Tag Archives: business
How To . . . Minimise Inheritance Tax
http://www.ft.com/cm…l#ixzz2hyRHU65O By Lucy Warwick-Ching Few taxes are quite as emotive – or as politicised – as inheritance tax (IHT). In 2007, George Osborne, the chancellor, promised he would “take the family home out of inheritance tax” by increasing the nil-rate band to £1m. He was promptly accused of “betraying ordinary families”. But as property prices rise, so too do receipts – the Treasury expects to collect £3.3bn in the 2013/14 tax year. And far from increasing, the nil-rate band is set to remain frozen at £325,000 until 2018. IHT is payable at 40 per cent on the value of an estate over that tax-free nil-rate band. However, according to unbiased.co.uk, more than £472m could be saved each year through careful IHT planning. FT Money explains how to cut the amount you pay to HM Revenue & Customs (HMRC). ——————————————- Make a will This is the first step toward avoiding IHT. “If you die without making a will, known as dying intestate, your assets are distributed according to statutory rules and this may result in a higher IHT bill than might otherwise arise. Plus, the intestacy rules might not fulfil your actual wishes,” says Julia Rosenbloom, an associate tax director with Smith & Williamson, the accountancy and investment management group. “With thoughtful tax planning you can pass on assets to family members more effectively,” she says. www.willwriters.com www.ipw.org.uk ——————————————- Transfer your assets Andrew Cameron, a private client lawyer and partner at Charles Russell, says all transfers between married couples and civil partners are exempt from inheritance tax. In terms of transfer to other people, any amount can be transferred or given away free of tax provided the donor survives for another seven years. However, it is important to note that the person giving the assets away cannot retain any interest in the assets. For example, if you give your house to your children, but continue to live there without paying a market rent, then the house will remain in your estate for IHT purposes. Also, keeping proper records of transfers is essential. www.charlesrussell.co.uk ——————————————- Donate to charity Since April 2012, estates that leave 10 per cent or more of their total assets to charity pay a reduced 36 per cent IHT on the remainder of the threshold. “The savings on the tax can fund the charitable donation so this could be particularly worthwhile if you want to make charitable donations anyway,” says Ms Rosenbloom. www.cafonline.org/legacies ——————————————- Set up a trust If you want to make a gift for tax planning purposes but do not want the beneficiaries to have the asset now, you could use a trust. Once the gift is made, any future growth is regarded as outside the estate for tax purposes. There are two main types of trust. Discretionary trusts are governed by trustees, whereas fixed trusts allow one or more people to receive the income, but the capital is held in the trust. In either case, you may like to leave a non-binding letter of wishes to your trustees, explaining how you would like them to exercise their powers. You can gift assets, including cash, property, or shares, worth up to the £325,000 IHT threshold through a trust without any tax charge. You can gift more than this, but you will pay a 20 per cent charge on the amount above the IHT when you establish the trust and a periodic charge of 6 per cent on all assets above the IHT threshold every 10 years. The trust fund may be subject to IHT when the initial capital is transferred out. This exit charge is based on the rate of IHT paid at the last periodic charge, the time elapsed since the last periodic charge and the amount being distributed from the trust. Solicitors can usually set up a trust; the cost is generally between £1000 and £5000, depending on complexity. www.smith.williamson.co.uk ——————————————- Use business property relief Investments in unquoted companies are exempt from IHT if you hold on to the shares for at least two years, under Business Property Relief (BPR). Companies listed on the Alternative Investment Market (Aim), also qualify for BPR, as do investments in companies that qualify as enterprise investment schemes (EIS). EIS investments allow you to invest up to £1m a year and you can carry forward the previous year’s unused allowance. You get 30 per cent income tax relief but any dividends are not sheltered from tax. Significantly, there is 100 per cent inheritance tax relief after two years, provided the investments are still held at the time of death. FT Money Show Relief at last for annuity buyers as gilt yields inch higher. Are emerging markets worth the extra risk? And how to minimise the impact of inheritance tax. Click here to download the FT Money Show podcast Ms Rosenbloom also says agricultural land which is rented out can become IHT-free after seven years and could be IHT-free after two years if you farm the land. If land and property cease to be used for agricultural purposes, agricultural property relief will no longer be available. If the new activity represents a business in its own right, then business property relief may be available instead, but this relief may not extend to the farmhouse. Where the new activity generates investment income rather than business income – this would include renting a farm cottage or leasing land for solar power, then both agricultural property relief and business property relief could be lost. www.hmrc.gov.uk/inheritancetax ——————————————- Death benefits Lump sums paid from pension plans upon death are normally exempt from IHT. However, it is important that they are not simply paid directly to a surviving partner otherwise the funds will become taxable on the second death. Ms Rosenbloom also makes the point that if you are wounded in military service and this contributes to your death then your estate may become IHT-free. www.hmrc.gov.uk/pensioners/passing-tax.htm ——————————————- Don’t wait until you die The easiest way to reduce your estate for IHT purposes is to make regular gifts during your lifetime. There is an annual “small gifts allowance” of £250, which you can pay to as many people as you like without triggering an IHT charge. A larger annual gift allowance of £3,000 is also available, and you can make one-off tax-free wedding gifts of £5,000 to your children (£2,500 to grandchildren). You can make further regular contributions from excess income. This is defined as any earnings that are not used for living expenses and would not cause a detriment to your standard of living if you gave it away. But you must be able to prove to HM Revenue & Customs that you have “spare” income above your needs. You can give more than the annual limits mentioned above, but you must then survive for at least another seven years for such gifts to be IHT exempt. If you die within this time, your descendants have to pay IHT on a sliding scale: 40 per cent if you die within the first three years, down to 8 per cent if you die after six years. Continue reading
Using AIM For IHT Purposes
AIM shares can be used to mitigate the death tax under business property relief rules. . By Nyree Stewart | Published Sep 30, 2013 Investing in AIM shares hit the headlines earlier this year when they became permitted investments within Isas, but perhaps less well known is the fact they can also be used for inheritance tax-planning purposes. Under the umbrella of business property relief (BPR) holding shares in an unquoted company can qualify for 100 per cent tax relief, providing they are owned for at least two years. For these purposes, companies listed on AIM are considered unquoted, even though they are technically listed on a stock exchange. However, as with most UK tax regulations, it is not that straightforward. Jonathan Gain, chief executive of Stellar Asset Management, explains: “Not all companies on AIM will qualify. There are a number of foreign-owned resources and mining companies which are managed and controlled in far flung places that are not necessarily EU managed or domiciled, so those types of companies won’t qualify.” That said, he points out this still leaves the investor looking to mitigate their IHT liability with more than 1,000 companies to choose from that have a UK presence or UK activity, which means they qualify for BPR. Marilyn McKeever, associate director in the private client practice at Berwin Leighton Paisner, adds: “Shares in unquoted trading companies are, broadly, exempt from inheritance tax. An individual can give such shares to a trust without the 20 per cent entry charge and for as long as the trustees hold the shares, the trust will escape the periodic and ‘exit’ charges.” But Paul Thompson, tax and estate planning consultant at Canada Life, adds that they can be quite volatile and so won’t suit every investor’s risk profile. Mr Gain agrees that the size of most of the companies on AIM are clearly not as substantial as say the FTSE 100-listed firms, but there are still some surprisingly large and well-known names such as Asos, Majestic Wine and Mulberry. “These are decent sized companies and are therefore set up to be managed well in good times and bad times and are much less volatile than much smaller companies.” On the issue of whether AIM investments are more volatile, he points out that people looking to use AIM for IHT mitigation understand that it will be a more volatile investment. But that can be managed by having the portfolio discretionally managed and can therefore mitigate the volatility by having a broad spread of holdings.” Other key points for using AIM shares as an IHT tool is to know which are the good companies and meet the management on a regular basis to understand what their plans are and to make a more informed buy or sell decision. Investing in AIM shares for IHT purposes is an alternative way to both mitigate IHT and provide some extra returns. But with all investments, the key is due diligence and understanding the risks involved in investing in a much smaller market. Nyree Stewart is deputy features editor at Investment Adviser Continue reading
When Should You Use BPR To Plan For IHT?
By Tony Mudd on Monday, 7 October 2013 Business property relief isn’t the right tool for everyone planning their inheritance but it’s well worth a look to see whether you might benefit from it. It has occurred to me that anyone who read my previous article Beware Government Bearing Gifts may have been left with the view that investing in businesses that qualify for Business Property Relief (BPR) brings with it such inherent liquidity and investment risks as to make it an area to be avoided. To use an old and often quoted adage that it would be akin to letting the tax tail wag the investment dog. If this was indeed the case then it would only be appropriate to outline the counter arguments; specifically the value BPR qualifying investments outside of an Individual Savings Account (ISA) wrapper can have. It is the case that Alternative Investment Market (AIM) shares qualifying for BPR offer a narrower range of investment options than the wider BPR investments available outside of an ISA wrapper and by definition lower diversification and higher investment risk. However I am going to look here at the tax benefits and the type of investors or situations where this type of investment may be of particular relevance to make my point. To remind readers, investments qualifying for BPR provide the simple but straightforward benefit of being exempt from Inheritance Tax (IHT) once they have been held for two years provided they remain in the hands of the investor at the point they become chargeable ie lifetime gift into trust or on death. Elderly investors or those in poor health Many IHT solutions either require investors to survive a period of seven years or rely on them being able to arrange life assurance. For elderly investors or clients in poor health the fact that the planning involving BPR is effective within two years and/or does not require medicals can be of significant value. Attorneys and deputies Where an investor loses mental capacity their financial affairs will either be dealt with by an attorney or deputy. In these circumstances due to the limitations imposed in relation to lifetime gifts (with the possible exception of Continuing Powers of Attorney in Scotland), the ability for the attorney to invest in the individual’s own hands in a BPR qualifying investment may be the only inheritance tax planning option available. Existing trusts Where the existence of trust assets will trigger a liability to IHT the selection of BPR assets as a trust investment can provide significant tax planning benefits. A liability to IHT could arise in respect of Interest in Possession Trusts or Immediate Post Death Interest Trusts on the death of a beneficiary or in respect of Discretionary Trusts for periodic (10 yearly) charges. Business owners Many investors who also run their own business will be well aware that the business itself offers the perfect shelter from IHT. The reason for this is that the business, assuming it is a trading entity, will qualify for BPR. However if and when the business is ultimately sold the protection from IHT will be lost. Through the use of BPR investments not only does this not need to be the case but the normal two year qualification will also not apply. BPR investments can also be used by husband and wife or those in civil partnerships where only one party needs to survive the two years that the investment is held and in combination with appropriately drafted wills whereby in some circumstances the tax advantages can be doubled. As with AIM shares qualifying for BPR in ISAs BPR investments outside of an ISA wrapper is not a panacea but for some clients in the right circumstances, well worth a look. Continue reading
