TAX PLANNING
"In this world nothing can be said to be certain except death and taxes"
(Benjamin Franklin)
Inheritance Tax (IHT)
Inheritance Tax (IHT) is now an issue for an increasing number of people, with the family home often pushing families into the Inheritance Tax bracket.
Much can be done to help to reduce the Inheritance Tax burden. Remember, though, that IHT is more an issue for those left behind, rather than for you while you are living. When considering any IHT strategy, firstly ask yourself whether you are compromising your own security and freedom of action, and whether that is worthwhile in order to save tax and increase someone else's inheritance.
The most effective way to reduce Inheritance Tax is to give money away to other individuals, if you can afford to do so. Provided that you survive for seven years after making the gift, no Inheritance Tax is payable on the gift. Note, however, that once you have made the gift you must have no further access to it.
Special types of trust can be created that can often help to reduce an Inheritance Tax bill. But be careful. Although using the right trust arrangement connected to the right investments can be very effective in saving IHT, using trusts inappropriately can lead to unexpected and expensive consequences. Specialist tax planning advice is essential.
If giving lump sums away is not possible, it may be worth thinking about giving a regular monthly amount to fund a life assurance policy. The proceeds from the policy can be used to pay the Inheritance Tax when it becomes due. Again, great care needs to be taken in ensuring that the correct arrangements are made, so that the policy proceeds don't merely add to the IHT bill.
Some investments also have Inheritance Tax advantages. If this appeals, it is important to be sure that the investment is right for you in itself, and that you are not taking unnecessary risks simply to save tax.
Discounted Gift Trusts
This type of trust is designed to help to reduce Inheritance Tax liability, whilst allowing you to keep an income for as long as you live.
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)
.An advantage of this type of trust is that it can secure an immediate reduction in the size of your personal estate for Inheritance Tax purposes. This differs from many other arrangements, where the entire sum generally stays in your estate for a full seven years from the date of the gift
.Of course, you should be careful not to select too high a level of income, as this could lead to depletion of the fund.
This type of trust can be arranged as a discretionary trust, a flexible trust, or an absolute trust, and each has its own implications and potential complications. It is vital to choose the right type of trust, and you should not consider this type of arrangement without taking professional advice.
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 pre-yearend financial reviews are an essential method of focusing attention on these opportunities.
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