Wills and Inheritance tax planning,

Making financial decisions about wills and inheritance tax is something most tend to put off. Not only is it difficult to think about, but it is also a complicated area. While the following pointers should help you make financial decisions linked to wills and inheritance tax, you should seek professional independent advice if you are dealing with large sums of money.

Although it affects relatively few people, about £1.1 billion too much inheritance tax is paid each year. HMRC figures suggest an estimated 1.1 million people share inheritances of about £25 billion, with about £1.4 billion going to the tax office much of which could be avoided.

Each year about 53,000 people will die "intestate", meaning without having made a will. If you have no living relatives, or these cannot be traced, the money will go to the government.

GUIDE TO WILLS

Who can make a will?

Anyone aged over 18.

Why should you make a will?

A will lets those left behind know how you want your assets distributed. You need to make a will so you can ensure that your estate - which includes property, savings and possessions - is handed down to the beneficiaries of your choice.

If you die without making a will, there could be unpleasant legal wrangles and any money or property will be distributed according to the laws of intestacy. This does not recognise unmarried partners and, what's more, in cases of large legacies, a spouse does not automatically inherit everything.

How to make a will

Many people see a solicitor to make a will. This will mean you benefit from experience. But a consultation costs - typically about £60 for a 15-minute consultation, which should be enough time, in most cases, to get the job done. Some banks also offer help with making a will.

Can you do it yourself?

Yes, kits for writing wills are available from shops such as WH Smith for about £6. You can also do an online will.

Who else needs to be involved?

You will need to appoint executors, who are, typically, family members or lawyers. A will needs to be witnessed by two people who are not beneficiaries.

How often should a will be updated?

As your circumstances change, your will may need to be updated or altered. For example, if you marry and have children you may need to consider that, if you have children under 18, money should be left in trust for them.

Where should a will be kept?

A will should be viewed as a valuable item and be kept in a safe place, such as a bank safe deposit box. Copies are worthless and you should be aware of this if you ever need to send a will in the post, as only the original is recognised legally.

GUIDE TO INHERITANCE TAX

There are three main taxes that affect most people: income, capital gains and inheritance. The good news is that most people don't pay inheritance tax and HMRC states that 96% of estates avoid it. But it is an area that is now concerning far more people this is largely because of rising property prices in recent years. Many people, particularly in the south of England, now own valuable homes, and their total assets exceed the inheritance tax threshold.

Many peoplemanage to avoid inheritance tax, however, either through good planning or through leaving assets to their spouse (which means it is not payable).

What if I leave everything to my husband or wife?

No inheritance tax is payable, but you must both be domiciled in the UK.

What's the inheritance tax threshold?

This is £244,000 and, if you are liable for the tax, it will be levied at 40%. The sum-up to £244,000 is known as the nil-rate band.

What deductions are made?

Bequests to a spouse and UK charities are exempt, and outstanding bills, together with funeral costs, will also be deducted from the inheritance tax amount outstanding.

Who pays the tax office?

This will be paid by personal representatives. In some cases, children or heirs can find themselves having to pay the tax bill out of their own funds. Some people find themselves forced to take out bridging loans to meet tax liabilities because they are in the process of disposing of assets, which is why planning before you die can be very helpful.

When is money owed for inheritance tax payable?

It needs to be paid six months after the end of the month when the person has died. The authority to release the money held in the estate is known as probate in England and Wales and confirmation in Scotland.

How can I avoid paying inheritance tax through gifts?

The crucial issue with making gifts to below the inheritance threshold is that they are made seven years before you die - it is, in a sense, a clock ticking when you can beat the tax office.

What are the rules concerning gifts?

Although gifts made in the seven years before your death can be subject to inheritance tax, a number are exempt from tax. A list of these can be found in "An Introduction to Inheritance Tax", a leaflet available from HMRC. These gifts include: sums of money of up to £5,000 given as wedding gifts to children; maintenance payments to ex-partners and children; and other gifts of up to £3,000 made during a tax year.

Everyone has this £3,000 limit and, if it's not used up in one year, the amount can be carried forward to the next. In addition,small gifts of up to £250 can be made to any number of people.

After three years, the tax payable on a gift starts reducing until it reaches nil at year seven. This is known as taper relief.

The situation concerning gifts can be complicated and, again, it is an area where many people will want to seek advice from an experienced financial adviser.

What are "potentially exempt transfers"?

It is just another term used for gifts made within the seven-year period to friends and relatives. If you die within the seven years, the value is added to your estate; if you don't, then the gift is exempt. You do not have to tell the tax office about gifts you have made, but the recipient is required to report the gift within a year of the donor's death.

If the death is within three years, 40% is charged; after this, a sliding scale is applied. This is equivalent to a reduction of a fifth if the gift was made between three and four years before your death; another fifth if between four and five years; and so on, until the seventh year.

What are chargeable transfers?

Although there is no inheritance tax charged on a gift made seven years before you die, chargeable transfers can incur tax. These are sums of money transferred typically to trusts for which tax payable at 20% is normally levied on the excess above £234,000.

These can also be known as discretionary trusts, which are administered by trustees and where the individual may have no immediate right to income. Gifts to companies are also known as chargeable transfers.

What about giving away a property?

Giving away your home to children or relatives will not mean you are automatically exempt from inheritance tax. If you plan to keep living in it, you need to prove you are paying the new landlord the correct market rent. The landlord could also face a capital gain tax bill when the property is sold and the inheritance tax sum owned if you die within seven years of making the gift.

What about insurance policies? Many people have life insurance and if you die and the proceeds are paid into your estate, this money could be subject to inheritance tax if it exceeds the £234,000 limit. The way around this is to have the policy within a trust. Pension fund proceeds passed on to a spouse will also be free of tax.

What about gifts to charity?

Anything left to a UK charity is free of inheritance tax and this also applies to political parties and housing associations.

What about a trust to avoid inheritance tax? Trusts are a good way of avoiding or paying less inheritance tax and a financial adviser can assist with setting these up. They are not necessarily a total escape from tax though - dependants may still face a tax bill, although at a far lower rate than 20%.

Financial products are held within trusts and are typically provided by insurance companies. It is worth noting that some have higher charges than others.

You will need advice on how to set these up. These are best viewed as a way of giving away ownership of money, but still retaining some measure of control.

If you do not set up a trust, although you can transfer assets to a spouse tax-free, when they die and pass on wealth to the next generation, inheritance tax will be payable on everything beyond their £234,000 limit.

Life insurance can be written in trust. This applies mainly to whole of life policies. In the case of married couples, for example, a policy would be written on both lives, which pays a death benefit on the second death - when inheritance tax would arise.

You can also buy a policy called a "gift inter vivos" - meaning a gift between two living people - which is also written within a trust. This is a temporary type of cover, aimed at meeting an inheritance tax liability if you die within seven years of making a lifetime gift. The death benefit will reduce as the potential tax liability reduces.

LIVING ABROAD AND INHERITANCE TAX

A growing number of older people choose to retire in the sun, for example by moving to Spain or Cyprus.

But some people mistakenly believe they have escaped the clutches of HMRC by moving abroad. Although this means they no longer have to pay income or capital gains tax, they remain liable for inheritance tax.

Many people fail to understand the implications of going abroad. Just because you change your residence, it does not mean you change your domicile, which, in the case of many people, remains the UK.

Domicile, as opposed to residence, is a harder concept to define and is linked to "ultimate association". In some cases, it is possible to change your domicile and so avoid tax, but this is rare as it involves convincing HMRC that you have permanently severed all your ties with the UK and many people return to the UK before they die.

If you are considering moving abroad, you should seek advice without delay on how to tackle potential inheritance tax problems.

Some people could face a double whammy in tax bills - a charge from the UK and also from the foreign the European country where they were living. This does not apply to those who die in the UK.

Married women and property

Every year there are cases where husbands die and the wife presumes the property will automatically pass to her. But this only happens automatically if a property is registered in both names.

With older people, particularly, a home can be registered only in the name of the husband. If this is the case, there needs to be a grant of probate to dispose of the property and it then needs to be re-registered in the name of the surviving spouse.

This needs to be done with the Land Registry, takes several months and also incurs a cost. If you are a married woman and have been living in a property for many years, it is worth checking you are registered as a joint owner. An unmarried woman living with a man may have no right to a property if no will is made and she is not a joint owner.

CHECKLIST TO HELP WITH WILLS AND INHERITANCE TAX

• Work out the full value of your assets so you can plan how to avoid inheritance tax in plenty of time.

• Make a will.

• Check company benefits. Most employers pay a death in service benefit to the dependants of employees. It could be more tax efficient to ask an employer to pass this money on directly to children. If not, it will be passed on to the spouse's estate and become taxable when they die.

•· Don't forget to help your favourite charities.

• Remember the seven-year rule when it comes to making gifts. If you survive for seven years after making a gift, inheritance tax is not payable.

• Remember the £3,000 allowance for making gifts in a tax year. This allowance, if not used, can also be carried forward for one year.

• If children marry, they can receive up to £5,000 from parents and £2,000 from grandparents. Anyone else can give £1,000.

• There is information available on HMRC's website at www.hmrc.gov.uk and this also has details of help lines, where more assistance can be given.

• Your local Citizens' Advice Bureau should also be able to help with will and inheritance tax issues.

• Remember, some financial advisers will charge fees and others earn commission on the products they sell.

Bearing in mind you are likely to want advice and may not decide to buy any financial products, you may obtain better guidance if you are prepared to pay a fee.