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Top tax tips for effective lifetime planning

on Friday, 12 April 2024.

Tax can be confusing and complicated - it's imperative to understand the importance of effective tax planning to make sure you 'get it right'.

Broadly speaking, Inheritance Tax (IHT) is levied on the value of your estate when you pass away, Capital Gains Tax (CGT) is payable on the profit made from selling assets, and Income Tax (IT) is charged on your earnings. Knowing the thresholds, exemptions, and reliefs available for each tax can help you plan accordingly.

Below we explore a couple of 'easy wins' that should be considered as part of an overall tax planning strategy.

Utilising your tax allowances as a couple

If you are married or in a civil partnership, you should make sure that you are both making full use of your personal tax allowances and basic rate tax bands. For example, if you or your spouse pay income tax at a lower rate than the other, it may be beneficial to transfer let property, savings or investments in part or whole to reduce the overall combined tax liability.

In addition to the potential income tax benefits, this can also apply when disposing of, or selling assets which are subject to CGT. Consider transferring part of the asset to your spouse before the sale if the annual CGT allowance remains unused or if they are subject to lower CGT rates.

Transfers between spouses are usually CGT neutral, meaning the spouse making the gift does not make a chargeable capital gain as part of the transfer as the receiving spouse receives it at their spouse's base value.

Before proceeding with this exercise, seek advice as it involves gifting capital, which may not be appropriate in all circumstances.

IHT - Consider lifetime giving

Gifting assets, or spending, during your lifetime can be an effective way to reduce the value of your estate for IHT purposes.

There are various gift exemptions and reliefs available, including the annual exemption, small gifts exemption, and gifts out of surplus income - all these options allow for the gift to be immediately outside of your estate.

For gifts not covered by exemptions and reliefs to be considered as outside of your estate for IHT purposes, you have to survive seven years from the date of the gift.

Consider establishing a trust if you have concerns about losing control over the gifted asset or the beneficiary's capability to manage it effectively. Trusts can be valuable tools for tax planning, allowing individuals to transfer assets out of their estate while retaining control over them. Certain types of trusts can also provide tax advantages or a solution to gifting where there is a complex family dynamic.

However, trusts are complex legal structures. Seeking expert advice before establishing one is crucial, alongside obtaining appropriate financial advice before any gifting, whether involving a trust or not.

Staying up to date

Tax law and regulations are ever changing and it's important to stay informed about the developments and how that may affect your overall tax planning strategy.

For specialist tax advice, please contact Rachael Armstrong in our Private Client team at 0121 227 3726. Alternatively, fill out the form below.

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