This is still one of the most tax-efficient ways to save for retirement and the new Annual Allowance and Carry Forward rules are potentially highly beneficial. The ability to Carry Forward the unused Annual Allowance from the last three years potentially enables a significant increase or substantial catch-up of contributions.

Even if you have no earnings or you don’t pay tax, anyone under 75 can still invest £2,880 in a pension and the taxman will top up their contribution to £3,600. Contributions made on behalf of a child also benefit from tax relief. For married couples, building up income in both names may be one of the most tax-efficient ways of generating income in retirement. If you maximise the current personal allowance, the amount of taxable income you’re allowed to receive each year tax free is £9,440.

This could mean that married couples can still receive income from pensions, savings and investments of £18,880 a year tax free.

Any tax reliefs referred to are those currently applying, but levels and the bases of, as well as reliefs from, taxation are subject to change. Their value depends on the individual circumstances of the investor. Within an ISA all gains will be free of capital gains tax and a tax credit will be reclaimed on income from fixed interest investments.

Planning to enjoy your retirement years

Posted on July 1, 2013 by - Uncategorized

Talk to us about the new pension opportunities

One way of looking at planning for retirement is to think about the number of paydays you have before you retire, and the number you hope to have afterwards. Imagine you start your pension planning when youíre age 20, and you plan to retire when youíre age 65. You have 540 paydays between starting your pension plan and retiring to achieve financial independence.

Take action to fund for your retirement
In the 2013/14 tax year the additional rate of tax on earnings over £150,000p.a. has been reduced from 50 per cent and replaced by a new lower rate of 45 per cent. While this means that the highest rate of tax relief available on pension contributions has reduced, it is still important to take action to fund for your retirement.

Carry Forward of unused reliefs
You may be able to contribute in excess of the Annual Allowance of £50,000 for the 2013/14 tax year (this will reduce to £40,000 from April 2014) and receive tax relief at up to 45 per cent using Carry Forward if you have contributed less than £50,000 in any of the previous three tax years. As this is a potentially complex area, particularly where Defined Benefit schemes are concerned, professional advice should be sought.

Annual and Lifetime Allowance reducing
As of 6 April 2014, the Annual Allowance for retirement funding is reducing to £40,000, while the Lifetime Allowance is reducing from its current £1.5m ceiling to £1.25m. The Annual Allowance reduction represents a significant opportunity to fund a higher level of pension contributions prior to this reduction. The reduction in the Lifetime Allowance means that professional advice is even more important to ensure that you are optimising your retirement planning and are benefiting from the latest Lifetime Allowance protection opportunities.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax reliefs depends on individual circumstances. The value of a pension will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

Paying Inheritance Tax

Posted on July 1, 2013 by - Uncategorized

Reflecting an accurate open market value

The personal representative (the person nominated to handle the affairs of the deceased person) arranges to pay any Inheritance Tax that is due. You usually nominate the personal representative in your will (you can nominate more than one), in which case they are known as the executor. If you die without leaving a will a court can nominate the personal representative, in which case they are known as the administrator.

If you have been nominated as someone’s personal representative you have to value all of the assets that the deceased person owned. This valuation must accurately reflect what the assets would reasonably fetch in the open market at the date of death.

In most cases, if an estate owes Inheritance Tax, you must usually pay it within six months after the death or interest will be charged. In some cases, you can pay by instalments once a year over ten years. The due date differs if Inheritance Tax is due on a trust.

Forms you need to complete

If the estate is unlikely to be subject to Inheritance Tax (an excepted estate)
If the estate is likely to be subject to Inheritance Tax
In this case you complete form IHT400 plus any relevant supplementary forms (these are indicated on the IHT400).

You also complete:

form IHT421 ëProbate summary’ if the deceased person lived in England, Wales or Northern Ireland
probate application form PA1 if the deceased lived in England or Wales
form C1 Inventory if the deceased lived in Scotland

(In Northern Ireland you only complete a probate application form at interview.)

The due date for Inheritance Tax is six months after the end of the month in which the deceased died. You must pay Inheritance Tax before you can get the grant of probate (or confirmation in Scotland).

If you’re paying Inheritance Tax by instalments, the first instalment is due six months after the death on the due date. The second instalment is due 12 months after that.

If someone gives you a gift and doesn’t survive for seven years after making it and the gift is liable to Inheritance Tax, the payment on the gift is also due six months after the death on the due date.

If the value of the assets being transferred exceeds the current Inheritance Tax threshold £325,000, Inheritance Tax can be due:

on transfers into a trust
on transfers out of a trust
every ten years after the original transfer into trust
The due date depends on when the assets
are transferred
For transfers made between 6 April and 1 October, the due date is 30 April in the following year
For transfers made between 30 September one year and 6 April the next, the due date is six months after the end of the month in which the transfer was made

If you don’t pay Inheritance Tax in full by the due date, HM Revenue & Customs (HMRC) will charge interest on the amount outstanding, whatever your reason for not paying by the due date. It also charges interest if you pay by annual instalments.

If Inheritance Tax is due, you have 12 months from the end of the month in which the death occurred to send in a full Inheritance Tax account, this includes form IHT400, any supplementary pages and papers relating to probate (or confirmation in Scotland).

Unless you have a reasonable excuse for not delivering a full and accurate account within 12 months, you may have to pay a penalty in addition to any interest you owe.

Wealth preservation

Posted on July 1, 2013 by - Uncategorized

Making the most of different solutions

Decreasing term assurance
Decreasing term assurance can be arranged to cover a potential Inheritance Tax liability and used as a Gift Inter Vivos policy (a gift given during the life of the grantor who no longer has any rights to the property and can not get it back without the permission of the party it was gifted to). This is a type of decreasing term plan that actually reduces at the same rate as the chargeable Inheritance Tax on an estate as a result of a Potentially Exempt Transfer (PET).

For example, if you gift part of your estate away before death, then that part is classed as a PET, meaning that for a period of seven years there could be tax due on the transfer. This amount of tax reduces by a set amount each year for seven years.

The Gift Inter Vivos plan is designed to follow that reduction to ensure sufficient money is available to meet the bill if the person who gifted the estate dies before the end of the seven-year period.

Such policies should be written in an appropriate trust, so that the proceeds fall outside your estate.

Business and agricultural property
Business and agricultural property are exempt from Inheritance Tax.

Business Property relief: To qualify, the property must be relevant business property and must have been owned by the transferor for the period of two years immediately preceding death. Where death occurred after 10 March 1992, relief is given by reducing the value of the asset by 100 per cent. Prior to 10 March 1992, the relief was 50 per cent.

Agricultural Property relief: Agricultural property is defined as agricultural land or pasture and includes woodland and any buildings used in connection with the intensive rearing of livestock or fish if the woodland or building is occupied with agricultural land or pasture and the occupation is ancillary to that of the agricultural land or pasture, and also includes such cottages, farm buildings and farmhouses, together with the land occupied with them as are of a character appropriate to the property. Where death occurred after 10 March 1992, relief is given by reducing the value of the property by 100 per cent (certain conditions apply). Prior to that date the relief was 50 per cent.

Woodlands relief: There is a specific relief for transfers of woodland on death. However, this has become less important since the introduction of 100 per cent relief for businesses that qualify as relevant business property.

Where an estate includes woodlands forming part of a business, business relief may be available if the ordinary conditions for that relief are satisfied.

When a woodland in the United Kingdom is transferred on death, the person who would be liable for the tax can elect to have the value of the timber ñ that is, the trees and underwood (but not the underlying land) ñ excluded from the deceased’s estate.

If the timber is later disposed of, its value at the time will be subject to Inheritance Tax. Relief is available if:

an election is made within two years of the death, though the Board of HM Revenue & Customs have discretion to accept late elections, and
the deceased was the beneficial owner of the woodlands for at least five years immediately before death or became beneficially entitled to it by gift
or inheritance.

The Pre-Owned Assets Tax
Pre-Owned Assets Tax (POAT), which came into effect on 6 April 2005, clamped down on arrangements whereby parents gifted property to children or other family members while continuing to live in the property without paying a full market rent.

POAT is charged at up to 40 per cent on the benefit to an individual continuing to live in a property that they have gifted but are not paying a full rent, and where the arrangement is not caught by the gift with reservation rules.

So anyone who has implemented such a scheme since March 1986 could fall within the POAT net and be liable to an income tax charge of up to 40 per cent of the annual market rental value of the property.

Alternatively, you can elect by 31 January following the end of the tax year in which the benefit first arises that the property remains in your estate.

Rental valuations of the property must be carried out every five years by an independent valuer.

A gift with reservation

Posted on July 1, 2013 by - Uncategorized

Getting the full benefit of a gift to the total exclusion of the donor

A gift with reservation is a gift that is not fully given away. Where gifts with reservation were made on or after 18 March 1986, you can include the assets as part of your estate but there is no seven year limit as there is for outright gifts. A gift may begin as a gift with reservation but some time later the reservation may cease.

In order for a gift to be effective for exemption from Inheritance Tax, the person receiving the gift must get the full benefit of the gift to the total exclusion of the donor. Otherwise, the gift is not a gift for Inheritance Tax purposes.

An outright gift
For example, if you give your house to your child but continue to live there rent free, that would be a gift with reservation. If, after two years, you start to pay a market rent for living in the house, the reservation ceases when you first pay the rent. The gift then becomes an outright gift at that point and the seven- year period runs from the date the reservation ceased. Or a gift may start as an outright gift and then become a gift with reservation.

Alternatively, if you give your house to your child and continue to live there but pay full market rent, there is no reservation. If over time you stop paying rent or the rent does not increase, so it is no longer market rent, a reservation will occur at the time the rent stops or ceases to be market rent.

The value of a gift for Inheritance Tax is the amount of the loss to your estate. If you make a cash gift, the loss is the same value as the gift. But this is not the case with all gifts

Giving away wealth

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Tax-efficiently passing on parts of your estate

There are some important exemptions that allow you to legally pass your estate on to others, both before and after your death, without it being subject to Inheritance Tax.

Exempt beneficiaries
You can give things away to certain people and organisations without having to pay any Inheritance Tax. These gifts, which are exempt whether you make them during your lifetime or in your will, include gifts to:

your husband, wife or civil partner, even if you’re legally separated (but not if you’ve divorced or the registered civil partnership has dissolved), as long as you both have a permanent home in the UK

UK charities
some national institutions, including national museums, universities and the National Trust
UK political parties

But, bear in mind that gifts to your unmarried partner or a partner with whom you’ve not formed a registered civil partnership aren’t exempt.

Exempt gifts
Some gifts are exempt from Inheritance Tax because of the type of gift or the reason for making it. These include:

Wedding gifts/civil partnership ceremony gifts
Wedding or registered civil partnership ceremony gifts (to either of the couple) are exempt from Inheritance Tax up to certain amounts:
parents can each give £5,000
grandparents and other relatives can each give £2,500
anyone else can give £1,000

You have to make the gift on or shortly before the date of the wedding or civil partnership ceremony. If it is called off and you still make the gift, this exemption won’t apply.

Small gifts
You can make small gifts, up to the value of
£250, to as many people as you like in any one tax year (6 April to the following 5 April) without them being liable for Inheritance Tax.

But you can’t give a larger sum ñ £500, for example ñ and claim exemption for the first £250. And you can’t use this exemption with any other exemption when giving to the same person. In other words, you can’t combine a ësmall gifts exemption’ with a ëwedding/registered civil partnership ceremony gift exemption’ and give one of your children £5,250 when they get married or form a registered civil partnership.

Annual exemption
You can give away £3,000 in each tax year without paying Inheritance Tax. You can carry forward all or any part of the £3,000 exemption you don’t use to the next year but no further. This means you could give away up to £6,000 in any one year if you hadn’t used any of your exemption from the year before.

You can’t use your annual exemption and your small gifts exemption together to give someone £3,250. But you can use your annual exemption with any other exemption, such as the wedding/registered civil partnership ceremony gift exemption. So, if one of your children marries or forms a civil partnership you can give them £5,000 under the wedding/registered civil partnership gift exemption and £3,000 under the annual exemption, a total of £8,000.

Gifts that are part of your normal expenditure
Any gifts you make out of your after-tax income
(but not your capital) are exempt from Inheritance Tax if they’re part of your regular expenditure.

This includes:

monthly or other regular payments to someone, including gifts for Christmas, birthdays or wedding/civil partnership anniversaries
regular premiums on a life insurance policy (for you or someone else)

It’s a good idea to keep a record of your after-tax income and your normal expenditure, including gifts you make regularly. This will show that the gifts are regular and that you have enough income to cover them and your usual day-to-day expenditure without having to draw on your capital.

Maintenance gifts
You can also make Inheritance Tax-free maintenance payments to:

your husband or wife
your ex-spouse or former registered civil partner
relatives who are dependent on you because of old age or infirmity
your children (including adopted children and step-children) who are under 18 or in full-time education

Potentially exempt transfers
If you, as an individual, make a gift and it isn’t covered by an exemption, it is known as a potentially exempt transfer (PET). A PET is only free of Inheritance Tax if you live for seven years after you make the gift.

Trust in your future

Posted on July 1, 2013 by - Uncategorized

Helping you control and protect family assets

One of the most effective ways you can manage your estate planning is through setting up a trust. The structures into which you can transfer your assets can have lasting consequences for you and your family and it is crucial that you choose the right ones. The right structures can protect assets and give your family lasting benefits.

A trust is a legal arrangement where one or more trustees are made legally responsible for assets. The assets – such as land, money, buildings, shares or even antiques – are placed in trust for the benefit of one or more beneficiaries.

The trustees are responsible for managing the trust and carrying out the wishes of the person who has put the assets into trust (the settlor). The settlorís wishes for the trust are usually written in their will or given in a legal document called the trust deed.

The purpose of a trust
Trusts may be set up for a number of reasons,
for example:

to control and protect family assets
when someone is too young to handle their affairs
when someone canít handle their affairs because they are incapacitated
to pass on money or property while you are still alive
to pass on money or assets when you die under the terms of your will – known as a will trust
under the rules of inheritance that apply when someone dies without leaving a valid will (England and Wales only)

There are several types of UK family trusts and each type of trust may be taxed differently. There are other types of non-family trusts. These are set up for many reasons – for example, to operate as a charity, or to provide a means for employers to create a pension scheme for their staff.

What is trust property?
A trust property is a phrase often used for the assets held in a trust. It can include:

money
investments
land or buildings
other assets, such as paintings, furniture or jewellery – sometimes referred to as chattels

The cash and investments held in a trust are also called the trust capital or fund. This capital or fund may produce income, such as interest on savings or dividends on shares. The land and buildings may produce rental income. Assets may also be sold producing gains for the trust. The way income is taxed depends on the type of income and the type of trust.

What is a settlor?
A settlor is a person who has put assets into the trust. This is known as settling property. Assets are normally put into the trust when itís created, but they can also be added at a later date. The settlor decides how the assets in the trust and any income received from it should be used. This is usually set out in the trust deed.

In some trusts, the settlor can also benefit from the assets theyíve put in. These types of trust are known as settlor-interested trusts and they have their own tax rules.

The role of the trustees
Trustees are the legal owners of the assets held in a trust. Their role is to:

deal with trust assets in line with the trust deed
manage the trust on a day-to-day basis and pay any tax due on the income or chargeable gains of the trust
decide how to invest the trustís assets and/or how the assets in the trust are to be used – although this must always be in line with the trust deed

The trust can continue even though the trustees might change. However, there must be at least one trustee. Often there will be a minimum of two trustees: one trustee may be a professional familiar with trusts – a lawyer, for example – while the other may be a family member or relative.

What is a beneficiary?
A beneficiary is anyone who benefits from the assets held in the trust. There can be one or more beneficiaries, such as a whole family or a defined group of people, and each may benefit from the trust in a different way.

For example, a beneficiary may benefit from:

the income only – for example, they might get income from letting a house or flat held in a trust
the capital only – for example, they might get shares held on trust when they reach a certain age
both the income and capital of the trust - for example, they might be entitled to the trust income and have a discretionary interest in trust capital

If youíre a beneficiary you may have extra tax to pay or be entitled to claim some back depending on your overall income.

Trust law in Scotland
The treatment of trusts for tax purposes is the same throughout the United Kingdom. However, Scottish law on trusts and the terms used in relation to trusts in Scotland are different from the laws of England and Wales, as well as Northern Ireland.

When you might have to pay Inheritance Tax on
your trust

There are four main situations when Inheritance Tax may be due on trusts:

when assets are transferred – or settled – into a trust
when a trust reaches a ten-year anniversary of when it was set up
when assets are transferred out of a trust or the trust comes to an end
when someone dies and a trust is involved when sorting out their estate

The right type of trust
Ensure you donít more tax than is necessary
There are now three main types of trusts.

Bare (Absolute) trusts
With a bare trust you name the beneficiaries at outset and these canít be changed. The assets, both income and capital, are immediately owned and can be taken by the beneficiary at age 18 (16 in Scotland).

Interest in possession trusts
With this type of trust, the beneficiaries have a right to all the income from the trust, but not necessarily the capital. Sometimes, a different beneficiary will get the capital ñ say on the death of the income beneficiary. Theyíre often set up under the terms of a will to allow a spouse to benefit from the income during their lifetime but with the capital being owned by their children. The capital is distributed on the remaining parentís death.

Discretionary trusts
Here the trustees decide what happens to the income and capital throughout the lifetime of the trust and how it is paid out. There is usually a wide range of beneficiaries, but no specific beneficiary has the right to income from the trust.

Some trusts will now have to pay an Inheritance Tax charge when they are set up, at 10 yearly intervals and even when assets are distributed. The right type of trust in conjunction with your overall financial planning could help minimise the amount of Inheritance Tax payable. This is a highly complex area and you should obtain professional advice to ensure the right type of trust is set up for your particular circumstances.

Transferring assets

Posted on July 1, 2013 by - Uncategorized

Using a trust to pass assets to beneficiaries

Trusts may incur an Inheritance Tax charge when assets are transferred into or out of them or when they reach a ten-year anniversary. The person who puts assets into a trust is known as a settlor. A transfer of assets into a trust can include property, land or cash in the form of:

A gift made during a personís lifetime
A transfer or transaction that reduces the value of the settlorís estate (for example, an asset is sold to trustees at less than its market value) – the loss to the personís estate is considered a gift or transfer
A potentially exempt transferí whereby no further Inheritance Tax is due if the person making the transfer survives at least seven years. For transfers after 22 March 2006 this will only apply when the trust is a disabled trust
A gift with reservation where the transferee still benefits from the gift

If you die within seven years of making a transfer into a trust, extra Inheritance Tax will be due at the full amount of 40 per cent (rather than the reduced amount of 20 per cent for lifetime transfers).

In this case your personal representative, who manages your estate when you die, will have to pay a further 20 per cent out of your estate on the value of the original transfer. If no Inheritance Tax was due when you made the transfer, the value of the transfer is added to your estate when working out whether any Inheritance Tax is due.

Settled property
The act of putting an asset into a trust is often known as making a settlement or settling property. For Inheritance Tax purposes, each item of settled property has its own separate identity.

This means, for example, that one item of settled property within a trust may be for the trustees to use at their discretion and therefore treated like a discretionary trust. Another item within the same trust may be set aside for a disabled person and treated like a trust for a disabled person. In this case, there will be different Inheritance Tax rules for each item of settled property.

Even though different items of settled property may receive different tax treatment, it is always the total value of all the settled property in a trust that is used to work out whether a trust exceeds the Inheritance Tax threshold and whether Inheritance Tax is due.

If you make a gift to any type of trust but continue
to benefit from the gift you will pay 20 per cent
on the transfer and the gift will still count as part
of your estate. These are known as gifts with reservation of benefit.

Avoiding double taxation
To avoid double taxation, only the higher of these charges is applied and you wonít ever pay more than 40 per cent Inheritance Tax. However, if the person who retains the benefit gives this up more than seven years before dying, the gift is treated as a potentially exempt transfer and there is no further liability if the transferor survives for a further seven years.

From a trusts perspective, there are four main occasions when Inheritance Tax may apply to trusts:

when assets are transferred – or settled – into a trust
when a trust reaches a ten-year anniversary
when settled property is transferred out of a trust or the trust comes to an end
when someone dies and a trust is involved when sorting out their estate

Relevant property
You have to pay Inheritance Tax on relevant property. Relevant property covers all settled property in most kinds of trust and includes money, shares, houses, land or any other assets. Most property held in trusts counts as relevant property. But property in the following types of trust doesnít count as relevant property:

interest in possession trusts with assets that were put in before 22 March 2006
an immediate post-death interest trust
a transitional serial interest trust
a disabled personís interest trust
a trust for a bereaved minor
an age 18 to 25 trust

Excluded property
Inheritance Tax is not paid on excluded property (although the value of the excluded property may be brought in to calculate the rate of tax on certain exit charges and ten-year anniversary charges). Types of excluded property can include:

property situated outside the UK that is owned by trustees and was settled by someone who was permanently living outside the UK at the time of making the settlement
government securities, known as FOTRA (free of tax to residents abroad)

Inheritance Tax is charged up to a maximum of 6 per cent on assets or property that is transferred out of a trust. The exit charge, which is sometimes called the proportionate charge, applies to all transfers of relevant property.

A transfer out of trust can occur when:

the trust comes to an end
some of the assets within the trust are distributed to beneficiaries
a beneficiary becomes absolutely entitled to enjoy an asset
an asset becomes part of a ëspecial trustí (for example, a charitable trust or trust for a disabled person) and therefore ceases to be relevant property
the trustees enter into a non-commercial transaction that reduces the value of the trust fund

There are some occasions when there is no Inheritance Tax exit charge. These apply even where the trust is a relevant property trust, for instance, it isnít charged:

on payments by trustees of costs or expenses incurred on assets held as relevant property
on some payments of capital to the beneficiary where Income Tax will be due
when the asset is transferred out of the trust within three months of setting up a trust, or within three months following a ten-year anniversary
when the assets are excluded (property foreign assets have this status if the settlor was domiciled abroad)

Passing assets to beneficiaries
You may decide to use a trust to pass assets to beneficiaries, particularly those who arenít immediately able to look after their own affairs. If you do use a trust to give something away, this removes it from your estate provided you donít use it or get any benefit from it. But bear in mind that gifts into trust may be liable to Inheritance Tax.

Trusts offer a means of holding and managing money or property for people who may not be ready or able to manage it for themselves. Used in conjunction with a will, they can also help ensure that your assets are passed on in accordance with your wishes after you die.

Writing a will
When writing a will, there are several kinds of trust that can be used to help minimise an Inheritance Tax liability. From an Inheritance Tax perspective, an ëinterest in possessioní trust is one where a beneficiary has the right to use the property within the trust or receive any income from it. Assets put into an interest in possession trust before 22 March 2006 are not considered to be relevant property, so there is no ten-yearly charge.

During the life of the trust there are no exit charges as long as the asset stays in the trust and remains the ëinterestí of the beneficiary.

If the trust also contains assets put in on or after 22 March 2006, these assets are treated as relevant property and are potentially liable to the ten-yearly charges.

Who gets what?

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Don’t leave your heirs embroiled in years of legal feuding

If you leave everything to your spouse or registered civil partner, in this instance there usually won’t be any Inheritance Tax to pay because a spouse or registered civil partner counts as an exempt beneficiary. But bear in mind that their estate will be worth more when they die, so more Inheritance Tax may have to be paid then.

Other beneficiaries
You can currently leave up to £325,000 tax-free to anyone in your will (frozen until April 2014), not just your spouse or civil partner. So you could, for example, give some of your estate to someone else or a family trust.

Inheritance Tax is then payable at 40 per cent on any amount you leave above this.

UK Charities
Inheritance Tax isn’t payable on any money or assets you leave to a registered UK charity ñ these transfers are exempt.

From 6 April 2012, if you leave 10 per cent of your estate to charity the tax due may be paid at a reduced rate of 36 per cent instead of 40 per cent.

Wills, trusts and financial planning
As well as making a will, you can use a family trust to pass on your assets in the way you want to. You can provide in your will for specific assets to pass into a trust or for a trust to start once the estate is finalised. You can also use a trust to look after assets you want to pass on to beneficiaries who can’t immediately manage their own affairs (either because of their age or a disability).

You can use different types of family trust depending on what you want to do and the circumstances. If you are planning to set up a trust you should receive specialist advice. If you expect the trust to be liable to tax on income or gains you need to inform HM Revenue & Customs Trusts as soon as the trust is set up. For most types of trust, there will be an immediate Inheritance Tax charge if the transfer takes you above the Inheritance Tax threshold. There will also be Inheritance Tax charges when assets leave the trust

Take it step by step

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How to avoid the probate pitfalls

A look at the steps to take in England and Wales (the process differs in Scotland and Northern Ireland).

Step 1 – Value the estate to see if you need a grant of representation.
When you might not need a grant of representation

A grant may not be needed if the estate:

is a low-value estate - generally worth less than £5,000 (though this figure can vary) – and doesnít include land, property or shares
passes to the surviving spouse/civil partner because it was held in joint names

When you contact the deceasedís bank or other financial institutions, they will either release the funds or tell you to get a grant of representation (or confirmation) first.

Some banks and financial institutions may insist on a grant before giving you access to even a small amount of money.

When a grant of representation is usually needed

You will almost certainly need a grant if the estate includes:

assets generally worth more than £5,000 in total (though again this figure varies)
land or property in the sole name of the deceased, or held as tenants in common with someone else
stocks or shares
some insurance policies

Step 2 – Applying for a grant of representation
Youíll have to fill in an Inheritance Tax form in addition to the PA1 Probate Application form, even if the estate doesnít owe Inheritance Tax. The estate will only owe Inheritance Tax if itís over the threshold currently £325,000 (frozen until April 2014).

The Inheritance Tax forms you need depend on the following:

where the deceased lived – England and Wales, Scotland, Northern Ireland or abroad
the size of the estate
whether it is an excepted estate (i.e. you donít need to fill in a full Inheritance Tax account – form IHT400)

Usually, if an estate has no Inheritance Tax to pay, it will be an excepted estate. However, this is not always the case. Some estates that donít owe Inheritance Tax still require a full Inheritance Tax account.

If youíre not sure whether the estate is an excepted estate, youíll need to start filling in a Return of Estate Information form (form IHT205 in England and Wales).

Depending on your answers to certain questions, the form will make clear when you should stop filling in that form and switch to form IHT400 (a full Inheritance Tax account) instead.

Step 3 – Send the forms to the relevant government bodies
Send completed IHT205 forms and the PA1 Probate Application form to your nearest Probate Registry.

Youíll also have to include the original will (if there is one), the death certificate, and the probate fee. If youíve filled in form IHT400, follow the instructions on page 55 of the IHT400 guidance notes.

The process is different in Scotland and Northern Ireland.

Step 4 – Pay any Inheritance Tax due
If the estate owes Inheritance Tax, you wonít receive the grant of representation (or confirmation) unless you pay some or all of the Inheritance Tax first. The due date is six months after the date of death.

Steps 5 to 7 – What happens next?
Once youíve paid any Inheritance Tax and sent off the forms to the Probate Registry, the process takes about eight weeks if there are no problems. There are three stages:

examination of forms and documents - Probate Registry staff check the forms and documents and prepare the papers for your interview

swear the oath – all the personal representatives who have applied for a grant of representation will need to swear an oath, either at the Probate Registry or local probate office

probate is granted - the grant of representation is sent to you by post from the Probate Registry

After you get the grant of representation (or confirmation) and have paid any Inheritance Tax due, you can collect in the money from the estate. You can then pay any debts owed by the estate and distribute the estate according to the will or the rules of intestacy.