One in three houses are now over the Nil Rate Band (£285,000 for 2006/07 tax year).

There are ways in which inheritance tax liabilities can be reduced which effectively involves making a gift of capital and/or income in one form or another. However, many people find that their houses are their only asset and they have little other capital, and need all their income, so they have little room for making gifts.

Many people have, in the past, made gifts into Trusts so that after 7 years the capital is outside their estates, and beneficiaries receive the capital at a date decided upon by the donor, either at outset or later.

However, proposals in the Budget on 22 March made these Trusts less attractive by:

• Imposing a tax charge of 20% upon setting up the Trust.
• Charging 6% of the value of the Trust every 10 years.
• A proportionate exit charge being imposed when the capital leaves the trust between ten year anniversaries.

In addition, the Potential Exempt Transfer (PET) is now known as a Chargeable Lifetime Transfer (CLT).

These proposals have now been formally approved by the passing of the Finance (No 2) Bill 2006 and it seems that only gifts that are in excess of £285,000 will have the 20% charge and that the 6% charge will be applied to trusts' assets over the then nil rate band.

What this probably means is that gifts below the nil rate band can be put into a flexible trust without the 20% tax charge, and the 6% charge will only apply every 10 years on the trust's assets which exceed the then nil rate band.

It should be noted that these tax charges do not apply to Absolute Trusts.

Comment

The Government say that it is only the very rich that will be affected now and in the future, but many people not so very rich may have to rewrite their Wills at an obvious cost and suffer in that way.

Returning now to the subject of gifts in general, some find they cannot afford to gift away capital as they lose the right to benefit from it, especially if they need income. However, there are plans whereby capital can be gifted and an income from the capital can still be retained by the donor. In this way, the capital and any growth will be available outside the donor's estate but the donor will still receive an income.

If capital can be released from the donor's property and placed into such a plan then:

• The inheritance tax liability is reduced.
• The homeowner's/donor's income is increased.

Of course, trusts are not the only way to mitigate inheritance tax. Other means are by gifting away capital directly to children/grandchildren, setting up some sort of whole of life plan and investing monies into an AIM share portfolio.

Careful Will planning is essential, remembering that your total assets (onshore and offshore) are assessed for Inheritance Tax purposes and the advice of a solicitor should be sought. Indeed, your Wills and any existing Trust arrangements should be reviewed in light of the Finance Bill, with any alterations made before 6 April 2008.

The Financial Services Authority does not regulate Taxation and Trust Advice and Will Writing. The levels and bases of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor.