IHT Solutions

Common estate planning terms

Administration
Dealing with the affairs and estate of a person who has died, including collecting their assets, paying their debts and paying the residue to the people who are to benefit.

Affidavit
A document giving evidence which is sworn in front of a solicitor or other person who can administer oaths.

Agricultural Property Relief (APR)
Relief from Inheritance Tax for the agricultural value of some farms and farmhouses (the value if the land and buildings could only be used for agricultural purposes and not the open market value). Various conditions apply, including a minimum ownership period.

Beneficiary
A person or organisation who will receive assets from the estate of the deceased.

Bequests and Legacies
Bequests and legacies are names for gifts left in a will.

Business Property Relief
Relief from Inheritance Tax for businesses; a minimum ownership period applies and the business or interest in the business must fulfil the conditions.

Capital Gains Tax
This is tax which may be payable on a disposal (for example, when you sell an asset) if you make a chargeable gain. Usually you have made a gain if the asset is worth more at disposal than it was when you acquired it. A disposal is not only a sale for money’s worth. You will only pay Capital Gains Tax on capital monies (monies that you received) that do not form part of your income. The tax applies not to the value of the asset but to the increase in value.

Caveat
A notice entered at the Probate Registry – for example, if you have entered a caveat you will be warned before any Grant of Representation is issued.

Charity
A charity is an organisation that has as its aim purposes which are exclusively ‘charitable’ (as recognised by law), such as the relief of poverty or promoting education. Charities can be structured in a variety of ways – for example, as a company with a board of directors or as a trust fund with a board of trustees. Charities must be for the public benefit. Most charities must register with the Charities Commission. Charities are strictly regulated.

Chattels
Assets of a person other than land – for example, jewellery, ornaments, clothes, cars, animals, furniture and so on.

Codicil
An addition to a will which may change, modify, delete, extend or add to a will.

Deed of Variation
A document that can vary the division of a person’s estate after they have died, either by changing their will retrospectively or altering the persons entitled on an intestacy (where there is no will or the beneficiaries no longer exist). This must be done within two years of the person’s death.

Discretionary Trusts
A trust where the trustees can choose which beneficiaries (if any) should receive income and/or capital. They are a flexible way of setting property aside for the benefit of one or more persons.

Domicile
Your domicile will affect whether you pay Inheritance Tax on particular assets and can affect how much Inheritance Tax you pay. Domicile is not the same as residence.

Estate
All the property and assets of the person who has died.

Executor
This is the personal representative (see below) who has been appointed by the will or codicil.

Guardian
A guardian will have parental responsibility for any child (under 18) of whom they are named guardian. Parental responsibility means legal authority to act in relation to a child on such matters as medical care, where they are to live, their education and what surname they should be known by. Guardians may be appointed by a parent who has parental responsibility, an existing guardian or the Court. If you name a guardian in your will, the appointment may not take effect if your child has a surviving parent with parental responsibility.

Inheritance Tax
A tax on the value of a person’s estate on their death and also on the value of certain gifts made by an individual during their lifetime. You may be subject to Inheritance Tax on all your assets everywhere in the world if you are domiciled in England & Wales. Inheritance Tax also applies to most types of trust and may be charged when assets are added to or leave the trusts and on the ten-yearly anniversaries of the trust’s creation.

Intestate/Intestacy
The rules that govern where a person’s estate is to pass and who can deal with the estate in the absence of a will.

Joint Tenancy
A way of co-owning land and other property. On the death of one of the co-owners, the other takes their share by survivorship. For example, if you and your spouse own your home as joint tenants it will automatically pass to the surviving spouse when one of you dies. Your share of your house will not be part of your estate as it passes automatically.

Letters of Administration
A grant of representation where there is no valid will, or there is a will but no executor appointed.

Life Tenant
This is a person who is entitled to benefit from a trust during their lifetime. They cannot have the capital in the trust fund; they are entitled only to the income or enjoyment of the property. For example, if the trust fund was a house, the beneficiary would be entitled to live there.

Personal Representative
The person who is dealing with the administration of the estate of the person who has died.

Potentially Exempt Transfer (PET)
This is an outright gift by an individual to another individual or certain types of trust. If the giver (donor) survives the gift by seven years, it will become completely exempt from Inheritance Tax and will be outside the donor’s estate for the purposes of calculating Inheritance Tax.

Power of Attorney
This is a formal document giving legal authority from one person (the donor) to another (the attorney) so that the Attorney may act on behalf of their principal. Power of Attorney may be an ordinary General Power or it may be a Lasting Power of Attorney.

Lasting Power of Attorney
A Lasting Power of Attorney can relate to your property and affairs or your personal welfare, i.e. decisions about your medical treatment. In order to make a Lasting Power of Attorney you must have mental capacity to do so, which must be certified by a certificate provider. An ordinary General Power of Attorney will come to an end if you lose your mental capacity but a Lasting Power of Attorney will not.

Probate (Grant of)
The ‘Proving’ of a will by sending it to the Probate Registry.

Residue
The remainder of the estate of the person who has died after all their debts have been paid and any specific gifts they made under their will have also been paid.

Revocation (of will)
This is the process by which someone cancels or takes back a will (or codicil) made previously when they no longer intend that will to take effect. The Testator (person who made a will or codicil) must have mental capacity to revoke the will (or codicil). The effect of revocation is that any earlier will is resurrected and will take effect as if the later cancelled will does not exist. If there is no previous will, then the person revoking their will becomes intestate. Most new wills contain an explicit clause stating that they revoke any previous wills. There are formal requirements for revocation of a will as there are for making a will.

Statutory Legacy
If a person dies intestate with a spouse or civil partner, the statutory legacy is the amount of the deceased’s estate that their spouse or civil partner will receive. A common misconception is that the spouse or civil partner will automatically receive all of the estate of the person who has died intestate, but this is not necessarily the case if there are surviving children and it is therefore desirable to make a will to ensure that your spouse or civil partner inherits all that you intend them to take.

Testator/Testatrix
The person making a will (male or female).

A Trust
A legal relationship in which one or more persons hold property for the benefit of others (the beneficiaries). A trustee is the person who is acting in the trust and holds the property for the benefit of someone else.

A Will
The formal document known as a ‘testamentary disposition’ by which somebody confirms their wishes as to the division of their estate on death.

Free Guide to Inheritance Tax Planning, provided by Retirement Solutions Limited, Independent Financial Advisers. Welcome to our guide to Inheritance Tax, dedicated to helping you mitigate the potential effects of Inheritance.

Download your copy now.

Tax on your estate, whether you are considering the use of family trusts or alternative solutions. Your wealth might encompass businesses, property and investments in the UK and abroad that require specialist considerations.

Helping you protect your wealth is an important part of what we do, and one thing is certain, you need to plan to protect your wealth from a potential Inheritance Tax liability. Benjamin Franklin once said that ‘nothing is certain but death and taxes’, and thanks to Inheritance Tax, they’re not only certain, they’re intrinsically linked. Once only the domain of the very wealthy, the wide-scale increase in home ownership and rising property values over the past decade have pushed many estates over the Inheritance Tax threshold.

Hundreds of thousands of households are at risk of paying inheritance tax (IHT). The much-hated tax is charged at 40 per cent on the value of your estate over the nil-rate band threshold – £325,000 for an individual and £650,000 for a married couple.

Once you factor in the family home, holiday properties, buy-to-lets, savings and investments, many people’s estates are now over this limit.

But there are ways to escape IHT and a few simple steps could ensure that your heirs pay nothing. Here we explain how.

Make a plan

Make sure you plan ahead , many families do not start thinking about IHT planning until it is too late, so the first thing to do is to work out if the tax will be an issue.

Get married

IHT is not payable when an estate passes between a husband and wife, or from one civil partner to another. Even better, married couples or civil partners can transfer the unused element of their Inheritance Tax free allowance to their spouse when they die.

A couple would escape tax on £650,000 by doubling up the allowance this financial year. In April 2010, when the nil-rate band threshold rises to £350,000, a married couple would escape tax on £700,000.

Give away assets

Giving away assets during your lifetime is a simple and legitimate way to take the sting out of death duties, as long as you do it in time. You can gift up to £3,000 a year and it is immediately exempt from IHT, or £6,000 if you did not make a gift of this kind in the previous tax year.

Live for seven years

It is possible to make further tax-free gifts known as potentially exempt transfers (Pets), but you have to survive for seven years after making the gift.

If you die within seven years and the gifts are valued at more than the nil-rate band threshold, you apply taper relief. The tax reduces on a sliding scale if the gift was made between three and seven years earlier.be there, you have to pay a market rent, which can wipe out the tax benefits.

The law allows you to leave an estate worth up to £325,000 (2009/2010) without having to pay any Inheritance Tax upon it. This £325,000 is called the ‘Nil Rate Band’. After the first £325,000, or the Nil Rate Band, the remainder of your estate will be charged 40% Inheritance Tax (IHT).

From 9 October 2007, spouses and civil partners can transfer their Nil Rate Band allowances so that any part of the Nil Rate Band that was not used when the first spouse or civil partner died is transferred to the individual’s surviving spouse or civil partner for use on their death.

The transferable allowance is available to all survivors of a marriage or civil partnership who die on or after 9 October 2007, no matter when the first partner died/dies.

The increased Nil Rate Band does not replace the single Nil Rate Band available to the survivor that determines whether or not their estate is an excepted estate.

How the transfer will work

Where a valid claim to transfer unused Nil Rate Band is made, the Nil Rate Band that is available when the surviving spouse or civil partner dies will be increased by the proportion of the Nil Rate Band unused on the first death. For example, if on the first death the chargeable estate is £150,000 and the Nil Rate Band is £300,000, 50% of the Nil Rate Band would be unused. If the Nil Rate Band when the survivor dies is £325,000, then that would be increased by 50% to £487,500.

The amount of the Nil Rate Band that can be transferred does not depend on the value of the first spouse or civil partner’s estate. Whatever proportion of the Nil Rate Band is unused on the first death is available for transfer to the survivor.

Good Inheritance Tax Planning can help reduce or eliminate any IHT due by using exemptions and releiefs within the Inheritance Tax rules.

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