Tag Archives: gift

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 →