Top 10 Personal Finance Articles – September 2009

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Here is our usual monthly list of the top 10 read articles on shrewdcookie.com in September – there are some surprising entries!

1. Change in ISA allowances in Budget 2009

The changes announced in the Budget in respect of increases in the ISA allowances come into effect on 6th October for those over age 50 before the end of the current tax year – can invest up to £10,200 into a Stocks and Shares ISA. Woo hoo!!!

2. New Tax Year – New ISA Allowance

More detail on the changing ISA allowances.

3. Download a Free 2010 Yearplanner

I have put together a great little yearplanner for 2010 – it can be downloaded in A4 (landscape) or larger A3 (printed on 2 sheets of A4 for those without an A3 sized printer!). Feel free to send copies to friends, family and colleagues at work.

4. 19 Essential Money Tips for Students

With the start of the University/College/School term upon us here is a great article which might help a few students who are struggling through on their limited finances.

5.  Pay Yourself First

One of the first principles spoken of in the great book “The Richest Man in Babylon” is the need to pay yourself first – the principle here is to take a fixed percentage off your take-home pay and keep that money for yourself forever – then your lifestyle will change itself to allow you to live on the remainder. Get a copy of this book – a truly great read. It could be the most valuable £4.99 you ever invest!

6. Cashflow Forecasting – Planning Income and Expenditure

Here is a really helpful little spreadsheet which will allow you to plan your income and expenditure on a monthly basis – you will be able to see exactly where your money goes to each month – allowing you to make changes in your expenditure – a great tool for “what if” scenarios – what if I stopped eating out, what if I increased income by £200 per month etc.

7. Personal Pension Minimum retirement age increasing to 55 from 6th April 2010

Those people who will be over 50 before 5th April 2010 and were planning to retire in the next 5 years may have to take some urgent action between now and then – in the worst case scenario you may have to continue working for another 5 years!

8. Wear a uniform to work – here’s some free money!

If you have to wash your own work uniform you could be entitled to some money from the taxman – read the article for more information.

9. Get Money for your Old Mobile Phone

Did you know you can sell old mobile phones – I recently sold my old Sony Ericsson K800i and got £28 for it – worth checking out what yours might get you – see the article.

10. 10 Great Reasons for Writing a Will

Everyone needs and should have a Will – it saves so many problems in the event of your death – and let’s face it the only two certainties in life are death and taxes! Read the article now – you might be surprised.

And finally……

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Investment Bonds – An Introduction

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What is an investment bond?

An investment bond is, from a technical point of view, a “single premium, non-qualifying, whole of life assurance policy” for which the main principle is one of investment.

They are offered by life insurance companies as a place to invest money over the medium to long term with a view to either providing capital growth, “income” or both.

Non-qualifying relates to the tax treatment of the investment bond – the contract is essentially a life insurance policy which has been designed to be used as an investment vehicle.

Investment Options

The life company offering the investment bond will have a portfolio of funds, possibly both internal and externally managed funds, into which money can be invested. These will cover such asset classes as stocks and shares, commercial property, corporate bonds, fixed interest securities, gilts and government bonds, as well as cash.

Money can normally be invested in more than one fund at a time – typically 10 or more funds at one time is not uncommon.

Taxation of Investment Bonds

Taxation of investment bonds is a little beyond the scope of this article – we strongly recommend that you seek guidance from an accountant or financial adviser before making any amendments to any existing investment bond you may hold.

The investment bond is deemed to have paid basic rate income tax within the fund, however, many funds actually suffer a lower tax charge internally than basic rate income tax as a byproduct of the way the internal returns are broken down between capital appreciation, income in the form of interest and dividends received.

From the public’s point of view, basic rate income tax is deemed to have been paid and the term “non-qualifying” relates to the way any additional taxation may result on taking money out of the plan. A non-taxpayer cannot reclaim any tax paid by the life company within the investment bond.

In what circumstances may a policyholder have to pay additional tax?

The liability to additional taxation comes into play in the event of a “chargeable event”. A chargeable event generally occurs if any, but not limited to, the following happen:

  • Withdrawals in excess of 5% per year – up to 5% of the original amount invested can be withdrawn each year with no immediate additional tax liability – ideal for providing an “income stream” – possibly in retirement.
  • Death of a life assured – if they are the last life assured remaining on the investment bond
  • Partial or full surrender of the bond
  • Assignment of the bond – for money or money’s worth

The calculation of liability to tax is beyond the scope of this article but in brief any additional tax liability is calculated with reference to the individuals own income tax position in the tax year in which the policy year in which surrender takes place ends – phew!!! Ask an accountant or IFA for guidance in this area.

Top Slicing

“Top slicing” of gains on investment bonds generally allows the gain to be divided by the number of complete policy years, after which this “slice” is added to the individuals income for the tax year in question.

If this slice, when added to other income, takes the policyholder into the higher rate tax bracket then some or all of the gain may carry a liability to additional taxation (20% in the current tax year).

Again, seek professional advice before surrendering any investment bond.

Who can benefit from investing in investment bonds?

The ability to take an effective 5% annual withdrawal without any immediate additional higher rate tax liability may be attractive to higher rate taxpayers who may become basic rate taxpayers later in life.

People who have fully utilised their ISA allowances and are actively managing other investments which fully utilise their annual capital gains tax (CGT) allowance.

5% withdrawals are not classed as “income” – this is attractive to individuals over the age of 65 who benefit from higher annual allowances against income tax than under 65’s. For example, in the 2009/2010 tax year, a 66 year old can earn upto £9,490 before paying any income tax. Any income, such as interest or pension annuity, over a set level each year reduces this additional personal allowance,

An additional benefit to retired people is that investment bonds are not normally included in assessing a persons personal finances by a Local Authority in respect of funding long-term care. Care should be taken when considering retirement home planning and investment bonds – any action to move money into investment bonds in the period near to having to go into a retirement home could be deemed “deprivation of assets” by the local authority. More information can be found in the CRAG report.

Investment Bonds are classed as “NIPA’s” – Non-Income Producing Assets which makes them ideal for holding as part of a Discounted Gift Trust (DGT) or Gift and Loan Trust, which are both inheritance tax planning arrangements. Many life offices have their own DGT and Loan Trust packaged schemes with the core investment held in an investment bond due to the favourable tax treatment of investment bonds within a trust arrangement.

Conclusion

Investment Bonds can be viewed as more than just an investment – invariably they are a retirement and estate planning tool and care should be taken in taking any action in regard of investment bonds.

Personal Finance Questions – April 2009

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In this new feature we will answer some of the many questions we have been receiving from visitors to shrewdcookie.com. It is often said that if you ask a question chances are that many other people also want to ask that very same question.

Although we receive a large number of personal questions we have to remind you that we do not give financial advice on this website – we encourage you to visit an independent financial adviser, solicitor or accountant if you wish to discuss any particular course of action which may be prompted by an article you read on our site.

1. What are the new ISA allowances announced in the recent Budget?

The ISA limit is increasing from £7,200 to £10,200. The change comes into effect for the over 50’s from 6th October 2009 and from 6th April 2010 for the rest of the population. Of the new £10,200 limit, upto £5,100 will be allowed for Cash ISA investment, with any surplus between the amount you place in a Cash ISA up to £10,200 being available to invest in a stocks and shares ISA.

2. Inheritance Tax – who pays?

The liability for paying inheritance tax lies in the hands of the executors/administrators of the deceased’s estate. Inheritance tax is payable within 6 months after the end of the month in which the person passed away. It is possible to pay Inheritance Tax in instalments over up to 10 years – this is the case in circumstances where say the estate includes a house. There is an interest charge if you pursue this method of paying Inheritance Tax – http://www.hmrc.gov.uk/ for more details.

3. I am married to someone who was not born in this country – how does this affect our Inheritance Tax position.

Where a spouse is deemed to be non-Uk domciled then the Interspousal transfer is limited to £55,000, there in no limit to the Interspousal transfer where both partners are UK domiciled – no liability to inheritance tax on first death if you leave all your assets to your marital partner. Consult a solicitor or accountant about your own particular situation.

4. How do I get a State Pension Forecast?

To obtain a forecast of your state pension entitlement, based on your national insurance record you need to fill out and submit a form BR19 – this article – “How Much State Pension will YOU get” gives more details.

5. If I invest a lump sum now how can I easily calculate how it will grow between now and retirement?

Using the Rule of 72 – by assuming an interest rate and dividing this into 72 will tell you how long that money will take to double in value. For example, at 6% your money will double in value every (72/6) 12 years. If you had say 36 years to retirement, at 6% growth your money would effectively double 3 times. See this article for more details.

6. Can I back-date my ISA investment to use last years allowance?

No – your money needs to be invested by midnight between 5th and 6th April each year to use the ISA allowance for that tax year – there is no way to backdate an ISA investment. A case of “use it or lose it”!

7. I am a female born in 1954 – when do I get my State pension?

State retirement age for men and women is being equalised to 65 for both sexes. See this article . There is also a State Pension Age calculator provided by The Pension Service – enter some basic details and it will tell you exactly when you qualify for your State Pension.

8. Can I hold Cash in a Stocks and Shares ISA? What is the tax liability?

Yes – many providers offer a “cash park” facility whereby you can invest temporarily in cash and then switch into stocks/funds over the short term. There is the facility to receive interest on this cash held but the interest is subject to tax and a non-taxpayer cannot reclaim this tax either. See this article for more details.

9. What is the minimum deposit on a mortgage for first-time buyers?

There is no legal minimum deposit, the minimum is set by market forces – we are currently suffering from the “credit crunch” whereby lenders are being cautious about lending to people particularly with the housing market currently falling. Therefore, more and more people are being expected to make a deposit when buying their first homes – typically 10% or more is required to obtain a good interest rate product – see “5 tips for first-time buyers” for more details.

10. What is the “deferred period” on my income protection plan for?

The deferred period is the time between notifying the claim to the life office and the benefit being paid out. The plan is designed to provider a replacement income in the event of long-term absense due to illness or accident. The longer the deferred period, the lower the risk to the insurance company of having to meet a claim which therefore means a lower premium. See these article on “income protection” for more information – “Income Protection – an introduction” and “Critical Illness Cover versus Income Protection”.

These are just some of the areas we have received enquiries on in the past month. Although we cannot reply directly please ask a question and we will try to feature it in the next FAQ article next month. Add a comment below or complete this short form to contact us.

Simon

10 Great Reasons to Write a Will

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In our previous article we considered the basics of will writing, setting out the key people involved in the writing and execution of a Will.

In this article we will consider the REAL benefits to be enjoyed from ensuring you have a properly written Will.

10 Great Reasons Why You Should Write a Will

1. To allocate assets between different people.

You may wish to leave jewellery to a niece, or promised a grandson your war medals. A Will can formalise all these gifts and help prevent family arguments – remember this – family and money rarely mixes!

2. If you’re not married then you need to make Wills.

There is no automatic transfer of assets between couples who are cohabiting. Other than jointly owned asset which would pass to the surviving owner on first death, in law, all other assets could pass back to the deceased’s family under intestacy rules. In practicality though it is unrealistic to expect your deceased partners family to come asking for his/her DVD collection but a Will formally arranges your affairs after death and avoids problems later.

3. Leave assets to an ex-partner.

It could be that you have now remarried or are living with someone else. A Will could be used to leave assets to an ex-partner, for example, they may have made a large gift to you during your relationship which you would like to return to them in the event of your death.

4. Reduce the amount of Inheritance Tax you pay.

In the current tax year we can each leave an estate of up to £325,000 (2009/2010 tax year) with immediate liability to inheritance tax. Anything we own, over and above this £325,000 Nil Rate Band is chargeable to Inheritance Tax at a rate of 40%. A Will could be written to leave up to £325,000 to be split equally between children or held in Trust for their benefit. Under a normal “British” Will it is usual for all assets to pass between husband and wife. It might be prudent to still include a will trust to hold £325,000 for the benefit of your children – leaving all your assets to your spouse could see that money all eaten up in care home fees – it is vitally important that you take legal advice in this respect.

5. A Will can be used to make assets skip a generation.

It may be that your own children are financially successful in their own right. Passing assets to them on your death may be of no benefit and could simply compound their own Inheritance Tax problems later by artificially expanding their Estates. If this is the situation then why not leave your Estate to benefit your grandchildre, or even great-grandchildren if that is the case.

6. A Will can be used to set up a Trust.

If you are fortunate to have a very large Estate you may choose to set up a Trust to benefit a local charity or support group in terms of providing them with a regular income. Seek legal advice if you are considering this course of action.

7. To avoid Intestacy.

If you don’t make a Will then the Government have already made one for you. These are known as the rules of Intestacy – you are said to have died “intestate” if there is no valid will at the time of your death. For example, if you are married and die with a spouse and children then your spouse doesn’t automatically get eveything – if your Estate is less than £250,000 everything goes to the surviving spouse. If the estate is over £250,000 the surviving spouse gets £250,000 and all personal possessions.

Half of the remaining estate is split equally between the children with the spouse retaining a “life interest” e.g an income from the remaining 50% with this 50% ultimately being split between the children on second death.

As you can see – assets being allocated in this manner can and does cause problems after death.

More information on intestacy rules can be found here – HMRC – Intestacy Rules

8. You need to appoint Guardians for your children – this is vitally important.

In the absense of a Will it would be the Courts/Social Services who decide where your children are best placed – and it might not be with the people you thought would look after and raise your children. By making a Will with Guardians named for your children you can avoid this uncertainty. You should also consider putting in place life insurance to provide for your children in the event of your death – consider this – it could be very difficult if one day two children turned up on your doorstep expecting to be looked after until they are 18 and there is no money there to fund them!

9. If you are separated but not yet divorced.

You should write a will with the will written in view of the divorde going ahead as there is a possibility in law that, in the event of your death, your asset could pass back to your ex-partner. Although you are separated, in the eyes of the law your ex-partner might be entitled to your Estate after your death!

10. If you have been married previously or you don’t trust/like your spouses family.

You might care to write your Will so that in the event of you both dying together your assets don’t end up passing to your spouse’s family. For example, if you were killed in a car crash, in the eyes of the law, the eldest person is deemed to have died first. It is possible that their Wills leave all their assets to their families – you could see your assets momentarily pass to your spouse before passing straight to her family. Is this what you want to happen?!

We hope this article was of some benefit in sparking an interest in writing your own will.

Will Writing – an introduction

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Why you need a Will

There are many reasons why it is prudent from a personal, as well family perspective, to ensure you have a suitably worded Will in place – and Will Planning is not just for old people either!

What is a Will?

A Will is your written instruction which formalises what is to happen with your estate, and your children, after death. It can be a shrewd tax and estate planning instrument when used correctly and there are also a number of reasons why you should write a will sooner rather than later. We will cover these further in our next article in this series. This article is an introduction to Will Writing.

There are several ways in which a Will can be written – you could use the services of a Solicitor, a Will Practitioner/Specialist, a financial adviser or even a “DIY” Will purchased from a stationers.

In order to make a Will you need to be of sound mind and over the age of 18.

What is contained in a Will?

A Will sets out the administration of your estate in the event of your death. In it you can state your funeral preferences together with details of any gifts to charity or the National Trust.

Individual items can also be named, for example, leaving jewellery to a daughter or military medals to a grandson.

The Will for the most part will deal with the distribution of your estate – these are all your worldly goods and possessions. It is common for married couples to leave everything to each other and then shared equally between children on second death – this is generally known as the “Great British” Will – and may or may not be the most efficient and effective way of administering your Estate.

Who is involved in the Writing of a Will?

As the person making the Will you are known as the Testator (Testatrix if female) and the Will will be witnessed by two individuals who are not to benefit under the terms of the will – these are the Witnesses.

In the Will you nominate a person or people to administer your Estate after your death – these people are known as the Executors and it is their legal obligation to ensure that your wishes are carried out to the best of their ability.

I have an existing Will – does it need changing?

It is important to ensure you review your Will on a regular basis as people’s circumstances do change and the Will previously written may no longer match your wishes.

In addition to this, on several occasions, during my time as a financial adviser, I came across situations where people simply do NOT have a valid Will – in one case for example, the person had received their copy of the Will back from the Solicitors office and had simply filed it away without signing and witnessing the Will – remember – you need to ensure you sign your Will and that this signature is witnessed by two independent witnesses for it to be valid.

Is it feasible to make my own Will?

Although it is possible to write your own Will it is always advisable to have your Will written by an expert, such as a Solicitor or STEP practitioner.

A word of caution – in many cases the person writing the Will may wish to add themselves to the Will as an executor – I would always err on the side of caution at this suggestion. This person would be acting in a professional capacity and therefore the level of charges which might be incurred could be an unknown. You could in effect be writing a “blank cheque” on your estate by including a professional to act as an Executor on your Will. Remember – the other people acting as Executors (e.g. family) can always bring in professionals to act, at an hourly rate or agreed cost basis, should the need arise.

Next article – 10 GREAT reasons for Writing a Will

Trusts – Protecting Wealth and Financial Planning

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Trusts – An Introduction

This article is an introduction to Trusts and how they can be used in financial planning to achieve your money and wealth goals not only as a tax planning tool but also to protect your existing wealth.

What is a Trust?

A Trust is any arrangement whereby one person(s) manages and looks after assets for the benefit of another person or people. It is a legally binding agreement and is covered by various Trust and Taxation laws as well as judicial precedent.

Who is involved?

There are three classes of person involved in the setting up of a Trust – a Settlor is the person who sets up the trust, normally to receive their own assets – the trust assets are looked after by the Trustees for the ultimate benefit of the Beneficiaries.

During the term of the Trust, the Trustees are the legal owners of the Trust assets but the Beneficiaries are the beneficial owners. It is the Trustees legal responsibility to ensure that all decisions made in respect of Trust assets are made in the best interests of the Trust’s Beneficiaries.

It is normally good practice to have more than one Trustee and in the majority of cases the Settlor will also be Trustee. In line with this, it is also possible to name direct individuals to be Beneficiaries under a Trust or this could be written into the Trust to cover a group of people – for example, “all my children who survive me by 28 days”.

How is a Trust set up?

A Trust is generally set up by completion of a Trust deed. This deed sets out the nature of the Trust, the Beneficiaries of the Trust and the powers and obligations of the Trustees.

In respect of life insurance policies generic Trust wording can usually be supplied by the life office to help the Settlors’ legal representative ensure that a correctly worded Trust is put in place.

Are there many Different types of Trust?

Yes – there are a number of different types of trust and they all have different purposes – further information on the different types is available from your Solicitor – the purpose of this article is to introduce you to the topic of Trusts and how they can be used in relation to your own personal financial planning. In future articles we will deal with some of the more common Trust arrangements in more detail

How are they used in financial planning?

Two of the most common uses for Trusts in financial planning are to protect assets from taxation or creditors or to ensure that assets pass to the correct beneficiary in the event of the death of the Settlor.

The majority of people reading this article may come into contact with a Trust arrangement through taking out a life assurance policy.

The Settlor, who is also usually the life assured, sets up the Trust using a standard wording provided by the life office (which it is advisable to get checked by a suitable qualified Solicitor) to leave the benefits from the policy (the sum assured) for the benefit of specific individuals.

A normal course of action would be for a parent to effect a life policy and place it in Trust for their children. There are several benefits to this course of action:

1. The sum assured on death is outside of the deceased’s estate and is therefore not normally subject to Inheritance tax.
2. The proceeds from the plan can normally be paid out quicker as there is no need to wait for probate to be obtained to allow release of funds. Usually provision of the death certificate and a copy of the Trust is all that is required.
3. It stops third parties accessing the funds which may not be what the life assured intended – it’s amazing who can “come out of the woodwork” when someone dies and there is money to be shared out!
4. It stops the sum assured being used to repay debts of the life assured in the event of the life assured dying whilst being insolvent or having large debts.
5. If the Beneficiaries are young children then the money can be held within the Trust and the Trustees would usually have the ability to make advances of the funds for the welfare and benefit of the children, whilst retaining the monies until the children are older and better able to manage their own affairs.
6. Grandparents could utilise a Trust to allow their assets to effectively “skip a generation” and be passed to grandchildren which is a particularly popular arrangement where their children are already wealthy in their own right.

What about Tax Planning?

Yes, Trusts can also be used for tax planning and in later articles we will discuss the various Trust planning tools available in the UK today. Gifts can be made into specific Trusts which provide an immediate saving against Inheritance tax; other Trusts exist to remove growth of investments outside of an Estate whilst still allowing the Settlor access to their capital.

Please add any comments below.

Inheritance Tax – allowances and reliefs

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In this second part of a three part series we will consider the main allowances and reliefs which can be used to reduce your liability to Inheritance Tax.

Nil Rate Band

This is the main relief which most people enjoy. The Nil Rate Band currently stands at £325,000  – on the first £325,000 of your net taxable estate IHT is payable at 0% – hence the name “Nil Rate Band”.

In the previous article we discussed that recent changes in legislation entitled a married couple to pass on any proportion of unused Nil Rate Band to the surviving spouse on first death.

(Please note – the Nil Rate Band has been updated for the 2009/2010 tax year which commenced on 6th April 2009 – Simon)

Inter-Spousal Exemption

Under this exemption, all transfers between spouses and civil partners, as long as they have a permanent home in the UK, are exempt from Inheritance Tax.

The exception to this rule is when a UK domiciled individual is married to a non-UK domiciled individual – in this case, any transfer from the UK domicile to the non-UK domicile receives IHT relief on the first £55,000 transferred only.

Exempt Gifts

Certain gifts are exempt from IHT, regardless of whether they are made during the donor’s lifetime or as a result of a gift through their Will on death: –

  • Gifts between husband, wife and civil partners
  • UK Charities – here is a list
  • Some national institutions such as museums, universities or into the National Trust
  • UK political parties

Annual Exemption

Any individual can make a gift of up to £3,000 in any tax year which is free from Inheritance Tax. Any unused relief can be carried forward for just one tax year.

Other Gifts

Some gifts made during lifetime are exempt from Inheritance Tax and they are detailed below:-

Gifts on marriage or entering a Civil Partnership

  • Parents can each give £5,000 cash or gifts
  • Grandparents and other relatives can give cash or gifts up to £2,500
  • Anyone else can give cash or gifts up to £1,000

Small Gifts Exemption

Any individual can make a gift during lifetime to any other individual up to £250 and not be liable to Inheritance Tax.

Gifts out of Normal Expenditure

Any regular gifts made out of net income (i.e. after tax has been paid) are free from Inheritance Tax. These can include regular gifts to someone – e.g. christmas presents, premiums on a life insurance policy or other regular or monthly payments to another person.

In order for this relief to work, the gift must be made out of normal expenditure and not be so high as to affect the donor’s standard of living in that they have to access their own capital to make good any shortfall in maintaining their standard of living.

Potentially Exempt Transfer – the Seven Year rule

Any gifts made to individuals will be exempt as long as there is a period of seven years between the date of the gift and the date of death.

If you die within seven years, and the value of the gifts exceeds the nil rate band, then IHT may be due on the gift. It would be the recipient’s responsibility to pay the IHT due on this gift.

If the value of the gifts is in excess of the Nil Rate band then “taper relief” may apply. HMRC give more information on taper relief here.

Gifts for Maintenance of the Family

Any lifetime gift for the maintenance of the spouse, child or a dependent relative may be exempt from tax as long as the gift is used for maintenance, education or training up to the age of 18, or to the end of full-time education if this is at a later date.

Other Reliefs – to be covered later

Other reliefs are available in respect of businesses, woodland, heritage and farmland – these reliefs will be covered in more depth at a later date.

Note

As with any issue relating to taxation, rules can and do change on a regular basis. Please ensure you take advice from a suitably qualified accountant or solicitor in respect of Inheritance Tax and the allowances and reliefs your own personal estate may enjoy.

Inheritance Tax – an introduction

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In the first of a three part series we will consider Inheritance Tax – a tax previously deemed to be paid by “those who trust their heirs less than they trust the government”!

In part one we will consider what the tax is, how much is payable and the situation facing married couples.

What is Inheritance Tax?

Inheritance Tax is a tax payable on the value of your estate following death, and some gifts made within the 7 year period prior to your death – the tax is payable on the value of your net estate – all assets less all liabilities after certain reliefs and allowances have been made.

On what Assets is it Payable?

When considering Inheritance Tax we need to consider the domicile of the individual who has died. Domicile is a legal concept which explains a person’s true home and there are various factors affecting it. It is a complex legal subject which is beyond the scope of this article.

Generally, if you were born to UK parents, then that is your domicile and the liability to inheritance tax is payable on the value of ALL your assets, regardless of where in the world they are situated.

If you are non-UK domiciled, i.e. you moved to the UK recently, then liability to inheritance tax is calculated with reference to your UK assets only.

The tax is payable within 6 months of death and it is the duty of the Executors of your Estate to complete and file a probate form. If the tax is not paid within the 6 month window then interest will start to be charged on the amount outstanding.

How much is Payable?

Inheritance Tax is payable at the rate of 0% on the first £325,000 in the current 2009/10 tax year, with tax at a rate of 40% payable on the value of your estate in excess of this “nil rate band”.

So for example, if your net estate is valued at say £500,000 the liability to Inheritance Tax after your death would be £70,000 (£500,000 minus £325,000 at 40% taxation).

What about for Married Couples? Didn’t the rules change for them recently?

Fortunately, the law as it stands allows for all transfers between spouses to be made with no immediate liability to inheritance tax. In these circumstances Inheritance Tax is payable on second death.

There is an exception to this rule though, and that considers the situation where a domiciled individual is married to a non-domiciled individual. If the domiciled individual dies first, the transfer to the non-domiciled widow(er) is tax-free up to £55,000. Over £55,000 inheritance tax is payable.

Since October 2007, both married couples and registered civil partners have been able to raise the threshold on their joint estates on second death by effectively transferring any unused nil rate band (personal allowance) from the estate on first death to the estate on second death.

It is important to remember that on first death, the transfer of estate from the deceased to the widow(er) is exempt from Inheritance Tax, so 100% of their personal “nil rate band” allowance can be passed along for use on second death.

Also remember, it is the percentage of unused allowance, not the value of unused allowance that is passed on to the second estate.

For example, say John dies in 2008 leaving £500,000 to his wife, but also leaving £156,000 to his son. The transfer to his wife would be free of Inheritance Tax as it is an inter-spousal transfer, and the amount left to his son would also be free of Inheritance Tax as it falls within John’s nil rate band, which is £312,000 in that tax year.

In this example, John has used 50% of his nil rate band allowance and therefore, on second death, the estate can be reduced by applying 100% of John’s widows’ nil rate band PLUS 50% passed along following John’s death. So in effect, on second death, the estate benefits from 150% of whatever the Nil Rate band is at that time!

Inheritance Tax is a complicated subject and every person’s circumstances are different – it is vitally important that you take advice from a suitable qualified solicitor or accountant before putting in place any plans to reduce your inheritance tax liability.

In the next section, we will consider the various rates and allowances which can be used to reduce the Inheritance Tax bill. The final section will outline the various methods by which the Inheritance Tax liability can be mitigated.