Tax Planning
When planning for the future, tax considerations will inevitably play an important role.
Inheritance Tax
A brief summary of the rules at current rates is as follows:
At present, if your assets exceed £325,000 when you die, then Inheritance Tax is payable at 40% on anything over and above that amount. Those who you wish to benefit after your death may therefore be left with a large tax bill unless you take appropriate steps in your lifetime, and in your Will, to limit the tax paid.
Exemptions and Reliefs. There are certain exemptions and reliefs from Inheritance Tax, the most important of which are as follows:
- Annual exemption. You may give away up to £3000 each year.
- Small gifts. You may make gifts of £250 to other individuals.
- Normal expenditure out of income.
- Gifts in consideration of marriage. A parent may give £5,000 to each of their children, a grandparent £2,500 per grandchild, and anyone may give £1,000 to anyone else in consideration of their marriage.
- Gifts to spouses and civil partners. Exempt from Inheritance Tax.
- Gifts to charities. Exempt from Inheritance Tax.
- Agricultural Property Relief. Is available at up to 100% in relation to certain agricultural property.
- Business Property Relief. Is also available at up to 100% if certain criteria are proven in relation to business assets.
- Gifts. Any gifts, other than those mentioned above will potentially still be taken into account in calculating your estate, even though you have given them away. These gifts are known as Potentially Exempt Transfers as, if you survive 7 years from the date of the gift, the value of the gift will fall out of your estate completely. You should be aware that some gifts, such as gifts into Discretionary Trusts, are not potentially exempt, and Inheritance Tax is payable at 20% on the value of the gift at the time that the gift is made if it exceeds £312,000.
- Taper Relief can apply to reduce the amount of tax payable on lifetime gifts if you die more than 3 but less than 7 years after the date of the gift.
- Reservation of Benefit Rules. People considering making gifts in order to reduce tax liability should be aware that there are strict rules governing such gifts. If it can be shown that you made a gift but continued to use it, and benefit from it, as if it were still yours, then it will be considered as yours on your death. It will therefore still be part of your estate even though you gave it away.
Capital Gains Tax
If you are making gifts of anything other than cash, you must consider the Capital Gains Tax consequences if the value has increased since you have owned the item.
Capital Gains Tax is not payable on your main residence or chattels and can be held-over (postponed) if the gift is to a Discretionary Trust or is a gift of business assets.
If Capital Gains Tax is payable then you have an annual exemption of £9,600 which you can use to reduce any gain. If Capital Gains Tax is still payable it will be taxed at a flat rate of 18%.
