Where there's a will and an IFA there's a way out

IT is said that there are two certainties in life - death and taxes - but unfortunately even when you have departed this world, the taxman has not done with you.

Without careful planning, more inheritance tax than necessary could be paid on your estate, meaning loved ones miss out on the full benefit of your financial support after your death.

In the year to April 2005, the taxman captured £2.8 billion in inheritance tax (IHT), some of which could have been saved.

Inheritance tax now kicks in on estates valued at more than £275,000 (2005-06) and above this threshold it is set at a stinging 40 per cent. Although IHT was originally a tax on the rich, today - with the average house alone valued at £162,994 in July (Source: Halifax House Price Index) - more and more of us are liable for IHT on the estates of deceased family members.

A will is the first step in estate planning and should ideally be followed by IHT planning with the help of an independent financial adviser. If you die "intestate", ie without having written a will and have no surviving family members, the Government will take all your assets. If married, in English Law, the assets including property up to the value of £130,000 go to the surviving spouse plus belongings. Any other financial assets are divided between spouse and children. The whole process can take months.

However, research by Standard Life found 57 per cent of people did not have a will and of those who did, around half had failed to update it to include a change in circumstances.

By not updating your will, it means in death an unintended person, such as an ex-spouse, could inherit your assets. If you move home, have a baby, get married or divorced, you should update your will.

Life assurance policies, too, form part of your estate and if you don't have a will any benefits could go to the Government.

You can arrange to write a will through your solicitor or will- writing service, or could use a DIY will pack sold in the high street. The only problem with the DIY versions is that sometimes there may be ambiguities. The best way to ensure you have adequate IHT planning in place is to consult your financial adviser.

To illustrate, Barclays calculates that if no IHT advice is taken on an estate worth £750,000 left to three children, the Government would be the largest beneficiary, walking away with £194,800 and leaving the three kids with just £168,400 each. And you don't have to be what you would necessarily think of as "rich" to need IHT planning advice, all you need is an estate worth more than £275,000. Your estate is the total value of everything you own at your death - not just property - less any outstanding commitments.

There are a number of things you can do to avoid IHT, such as gift money to family, give money to charity or set up a trust.

The other option is to take out a life assurance policy in trust which wouldn't reduce your liability, but could help to pay the IHT bill when the time comes.

This does not constitute investment advice and you should seek independent financial advice if you are unsure as to the suitability of any investment for your circumstances. This article is based on AWD's understanding of tax legislation which is subject to change and readers should be aware that any changes made might be retrospective

For more information go to www.moneyextra.com

Willie Ewen, AWD Group, www.awdplc.com