TAX PLANNING
"In this world nothing can be said to be certain except death and taxes"
(Benjamin Franklin)
Inheritance Tax (IHT)
Inheritance tax can apply to portions of the wealth you leave to your children and heirs, but it is relatively easy to avoid to the extent that it has been called a voluntary tax.
Nonetheless, many people fail to put in place a timely strategy for Inheritance Tax avoidance and the Revenue was expecting to net some £2.3bn in Inheritance Tax during 2009/10.
The individual tax-free allowance for Inheritance Tax in 2010/11 is £325,000 (£650,000 for a couple), and any additional wealth above those allowances can be subject to Inheritance Tax at 40%. Wealth included in your estate can be the value of your home, of insurances, and other properties and assets, less your debts and liabilities when you die.
Strategies to avoid Inheritance Tax
There are a number of strategies to avoid Inheritance Tax that form the basis of our Inheritance Tax advice:
- Gifting capital: Inheritance Tax gifts can be used for passing large portions of your wealth on to your children and heirs, with no Inheritance Tax liability although there are limits on how much you can gift each year.
- Trustee Investments: You can however gift unlimited capital into trust whilst maintaining an income from the capital. This is known as a Discounted Gift and Income Trust. You give away a sum of money to a trust, and this amount will not normally form part of your estate for Inheritance Tax purposes provided you survive for seven years. The money that you give away is invested by trustees. The trustees pay you a level of income that you select, out of this investment. The investment in the trust when you die belongs to the beneficiaries of the trust (possibly your children, grandchildren, or others if you wish)
- Simple Trusts: You can also reduce the value of your estate by hundreds of thousands of pounds by simply writing your life insurance in trust. This simple procedure involves completing a form that will remove the value of your life insurance from your estate, thus enabling you to avoid Inheritance Tax on your policy and cut the total value of your estate at the same time.
- Investments: certain types of investments such as those invested in the AIM Stocks (Alternative Investment Market) attract 'Business Property Relief' and so fall outside of your estate after 2 years. This type of investment is highly volatile and it is important that all other avenues are exhausted before electing this one.
By obtaining Inheritance Tax advice from Wallwork Ludlow, you could mitigate the whole of your IHT liability!
ARRANGE AN IHT REVIEWCapital Gains Tax (CGT)
Capital Gains Tax is a tax on the profit or gain you make when you sell or 'dispose of' an asset. You have an annual tax-free allowance for Capital Gains Tax known as the 'Annual Exempt Amount'.
The Annual Exempt Amount for the tax years 2009-10 and 2010-11 is:
- £10,100 for each individual
- £5,050 for most trustees
If your overall gains for the tax year are above the Annual Exempt Amount, you'll pay Capital Gains Tax on the excess.
From 23 June 2010 the following Capital Gains Tax rates apply:
- 18% and 28% for individuals ( the rate used will depend on the amount of their total taxable income and gains)
- 28% for trustees or personal representatives
- 10% for gains qualifying for Entrepreneurs' Relief
It might be helpful to start with exemptions. That is, situations and types of security that are not liable to CGT:
- Government securities;
- Qualifying corporate bonds - broadly, interest-based corporate loan stocks, excluding convertibles;
- Venture capital trusts - subject to conditions;
- Enterprise investment schemes - subject to conditions;
- Gifts to charity;
- ISAs and PEPs, whatever securities are held within them; and
- Transfers between spouses. This is not restricted to shares and applies to any asset so transferred.
Capital Gains Tax can therefore be avoided through careful financial planning:
- Remember your annual CGT allowance
- Realise losses to offset gains
- Exploit your annual ISA allowance and pension
- Don't sell your asset
- Transfer assets to your spouse (husband, wife, or civil partner)
- Carry forward capital losses
For advice on transferring/selling an asset or capital gains tax mitigation please contact us
Tax Planning via your Pension Arrangements
Pensions still represent a tax efficient way to provide a future income in retirement.
For directors and senior executives, careful forward planning prior to year end and tax year end is vital to ensure that tax allowances are maximised for both the company and the individual. Our year-end financial reviews are an essential method of focusing attention on these opportunities.
As well as this Personal Pensions offer tax relief on your notional rate of income tax i.e. 20% tax relief for basic rate taxpayers, 40% relief for higher rate tax payers and 50% relief for high-earners.
There are more tax advantages to being in a pension scheme:
Pension fund growth: The money you save (including the tax relief amount) in your pension will be invested by your pension scheme. Your pension fund growth may be largely free of tax (there are some exceptions).
Capital gains tax: Any rise in the value of the scheme's assets between what you put in and what they're worth at the end is called capital gains. This is tax-free.
Withdrawing funds as a retirement lump sum: You may be able to withdraw up to a quarter of the value of your stakeholder or personal pension fund as a tax-free lump sum. Your pension provider will be able to tell you whether or not you will be able to do this.
Inheritance Tax: Whilst you are not drawing any benefits for your Personal Pension (i.e. the fund is not crystallised) the pension will normally remain outside of your estate for Inheritance Tax purposes.
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