If you die tomorrow, leaving behind an out-of-date will or no will at all, the chances are that your heirs will be faced with an inheritance tax (IHT) bill. This is likely even if the only asset you own is your home. The IHT exempt limit on death is a mere £285,000 which is much less than the value of most GPs’ homes.
Amazingly, many GPs still fail to make a will, although this is the simplest preventive measure you could prescribe for maintaining the health of your assets.
Wills are the only way to ensure that your possessions are distributed in accordance with your wishes when you die. You can also include provisions in your will to ensure that young children or other dependants are taken care of.
IHT is currently payable on the value of your estate on your death at a rate of 40 per cent on the surplus over £285,000. But IHT planning (or ‘avoidance’) together with a will can save up to £114,000 in tax.
Otherwise, in the worst-case scenario, this tax would have to be paid to HM Revenue and Customs before your estate is divided up according to the rules of intestacy. Under these rules, not everyone you might like to benefit may get a legacy. And, those who do inherit may not receive as much as they otherwise might.
As part of your will arrangements, it is vital to use the £285,000 exemption, known as the nil rate band, to reduce the potential IHT bill.
IHT is not payable on any assets your surviving spouse inherits. However, when your widow or widower dies (assuming they do not re-marry) and pass on their estate to the next generation or other beneficiaries, IHT becomes payable on its full value.
However, it is possible for married couples to arrange their wills so that when the first spouse dies, assets pass via a trust or directly to the children or other dependants to the value of the nil rate band, a saving of £114,000. When the surviving spouse dies, their nil rate band is used, ensuring that assets to the value of £570,000 (2 x £285,000) have been passed on, and another tax saving of £114,000 made.
Review your will
It is vitally important for GPs to review their wills on a regular basis.
Not only will your personal circumstances change during your lifetime, but changes to tax legislation can render existing IHT saving strategies obsolete. Bear in mind that it is important you consult someone who specialises in estate planning. Many solicitors will only follow your instructions when drawing up a will and may not advise you on the IHT implications.
As well as the £285,000 nil rate band exemption, there are a number of other IHT exemptions you may be able to take advantage of. These include annual gifts up to the value of £3,000 a year.
If you do not use your £3,000 allowance, it can only be rolled forward to the next year’s one, but you can give up to £6,000 in that year.
In addition to this, you can make small gifts of up to £250 to an unlimited number of individuals in any one year.
This applies as long as the beneficiaries have no connection with each other and a £250 gift is not made on top of a £3,000 gift in the same year to the same person.
Gifts of to £5,000 to each of your children, if given because they are getting married, are also exempt. Another exemption is for regular gifts of any amount made out of normal expenditure.
This exemption only applies if the gifts are made from your income rather than from capital, and making them does not affect your standard of living. Legacies or gifts to registered charities are also IHT-exempt.
Then there are potentially exempt transfers (PETs).
These are gifts in excess of the above exemptions. As long as you survive for seven years from the date of making a PET, there is no IHT to pay on it.
If you survive for a shorter period, IHT is charged on a sliding scale according to the number of years that you survive.
Before the Finance Act 2006, setting up a trust would have been an excellent way for you to give money away while still retaining some degree of control and access through the trustees and potentially avoiding any IHT liability on the amount of money placed in the trust.
However, changes brought in by the Act have to some extent curbed the potential for IHT avoidance.
If you have set up a trust or assets are due to be left in a trust under the terms of a will made before the Act was passed, it would be prudent to seek specialist advice.
Note that the use of trusts for assets up to the value of the nil rate band are unaffected by the new rules.
If, where practical and sensible in terms of your continuing financial needs, you have made use of IHT exemptions but your estate will still be liable to tax, you could consider taking out life insurance to meet the tax liability on death.
This arrangement should be written in trust so that the policy benefits do not increase the value of your estate and can be passed to your dependants quickly to enable them to pay any tax due. There are various other investment options that may be open to you, and we suggest that you seek advice from suitably qualified professional advisers.
James Cheetham and Kesh Liladhar are medical specialist independent financial advisers Bailey Beaumont Financial Solutions Ltd. Tel: (01476) 400027
For more information about inheritance tax go to www.direct.gov.uk/MoneyTaxAndBenefits/
Marriage and the £285,000 exemption
A married couple each have assets of £500,000 (£1 million in total). How they manage their estate will affect the IHT paid by their heirs.
The husband and wife leave all their assets to each other in their wills.
When the first spouse dies, there is no tax liability because gifts between husband and wife are exempt from IHT.
When the second spouse dies, there is no tax to pay on the first £285,000 but the surplus of their estate (£715,000) is taxed at 40 per cent.
Total IHT saving is £114,000 (40 per cent of £285,000).
The husband and wife each leave assets of £285,000 to their children and the rest of their estates to each other.
When the first spouse dies, there is no tax liability because gifts between husband and wife are exempt from IHT, and the £285,000 to the children is covered by the nil rate band is also exempt.
When the second spouse dies, there is no tax to pay on the first £285,000, but the surplus of their estate (£430,000) is taxed at 40 per cent.
Total IHT saving is £228,000 (40 per cent of £570,000).
Make or review your will.
Consider making IHT-exempt gifts.
Check if any existing life insurance policies are written in trust to avoid adding value to your estate on death.
Ideally, get help with IHT planning from a solicitor specialising in estate planning, an independent financial adviser and your accountant.
For the most effective strategy, persuade these professionals to work together on your behalf.
Don’t be tempted to ‘go-it-alone’ without specialist advice.