One thing we all think about is the future and our savings. Many save up and create investments such as buying property or gold to then pass them on to their children and grandchildren in the hope that they have an easier life financially.

 Many, however, do not realise that if they do not plan correctly when it comes to their savings, they may actually make a big loss.

 A report suggested as much as £550 million could be wasted in inheritance tax this year by individuals not taking appropriate action, such as placing life protection policies under trust. The predicted wastage is £20 million more than last year and an increase of £78 million on 2013.

 To ensure you get the most from your savings, I spoke to Inheritance Tax Expert Peter Legg. Peter worked in the Revenue for 18 years and has his own consultancy firm dedicated to providing information on inheritance tax planning.

 Quite simply, inheritance tax is payable on the value of a person’s estate at the time of their death. So when a person dies, they have bank accounts, properties, jewellery etc, all of which is valued. If the value of a person’s savings exceeds £325,000, the amount will be taxed.

 In 2007, George Osborne proposed that the Conservative Party would increase the threshold to £2million per person, ultimately affecting the wealthiest, but this did not go through as we had a coalition government and the Liberal Democrat Party fought against the proposal.

 The threshold should increase to match inflation but it has not. As the economy continues to improve, inheritance tax applies to more and more people; particularly with property prices increasingly massively. So inheritance tax does not apply only to top-end earners anymore.

 However, the threshold has been frozen at £325,000 by the current government until 2018. There is a Budget Review on July 8th in which the threshold could change. If you pass on a family home, the family home allowance threshold to a matrimonial home is £500,000.

 Peter explained the tax is an emotive one because people spend their entire lives building their wealth and paying taxes, and then the Revenue takes 40% after one has paid all of their taxes. But it is a state duty and one can put various measures into place when it comes to planning.

 So how does somebody calculate the value of their assets? You have an executor of your will who has to apply for a grant of probate so that banks have proof. To get this document, the executor has to put a value at market and it is a very subjective valuation of the assets.

 There is a six month deadline from the death of the person to pay the inheritance tax, and after this you will have to pay with added interest.

 You can pass on assets as gifts to your loved ones which can in some cases exempt you from having to pay inheritance tax. A gift is the transfer of an asset absolutely to an individual or through a trust so the donor still has full control over it. There are anti-avoidance revisions in place such as the donor cannot benefit from the gift after.

 For example, if you gift your house to your children and they then pay for your groceries as a form of repayment, they cannot do this.

 Your children have to pay rent on the house if they have been gifted it, depending on their age. You have to go through usual landlord-renter regulations and have a valuation on both sides. Both parents and children have to haggle a genuine rental price for the house to be recognised as a gift. Parents then have to pay their children on a regular basis at the agreed valuation price.

 There is a 7-year rule that applies to gifts. If the gift is under the taxable threshold of £325,000, you do not have to pay inheritance tax. If you survive the gift by seven years, you are not liable to pay inheritance tax. So Peter stated it is better to gift and plan early rather than leaving it later and potentially dying before you are exempt from the taxable conditions.

 7-year rules apply as follows:

 7 year rule: if a person makes a gift to you, you have to survive it by seven years. I

3 years: then you die, you are fully liable as part of your estate to pay the full tax. If the value at date of gift rises from, for example, £200,000 to £300,000, you will still be taxed on the £200,000 value.

4 years: you pay 80% tax

5 years: you pay 60% tax

6 years: you pay 40% tax

7 years: you are totally exempt from paying inheritance tax.

 Peter’s key tip with planning was do not leave it until you are 92! Do it earlier rather than later.

 Another key tip Peter gave us was that it is beneficial to take out a Trust. Trusts enable you to stay in control of your finances. For example, Peter explained his client won the lottery but had a trust so that he could stay in control of his assets.

 He also stated that you really should write a will. If you do not write a will, rules that are dependent on your family circumstances will be put into place. Statutory provisions that dictate how your state will pass on include your parent receiving a lump sum, and half of the residuary of state, and your children will get the other half of the residuary of state.

 And last of all, Peter explained that taking out an insurance policy was another top tip given by Peter to ensure you secure your assets.

 Top Tips:

  1. Plan early!
  2. Write a will
  3. Manage your assets through a Trust
  4. Take out an insurance policy