Where there's a will, there's a way

It is still true that seven out of ten of us have not made a will. By making a will you are choosing who benefits from your estate. However, the process should open up a whole host of other questions, not least of all inheritance tax.

It should also evaluate assets and how they sit in your estate. For example, are all your life assurance policies written in trust? In my experience, that happens very rarely.

Structure of ownership of property can also have a detrimental effect on your tax position on death. The last Budget introduced unexpected and radical changes to the inheritance tax (IHT) regime for trusts, with effect from March 22, 2006.

While many consider that trusts are used only in exceptional cases, in reality, they have become important for many relatively affluent individuals in planning their wealth, and are often the underlying component of wills and many investment products.

Under the new rules, transfers to nearly all new trusts and additions of assets to existing trusts will be subject to IHT. The tax will be payable on transfers into and out of the trust, and on every ten-year anniversary of the trust's creation.

Anyone considering creating a new family trust, or adding to or making distributions from existing trusts, should seek advice on the possible impact of these proposed changes.

Also, all but the most simple of wills should be reviewed. There is some concern the changes might reflect the start of harsher IHT penalties in future, making it advisable to decide on a prudent action plan now for reducing present and future exposure to IHT.

With the options for mitigating tax on non-business assets significantly reduced, it is more critical than ever to plan early and to preserve or bank the 100 per cent relief available on qualifying business and agricultural assets, including unquoted shares, family businesses and shares quoted on the Alternative Investment Market.

A staggering 2.6 million homes are now affected by inheritance tax. This figure is set to rise to four million by the end of the decade. Within five years, 12 per cent of the adult population of the UK will become liable on death to pay this tax! Between 1997 and 2006 the threshold was increased broadly in line with the retail prices index, rising by 22 per cent compared with house price inflation of 129 per cent.

As a result, the Government this year estimates inheritance tax revenue to be £4bn! Mitigating inheritance tax with a discretionary will trust' is perfectly legal and leaves you in control of your assets and income while you are alive.

Just as important, it leaves you or your spouse in control of assets and income when one of you dies.

So unless you actually want to leave up to 40 per cent of the value of your house and savings to the Inland Revenue, this should be the cornerstone of your IHT planning.

A discretionary will trust includes two expressions of wishes, two wills, two enduring power of attorneys, severance of tenancy of the property to tenants in common' and nil rate discretionary trusts with IOU loan notes.

Including provisions for a nil rate band discretionary IHT trust in both wills means that upon first death, an amount not exceeding the IHT threshold is left to a discretionary trust, wherein the trustees may decide who from the beneficiaries may receive any income or capital from the trust.

In this way, subject to the agreement of the trustees, the surviving spouse may have access to assets in the trust. Where the estate consists of property, it is important that it is held as tenants in common' rather than joint tenants.

This is to ensure the share of the property can be dealt with in accordance with the instructions in the will, rather than to pass directly to the surviving joint tenant.

Including a nil rate band discretionary IHT trust in the wills of a married couple, or civil partners, could reduce the estate's inheritance tax liability by up to £114,000.

Contact Dennis Mizzi or Tony Powell on 01865 849050