Inheritance tax, they say, is a tax for people who love the government more than they love their own children.
This is because inheritance tax (IHT) is one of the most avoidable taxes of all, and can be slashed or avoided altogether with some good advice, and careful planning.
The current allowance before IHT is due is £325,000 per individual, which means £650,000 for a couple.
Given that IHT kicks in at 40% on funds above that threshold, a little planning can save your children thousands, or even hundreds of thousands of pounds! Many customers thinking of an inheritance think primarily of their home - but IHT applies to the value of your 'estate', which includes many other assets and investments as well.
Or to put it another way - even if your home's value is still below the threshold, your other investments could well make you liable for IHT by topping up the entire value of your wealth - known as your 'estate'.
What's in my estate? Your estate includes your house, money held in bank or building society accounts, investments (shares, funds, premium bonds), and everything owned in your name (cars, holiday home).
This will then be reduced through the repayment of your liabilities e.
g.
outstanding mortgage, loans and overdrafts, credit card owings, and your funeral expenses.
The remainder, above and beyond your £325k per person allowance, will be subject to IHT.
How do I calculate IHT? Working out your IHT liability is a simple calculation.
Let us suppose your assets, as set out above, consist mainly of a home valued at £350,000 and insurances and investments of £400,000, plus a further £50,000 for other items.
Then let us assume that your debts are £50,000.
This means you own £800,000 in assets, less owings of £50,000, so that your estate's value is £750,000.
If you are a couple, the first £650,000 of this is tax-free.
The remaining £100,000 is taxed at 40%, so that your children lose £40,000 in Inheritance Tax.
You see? Inheritance Tax is simple.
Not cheap, but simple.
Worst of all, or best of all, it is often avoidable - with a little forward planning.
Life insurance set up 'in trust' You can set up your life insurance cover 'in trust' and thus remove it from your estate.
In the above example, this would have considerably lessened this couple's tax liability, and might even have removed it completely.
Gifts and the 7-year rule One way to transfer some wealth to your children free of tax before you die is to gift it outright, but you must survive for 7 years after that for the sum to become tax-free.
Many do this by setting up a trust for grandchildren who will not have access to funds until they turn 18 - but the seven-year rule still applies.
In other words, proceeds from the trust become tax-free if you have survived for 7 years since it was set up.
You can also gift your house to your children before you die, again subject to the 7-year rule.
But beware - if you continue to live there, you must pay a rent at market rates, in order to exempt the inheritance from tax.
Some cash gifts are exempt from the 7-year rule.
You can gift your children £3,000 per year every year, and when they marry you may give your children £5,000 and your grandchildren £2,500 as wedding gifts.
Inheritance tax is regarded by many as a voluntary tax, since with good advice from an independent broker it can be much-reduced or avoided altogether.
However, it needs forward planning, and so it is prudent to act now.