When it was revealed that the Prime Minister's mother had given him £200,000 and that, if she survives seven years from the date of the gift, there will be no inheritance tax to pay, this unremarkable piece of tax planning was scrutinised in certain quarters as if it were a shady and immoral practice.
There is no question that the climate around estate planning and tax efficiency has changed in the UK. This was evidenced by the introduction of the General Anti Abuse Rule (GAAR) in 2013 which has seen a move away from the previous situation where it was generally accepted that taxpayers had the right to arrange their affairs in as tax-efficient way as possible GAAR seeks to counter tax-motivated arrangements where “obtaining of a tax advantage was the main purpose, or one of the main purposes, of the arrangements.”
However, despite this climate, the concept of arranging one's affairs so as to pass on as much as possible of one's hard earned cash to one's children remains an important goal for many. But given that anything but the most vanilla tax planning is likely to be heavily scrutinised by HMRC what can you still do to plan as tax efficiently as possible?
- Regular gifts out of income
Regular gifts out of surplus income are absolutely fine from an inheritance tax point of view. You may give a monthly allowance, for example to a grandchild at university, and there will be no consequences in terms of inheritance tax, provided that it can be shown that the money gifted was surplus income and that you were not leaving yourself short of funds. It is possible to sign a declaration each year to show that such gifts were made from surplus income.
- Small gifts
All individuals may make an annual gift of £3,000 free of inheritance tax. In addition you can make as many gifts of up to £250 as you wish, though only one of these can be given to any individual. There are additional amounts that can be given away on special occasions. For example parents may gift £5,000 each to a child on the occasion of their marriage.
- Use your pension and ISA allowances
If you have a spouse ensure they use theirs tooUp to £40,000 can be invested in your pension and £20,000 in an ISA each year free of tax, taking the totals to £80,000 and £40,000 respectively for a married couple.
- Make use of Business Property Relief (BPR) and Agricultural Property relief (APR)
If you own a business, then the shares may well qualify for BPR. However, even those who are not business owners can benefit from BPR by investing in AIM shares. If you have owned these for two years at the date of your death, there will be no inheritance tax payable on them. Those owning farms or agricultural land should look into the availability of APR.
Trusts are still useful tax planning tools, but you need to ensure that the value of the assets held in any single trust are below £325,000, as above that amount, there will be entry charges when assets are put into trust and a 10 year anniversary charge equal to 6% of the value of the assets in the trust. There will also be exit charges when assets leave the trust. The best way to make use of trusts is to set up a trust with less than £325,000 of assets, and keep an eye on the value of the investments. If they look likely to exceed £325,000 then a distribution should be made to the beneficiaries to avoid future charges.
- Giving your property away
Giving away your home and continuing to live in it is tricky – as this will be caught under rules called 'reservation of benefit'. If however you give the property away and then pay market rent to the person you have given it to then, provided you survive seven years the property will not form part of your estate for inheritance tax purposes.
- Make use of your Capital Gains Tax allowance
All individuals have an allowance of £11,100 per annum after which gains are charged at 28% for residential property and 20% on other assets (these figures are 18% and 10% for other assets).
For more information, please contact Angharad Lynn on 020 7665 0904.