The two big taxes are IHT and CGT- Inheritance Tax and Capital Gains Tax
The two big taxes are IHT and CGT- Inheritance Tax and Capital Gains Tax – but any tax planning strategy needs to consider the overall impact.
There would be no benefit to minimising your inheritance tax but leaving you with a large capital gains tax bill or vice versa.
Tax planning strategies also need to consider your income tax position, the impact on your business, the impact on your future needs including care funding and your general financial circumstances.
Tax planning is an area which people find particularly daunting and something that is often put off or not done at all.
SFE Tax specialists are here to guide you through this minefield.
Sound Inheritance Tax planning and advice is vital to ensure that no more tax than necessary is paid from your estate after your death. Inheritance tax is often referred to as a voluntary tax as there are numerous ways and means of minimising or even irradiating your inheritance tax bill.
First and foremost every individual in the UK has a tax free allowance for inheritance tax known as their Nil Rate Band (NRB). The NRB at present is £325,000.
This means that on death the first £325,000 of your estate can be left tax free. The remainder may, subject to careful planning, pay tax at 40%.
The available NRB is reduced by any lifetime gifts you have made over certain prescribed limits within the last 7 years. So for example if you gave away £100,000 the year before you die your NRB for the remainder of your estate is reduced to £225,000.
In addition to the NRB there is now a Residence Nil Rate Band (RNRB). This is currently £100,000 in 2017/2018 but will increase to £125,000 in 2018/19, £150,000 in 2019/2020 and £175,000 in 2020/2021.
To benefit from the RNRB you must firstly own a property that is worth at least the above figures. In addtion that property must be left as part of your estate to a direct descendent (children, grandchildren, their spouses, step children, foster children etc).
If your total estate exceeds £2million however then the RNRB is subject to a taper that reduces the amount by £1 for every £2 your estate exceeds that limit.
Any gifts you leave to your spouse, civil partner or to charity within your will are also free of inheritance tax.
As mentioned above any lifetime gifts you make within 7 years of your death will reduce your available NRB on death. This is subject to certain small exemptions including the £3,000 annual allowance, the small gifts exemption of £250 per recipient, gifts from surplus income and gifts on marriage to children, grandchildren or other relatives.
If you survive 7 years from the making of a gift to an individual there is no tax impact on that gift for your estate.
If the gift exceeds the NRB and you die within the 7 year period then the recipient of the gift may be faced with a tax bill on your death. In these circumstances consideration could be given to 7 year term life insurance.
Further Inheritance Tax planning strategies
These are numerous and specific advice should be taken but by way of an example these will typically include:
- Lifetime giving,
- Making use of flexible freedoms,
- Life insurance,
- Creating trusts,
- Business Property Investments,
- Making gifts of the family home where relatives live with you
- Making gifts of holiday homes and paying for their use moving forward
- Making a considered will
- Making a Lasting Power of Attorney
- Charitable giving
Capital Gains Tax
As above any strategy to reduce inheritance tax must consider Capital Gains tax.
Firstly giving away cash is not subject to a CGT charge but gifts of assets that have increased in value during your period of ownership may be subject to this tax.
The tax is essentially on the profit you have made and is chargeable whether you sell or give away a chargeable asset.
An example here is giving away a holiday home that has increased in value significantly. After deduction of relevant costs and expenses the remaining gain is then subject to tax.
In addition each individual has an annual exemption they can deduct but the remaining gain is then taxable.
The rates for CGT vary between 10%, 18%, 20% and 28% depending upon the type of asset disposed of and the tax payers income tax position.
How SFE Members can help
SFE Tax specialists will look at ways of reducing the value of your estate for IHT purposes whilst being mindful of the implication for CGT and your general financial health.
There must be a balance between reduce your future tax bill with not giving away too much.
Starting the planning process early, helps you to understand where you stand and what you need to do going forward. Each person’s situation is individual, so our SFE tax specialists will take the time to understand your circumstances and objectives and advise you accordingly.