You will have no doubt heard by now about the 25-year-old who, upon his father’s unexpected death, was proclaimed as the new Duke of Westminster. Within hours, most newspapers around the land were running stories on how – as he was heir to his father’s fortune - he now owned “half of London” and was instantly one of the richest men in the UK and the world.
The late Duke continued the process his ancestors have followed since Queen Victoria bestowed the title on the family of passing on vast wealth and holdings through the generations.
However, for those early beneficiaries who inherited the family’s riches, the wealth had been assessed and taxed depending on the laws at the time, with a large sum being taken in the form of tax every time.
In recent years, the family learned their lesson and decided that they should carefully plan what should happen in the event that the late Duke did indeed pass away to ensure as much as possible was kept safe from the taxman.
This is where the newspapers decided to take the story. There were many claims of one rule for the rich and another for the hard working people of Britain.
However, you don’t have to be a Duke or a Duchess to benefit from proper estate planning and the need to minimise your exposure to Inheritance Tax. In fact, anyone with assets or an estate to pass on should look at the example of the Duke of Westminster and actively consider the benefits of proper, and early estate planning.
First, it’s important to understand what Inheritance Tax is and who is liable to pay it.
What is inheritance tax?
Inheritance Tax is tax which is payable on an estate when someone dies. In addition, IHT is payable on certain transfers made during a person's lifetime – gifts and trusts made up to 7 years before death are still including in your estate for IHT purposes – so last minute planning might not be effective.
Not everyone needs to pay it!
Not all estates have to pay IHT. The current inheritance tax threshold for 2015/2016 is £325,000, so if you don’t have an estate to that value – you should be fine.
Are there exemptions?
There are certain exemptions and reliefs available which can reduce the overall IHT liability. Certain gifts and legacies are exempt from IHT:
Gifts and legacies made to your spouse or civil partner
Gifts made to charities, whether during life or in your will
Gifts which you make 7 years or more before your death
Gifts which fall under the annual exemption - £3,000 for the tax year 2015/2016. This allowance can be rolled over once into the next year
Gifts of less than £250 per person
There are also certain reliefs for particular types of assets you might own – for instance assets that are used in your business.
The use of trusts
A trust is a legal arrangement whereby a group of people known as trustees hold property for the benefit of one or more beneficiaries. Using a trust doesn’t mean that no tax will ever be paid on your assets but rather trusts have their own tax rules and, used correctly, they are a legitimate way to plan your estate and protect assets for future generations.
With careful planning therefore, it is possible to use the various tax exemptions and trust rules to minimise the effect of tax on your assets and to ensure that your family can benefit from your lifetime of hard work.