The fortune you intend to pass on to your nearest and dearest could be severely reduced by inheritance tax. But, says Robert Outram, good planning can lower the bill markedly.
'Know that we have divided/ In three our kingdom, and 'tis our first intent / To shake off all cares and business off our state,/ Confirming them on younger years.'
So said King Lear. For Lear, rejected by his ungrateful daughters, estate planning turned into a real nightmare. It's still a good idea, though, particularly where inheritance tax is concerned. Benjamin Franklin tells us that nothing can be certain: 'except death and taxes.' The tax charge on your estate after death is far from inevitable, however - good advice and planning can reduce it drastically.
It is often said that inheritance tax is a 'voluntary tax.' That's sort of true, says Mike Warburton, head of tax at accountants Grant Thornton: 'In theory, it's an optional tax, but it's not as simple as that. You could say, though, it is only the stupid or ill-informed who pay large amounts of inheritance tax.'
The main device to avoid paying tax on assets over £200,000 is to give money away during one's lifetime. At present gifts up to any amount are exempt as long as the giver survives for seven years or more after the transfer. Gifts of up to £250 per recipient are not chargeable, and if the taxpayer can establish a 'pattern of giving' out of their normal annual expenditure over several years, this may be exempt too. Otherwise, there is a ceiling of £3,000 per annum on the total value of tax-exempt gifts (however many recipients).
It is hard to exaggerate the importance of making a will. Dying intestate will leave more of one's assets in the hands of the state. For large estates, a will should be planned in order to make use of the tax exemptions available. Changing the nature of ownership of one's house can also help to minimise tax. Most freehold property, if owned by a married couple, is held as a 'tenancy in common' which means that on the death of one partner it will automatically belong to the other. If the title is changed to a 'joint tenancy', part of the equity in the house can be transferred to children on the death of the first partner, again minimising inheritance tax.
Trusts can also be an important part of tax planning. An alternative to giving your children the money to spend right away is to transfer funds into a trust set up for their benefit. And trusts set up for the education and maintenance of minors are normally tax-free. If there's a need to build flexibility into a bequest, a discretionary trust can be built into the will, so that on death the estate is looked after, and divided in the most effective way, by the trustees.
Minimising tax should not be the only criterion for good estate planning, however, and there are important caveats to lifetime giving, as King Lear found to his cost. Says Nigel Gill, senior tax manager with Ernst & Young: 'With a home, if you give away control your children can decide to sell it, especially if there is a falling out in the family.'
The same can be true when the asset at stake is a family company. Elspeth May, partner in charge of personal financial services at KPMG, cites the example of a father whose two sons kicked him out of the family company: 'He went to his grave without speaking to either of them again.' May argues that since more people than ever plan to retire in their 50s, it's important to ensure that they retain enough to live to a comfortable old age: 'I'm a believer in the "spend and enjoy it" school of inheritance planning.'
KPMG's survey of business owner-managers earlier this year found that, while most were aware of the tax issues surrounding estate and succession planning, a large proportion had not done anything about it. The reluctance to contemplate one's own mortality is one of the main reasons why so many people do not even draw up a will, let alone put their tax planning in order.
The future of inheritance tax is uncertain. In the 1995 Budget, Chancellor Kenneth Clarke announced his intention to abolish it - when resources permit. He did raise the threshold by 30% to £200,000. In 1996/97 only an estimated one in 45 estates will pay tax. Shareholdings in unquoted family companies were also given 100% relief, providing they are held for two years or more. Inland Revenue figures show that inheritance tax is comparatively cheap to administer, though, and it raises around £1.5 billion for the Exchequer. Labour won't say what their plans for inheritance tax are, but it's a fair bet they'll be less sympathetic to inherited wealth than the present incumbents. With an election looming, the minds of tax advisers are being concentrated on estate planning once more.