Archive for the ‘Inheritance Tax’ Category

Get in Shape for 5th April

March 7, 2012

Year-end tax planning tips 

With further tax increases likely on the horizon, there really is no time like the present to take a step back and look at how you could reduce your taxes and improve your financial planning strategy.

The end of the current 2011/12 tax year is 5 April. We have provided an overview of the key areas you may wish to consider that could help you achieve a more secure future for you and your family.

 Make use of personal allowances

 Every person in the UK is allowed to earn a certain amount of money each year without paying income tax, known as a personal allowance. This tax year, the personal allowance is £7,475, with higher allowances available to those aged 65-74 (£9,940) and age 75 and over (£10,090)*. If you become 65 or 75 during the year to 5 April 2012, you are entitled to the full allowance for that age group. If you earn income above £100,000 you start to lose the personal allowance (at a rate of £1 for each £2 you earn above this limit).

 If you are married and one partner is not working, if appropriate, it could be beneficial to transfer savings accounts to them, so that you pay less income tax as a couple. If you don’t make use of your personal allowance in any tax year, you cannot carry it forward to the next year.

 ISAs allow you to save tax-efficient money. Within an ISA you pay no capital gains tax and no further tax on the income. You don’t even need to declare ISAs on your tax return. This tax year, you can invest up to £10,680 in a Stocks and Shares ISA or, alternatively, you can invest up to £5,340 in a Cash ISA and the balance in a Stocks and Shares ISA. Any allowance not used by the 5 April deadline will be lost forever. The value of tax savings depends on your circumstances and tax rules can change over time.

 Top up your pension contributions

 The annual allowance for the tax year 2011/12 is £50,000, inclusive of your own contribution and any other amounts paid into an approved pension scheme. Contributions paid by you to a personal pension plan or a stakeholder pension scheme are made net of 20 per cent basic rate tax. This means that for every £100 you want to save, you pay only £80. Tax relief of £20, topping your contribution up to £100, is then added by HM Revenue & Customs (HMRC).

 If you are a 40 per cent higher rate tax payer, you may be able to claim additional tax relief. If you are a 50 per cent additional rate tax payer, you may also be able to claim additional tax relief at your highest rate. Depending on how much you earn over the higher rate tax band, and your level of contribution, any additional rate tax relief would range between a further 1 per cent up to a maximum of 30 per cent.

 There has been much speculation in the media that higher-rate tax relief on pensions, or the annual allowance, may be reduced in the forthcoming Budget so it may be wise to make your contribution sooner rather than later.

 Plan for Inheritance Tax (IHT)

 Effective IHT planning could save your family hundreds of thousands of pounds. If you haven’t done anything about a potential IHT bill, now is the time to take action. Currently, IHT is charged at 40 per cent on anything you leave over £325,000 when you die (£650,000 for married couples or registered civil partnerships). With rising property prices in recent years, this has resulted in more people being subject to IHT.

 Start by writing a will, making it clear to whom you want to leave your money and possessions when you die. You may then want to try and minimise any potential IHT bill by giving regular small gifts away. Currently, you can give away a lump sum of up to £3,000 in each tax year without paying IHT – known as your ‘annual exemption’ – or £6,000 this year if you haven’t used last year’s allowance.

You also have a ‘small gifts exemption’, which means that you can make small gifts of £250 each year free of IHT. There is no restriction on the number of small gifts but they must each be to separate individuals. You cannot use your annual exemption and your small gifts exemption together to give someone £3,250.

 Reduce your capital gains tax (CGT) liability

 If you have made a taxable gain from the sale of property, shares, investments, businesses or any form of capital gain, make sure you don’t make unnecessary CGT payments. CGT is a tax charge that arises from the disposal of assets, such as shares or buy-to-let properties, charged at 18 per cent for lower and 28 per cent for higher rate tax payers. Every individual has an annual CGT-free allowance, which currently stands at £10,600 for the 2011/12 tax year.

 The limit applies to each individual, so if you are married or in a registered civil partnership you each have an annual exemption and should ensure that each of you maximises your CGT-free gains.

 There are different ways to reduce CGT bills, for example, equalisation or joint ownership of investments will transfer income to the lower-taxed one. This can be done CGT-free for married couples and registered civil partnerships. By transferring an asset into joint names, you could both make use of your tax-free allowance so that up to £21,200 of any gain can be tax-free in the current tax year. But the transfer to your spouse or partner must be a genuine outright gift, so this might not be a suitable strategy for everyone.

 It may also be appropriate for some unmarried couples to equalise non-CGT assets such as bank accounts, which could mean that it becomes possible to equalise or transfer assets on whichever gains are less than their annual CGT exemption. Even if an asset is only put into joint ownership the day before it produces income – for example, through interest or a dividend – that income will still be split equally between both owners.

 If you immediately sell employee shares that you get through a Save-As-You-Earn share option scheme, company share option scheme or enterprise management incentive scheme, you may have a CGT bill. Consider selling in several tranches, so that each year’s gain is within your annual tax-free allowance.

 If you have realised a capital gain over and above your annual allowance, it might be possible to defer the gain by reinvesting in an Enterprise Investment Scheme (EIS). These investments are also favourably treated for income tax and IHT purposes, but they are high risk and it is therefore essential to seek advice from your Independent Financial Adviser to ensure this is suitable for you.

 *The additional age related personal allowance is reduced by £1 for every £2 of income over £24,000, but cannot be reduced below the standard personal allowance.

 

Posted in Financial Life Planning, Financial Planning, Inheritance Tax, Money Matters

Five Practical Steps to Save Inheritance Tax

February 17, 2012

Step One – the basics

 Making a Will is vital – particularly if you are not married. If you die “intestate” (without a Will) your estate will be divided up according to the rules of intestacy. This is particularly important if you are not married because a “common law” spouse is unlikely to inherit partner’s money, or even their share of the home.

 For example, in England & Wales, your legal spouse only receives chattels and £250,000 plus a life interest in half the remainder of your estate; your children receive the balance at age 18. If you have no children, your spouse receives chattels plus £450,000 plus a life interest in half the remainder; your parents or siblings receive the balance. If you have no spouse and no children, your estate passes to your parents or then your siblings. If you have no legally recognised family, your estate goes straight to the Crown.

 Step Two – use your allowances

 You may gift up to £3,000 annually without being liable for Inheritance Tax, and unused allowances can be carried forward for one year. You may also make an exempt gift when someone gets married, this is £5,000 for parents of the bride or groom, £2,500 for grandparents and £1,000 for anyone else.

Regular gifts out of income are exempt from inheritance tax provided they do not adversely affect the donor’s standard of living. This provides a myriad of planning opportunities.

 Gifts to charities are exempt from Inheritance Tax.

 Step Three – using trusts

 Trusts have long been perceived as an easy way of brushing off an Inheritance Tax liability. If this was ever the case, it changed after the 2006 Budget, which closed down many planning opportunities. Under the new rules, Interest in Possession (IPP) and Accumulation & Maintenance (A&M) Trusts became subject to the same rules as Discretionary Trusts.

 Transfers into IPP and A&M trusts over the donor’s nil rate band (currently £325,000) are subject to an upfront 20% inheritance tax charge, and liable to a periodic charge of up to 6% every 10 years. Despite this, these trusts are still very useful planning tools as they allow the nil rate band to be gifted every seven years without giving rise to inheritance tax.

 Review your existing life assurance and pension policies; check that they are written under appropriate trusts to ensure that death benefits are not paid into your estate where they will become subject to inheritance tax.

 Step Four – consider life assurance

 Life assurance can be a useful way to facilitate enough money to pay your inheritance tax bill when it arises.  The policy is funded from “regular giving pattern” premiums which are usually exempt from inheritance tax, but it is essential that the policy is written in trust so that the proceeds fall outside your estate.

 Step Five – consider tax favoured investments

 Certain investments in businesses and smaller company shares are tax favoured when it comes to inheritance tax, provided that they have been held for two consecutive years in the past five years.

Some, such as Enterprise Investment Schemes, also attract income tax relief and favourable capital gains tax treatment. These investments however, will not be suitable for everyone, as they carry considerable risk to the capital invested – hence the favourable tax treatment. It is essential to seek Independent Financial Advice before embarking on these types of investment so that the risks can be tailored to the requirements of individual investors.

 Summary

 There are numerous opportunities for individuals trying to mitigate the effects of inheritance tax. Advice, timing and planning are essential in this area, where the old adage, “if you fail to plan, you plan to fail” holds true. Unfortunately the cost of failing to plan usually has four or more zeroes on the end.

 Contact Robin Clarke to review your inheritance tax position; robin@bluecoatwm.com or 01273 466533

 

 

Posted in Inheritance Tax, Legacy, Money Matters

Tax Matters

January 27, 2012

How much will your beneficiaries keep?

How much of your hard-earned money will the taxman get his hands on?

Inheritance Tax (IHT) in the UK may be one of life’s unpleasant facts but IHT planning and quality advice could help you pay less tax on your estate.

For the 2011/12 tax year, no IHT is charged on the value of your estate up to £325,000. This is known as the ‘nil rate band’. Everything above this is taxed at 40 per cent. This allowance is unchanged since April 2010 and has been frozen at this level until the end of this parliament. In real terms the allowance is decreasing.

If an individual’s IHT nil rate band is not used up on their death, the unused proportion can be transferred to their surviving spouse or civil partner. Please note that the additional nil rate band has to be claimed by the Executor’s  of the widow(er)’s Estate and that HMRC will require the following documentation (often 20 or more years after death);

  •  a copy of the first will, if there was one
  •  a copy of the grant of probate (or confirmation in Scotland), or the death certificate if no grant was taken out
  •  a copy of any ‘deed of variation’ if one was used to vary (or change) the will

Assets passed between spouses or registered civil partners are exempt from IHT (assuming the spouse or partner is domiciled in the UK), regardless of the worth of the assets and how soon you die after acquiring them.

Reducing your family’s tax bill

Any amount of money you give away outright will not be counted for IHT if you survive for seven years after making the gift. If you die within this period, the amount of the gift will be included within your estate. Taper relief may apply in these circumstances and can reduce the amount of IHT due. If you start gifting early enough each individual can reduce their Estate by £1.3 million over a 28 year period (four times IHT exemption at current levels by gifting every seven years). The type of Trust that you use should be carefully considered – many allow you to retain an interest in an income, some make this “income” available in a similar way to keeping hold of your capital, others allow loans to widow(er)s. Independent Financial Advice is essential as the cost of various Trusts differs enormously.

Certain assets are currently exempt from IHT. Business assets such as privately owned businesses, furnished holiday lettings, some commercial property and certain qualifying investments such as Enterprise Investment Schemes (EIS) and AIM listed shares are exempt, provided they have been held for two years continuously, during the previous five years. Investors should note that the IHT tax concession is given on these investments because they tend to be more risky than mainstream investments. EIS investments also benefit from income tax and capital gains tax concessions as these are perhaps the most risky.

Gifting your nil rate band into a Will Trust still has advantages despite the ability to transfer any unused nil rate band to the surviving spouse. It ensures that the assets cannot be used to pay for Nursing Fees, or squandered by a subsequent spouse, while allowing the survivor to enjoy income or the benefit of residing in the matrimonial home. Many Will Trusts allow the survivor access to capital by way of loans that accrue interest and count as a debt against their Estate, further reducing the final IHT liability. Good advice is essential in this area and Trustees should be chosen with care as they will control the Trust’s assets.

Conclusion

Inheritance Tax is often described as a voluntary tax as, with careful planning, steps can be taken to avoid it altogether or, at worst, mitigate the effects of it. The old adage, “if you fail to plan, you plan to fail”, is perhaps most pertinent in this area of Financial Planning as the cost of failing to take action can be enormous.

Posted in Financial Planning, Inheritance Tax, Legacy, Money Matters

Trust in your future

December 15, 2011

 

Trust in your future

Passing on wealth in a tax-efficient manner

Inheritance Tax (IHT) is an issue affecting increasing numbers of households across the country. Changes introduced in Chancellor Alistair Darling’s pre-Budget report in October 2007 have made it possible for couples and civil partners to combine their individual IHT allowances, so that it is easier for them to protect their families’ inheritance.

IHT is currently payable at 40 per cent on any amount over £325,000 – the nil rate band (tax year 2011/12). The nil rate band is the term used to describe the value an estate can have before it is taxed (£650,000 for married couples). So if you have an estate worth £500,000, £175,000 is taxed at 40 per cent, meaning the IHT bill would be £70,000.

Estate planning tool

Trusts are a well-established and useful tool in estate planning. A trust allows someone (the settlor) to make a gift of assets, without completely losing control of those assets, by placing them with a third-party (the trustees) to administer on behalf of the trust beneficiaries.

The value of a trust in IHT planning is that it enables you to reduce the wealth on which your beneficiaries will pay IHT without making a valuable outright gift – something you might be reluctant to do if the potential recipients are quite young or might take an irresponsible approach to a substantial sum of money, for example.

Passing on wealth

Other trusts, known as discretionary trusts, allow the trustees to retain control of the assets under the terms of the trust, which set out when and what the beneficiaries receive. They can also allow the trustees to react to changes in the beneficiaries’ circumstances. Again, the settlor can be named as a trustee.

Bare (Absolute) trusts

With a bare trust you name the beneficiaries at the outset and these can’t be changed. The assets, both income and capital, are immediately owned and can be taken by the beneficiary at age 18 (16 in Scotland).

Interest in possession trusts

An interest in possession trust is one where the beneficiary of a trust has an immediate and automatic right to the income from the trust after expenses. The trustee (the person running the trust) must pass all of the income received, less any trustees’ expenses, to the beneficiary.The beneficiary who receives income (the ‘income beneficiary’) often doesn’t have any rights over the capital held in such a trust. The capital will normally pass to a different beneficiary or beneficiaries in the future. Depending on the terms of the trust, the trustees might have the power to pay capital to a beneficiary even though that beneficiary only has a right to receive income.

Discretionary trusts

Here the trustees decide what happens to the income and capital throughout the lifetime of the trust and how it is paid out. There is usually a wide range of beneficiaries but no specific beneficiary has the right to income from the trust.

 

This article is for your general information and use only and is not intended to address your particular requirements. It should not be relied upon in its entirety. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation.

 

Posted in Financial Life Planning, Financial Planning, Inheritance Tax, Legacy, Money Matters