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As Benjamin Franklin said, 'the only things that are certain in life are death and taxes', a statement which has stood the test of time and Inheritance Tax touches on both of these issues. When you pass away, an assessment is made as to the value of your estate, including cash, property businesses and so on. If this exceeds the current nil rate band (set at £325,000 until 2014) then your family will have to pay 40% tax on all other assets.

This tax bill can be reduced through various methods, but you must consider the impact of these options and do an Inheritance Planning Review as there is rarely one solution which suits most people. For example the easiest way to avoid it is to gift your money away and live longer than 7 years so that the gift is completely outside your taxable estate. However there are obviously issues here regarding whether you would like access to this money again, whether it is wise to give your beneficiaries large amounts of money when they are young and so on.

If you are confident that you have enough income and capital to be able to afford to give money away in order to reduce an inheritance tax bill, then there needs to be serious consideration given to which type of trust structure to use. For example you may wish to gift all the money but still receive an income from the investment, or you may want to retain access to the capital should you need it but place all the future growth outside your estate immediately (therefore avoiding having to wait 7 years on this part of the money). You may not want an income but would like the option to start an income in the future or you may like to receive an immediate 'discount' in the inheritance tax you'd pay if you were to die within 7 years of setting up the trust. Therefore with so many options available it is worth considering your situation, your future objectives and the potential impact of any trust you put in place.

Since Gordon Brown introduced Chargeable Lifetime Transfer charges to Discretionary Trusts holding over £325,000 it has meant people need to plan their strategy extremely carefully in order to avoid having to pay a 20% tax charge on money going into the trust. One solution would be to use a Bare Trust instead, but this brings up issues regarding the plan being considered as part of the beneficiaries estate should they get divorced, go bankrupt or even pass away themselves and the money be charged inheritance tax twice!

Therefore we always advise people to seek professional independent financial advice for inheritance planning review before making any plans regarding their inheritance tax strategy.

Find more information about how to do inheritance planning review from the website of Inheritance Planning Review.

By Aravind Ramesh
Article Source: http://EzineArticles.com/?expert=Aravind_Ramesh