Time to review IHT planning

The changes to the inheritance tax rules for trusts have finally become law, after the government was forced to water down some of its initial proposals.

Certain trusts have emerged unscathed, but following the changes many trusts set up after 22 March 2006 – Budget Day – will now be subject to inheritance tax. The new rules mean that now is a particularly good time to review your will. Trusts are often created in wills and the changes could mean that your arrangements will not work in the way you expected.

The tax changes are not the only reason to review your will. Property and other asset values continue to increase far faster than the inheritance tax nil-rate band threshold, which is currently just £285,000. The rate of tax on death is a flat 40% above this level.

A recent study predicts that, by 2020, one in five homes will be worth more than the nil rate band threshold if it is just increased in line with retail price inflation. So far, calls for a large rise in the threshold have gone unheeded.

You should also look at any family trusts you may have. Many trusts for grandchildren that are currently exempt from inheritance tax may become liable to both the periodic and the exit IHT tax charges after 5 April 2008, depending on the age at which the child gains full control over the trust assets.

Despite some highly publicised calls for its abolition, inheritance tax is probably here to stay. It would certainly be imprudent to bet on its future disappearance, especially when it is still possible to save tax with some straightforward and highly effective planning.