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FOOL'S EYE VIEW
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A financial advisor has recently been going through the affairs of some friends of mine who are in the unfortunate situation of both having their pension funds with Equitable Life. As if they didn't have enough to worry about, he also mentioned the phrase 'Inheritance Tax'. Although my friends have got Wills (everything to each other and then to their son), the subject of Inheritance Tax (IHT)hadn't really occurred to them. Like many people living in the South of England and who have made a decent living over the years and who own their own home, their son will have a considerable IHT bill to pay when they pop their clogs. It simply hadn't occurred to them that the Chancellor would get a considerable proportion of their hard-earned money if they don't sort out a different arrangement to the one they already have. At the moment, you can leave everything to your spouse free of IHT but, of course, when the second partner dies, there'll a 40% tax rate levied on anything over and above the IHT threshold which currently stands at a rather measly £250,000. In my friends' case, their son could find themselves liable for a vast tax bill if his parents were to be wiped out in a car crash tomorrow. It's equally important if you are unmarried and simply cohabiting. In that instance there is no tax-free transfer to your partner and with only the £250,000 threshold, your partner could find themselves having to sell their home to pay IHT on the surplus. This is likely to change soon with cohabiting couples being given the same rights as those who are married but until it does, you're vulnerable. For my married friends, the good news is that there is currently a loophole that should enable them to re-arrange things. The bad news is that the Inland Revenue is already on the case and is probably already busy persuading the Government to change the law to close it. Earlier this year there was a court case called Inland Revenue v Eversden. It revealed that it would be perfectly feasible for couples such as my friends to set up a special type of Trust whereby one spouse's share could pass directly to the son whilst enabling the surviving spouse to get the benefit of the whole estate during his or her remaining years. This way the son could ultimately benefit from both of their IHT thresholds of £250,000 each. For people who don't have such complicated affairs then you can take advantage of the Will Aid scheme. It takes place every other November and involves solicitors offering a free will-writing service in exchange for a donation to charity. Note that the scheme is bi-annual so if you don't take action now you'll have a fair wait before it comes around again so bear in mind you've got less than a fortnight in which to do so. Obviously the scheme isn't really 'free' and you'll usually be expected to pay in the region of £50 for one uncomplicated Will and around £75 if you've got a partner. But that's cheaper than you'll pay normally. And the donation to charity can be incorporated into the Will so you don't even have to stump up now. If you do own more than the £250,000 in assets, then make sure you ask some questions about setting things up so your money doesn't go to the Exchequer. With house prices the way they are it's not difficult to fall within the IHT band and it goes without saying that even people with Wills already might want to think about reviewing them.