Articles
Preserving Wealth through Tax Planning
By Tal Kalsi, Senior Partner at Saffron Tax Partners LLP
We are often so busy trying to create wealth that we give little thought to preserving it, not only for our own benefit but for generations to come. Whilst clearly views will differ to what extent we should enjoy what we earn to the fullest, Inheritance Tax (IHT) is a hugely emotive topic, generating newspaper column inches significantly out of proportion to the amount collected. As a result, potential mitigation of IHT is always a hot topic.
The first and most crucial point that should be made is that IHT is essentially, but not exclusively, a tax on assets held on death. At the current rates, if the value of such assets amounts to £325,000 or less, then no charge to tax arises. Furthermore, it is generally the case that assets which pass to a spouse/civil partner on death are exempt; this can then result in a doubling of the “nil rate band” on the second death. It can therefore be seen that for a large proportion of the population, IHT will not be a consideration.
Nevertheless, as has been well documented, the significant rise in average house prices over previous years means that a still sizeable number of people could be potentially within the IHT net. For example a moderately wealthy person with net assets of say £6m, could potentially be exposed to Inheritance Tax of over £2m. It is therefore more important than ever to ensure that Wills are kept up to date, so that assets are distributed not only in accordance with the deceased’s wishes, but as tax-efficiently as possible.
There are also lifetime measures that can be taken in order to mitigate future IHT liabilities, some of which are summarised very briefly as follows:-
- Making gifts to utilise the annual exemption, currently set at £3,000 and doubled if unused in the previous tax year.
- Making gifts on marriage, current exemption rates being £5,000 if made by the parents, £2,500 if made by grandparents and £1,000 if made by anybody else.
- Regular gifts made out of after-tax income may also be fully exempt from IHT, being viewed as “normal expenditure out of income” if it can be shown that these are regular gifts, and do not adversely affect the normal life style of the donor.
- As already mentioned, IHT is substantially a tax on death, and consequently most lifetime gifts will not give rise to an immediate tax charge. Instead, they will normally be “potentially exempt transfers”, only becoming chargeable if the donor were to die within 7 years of making the gift. It will therefore be seen that substantial amounts might be given away by those with a reasonable life expectancy, having carefully reviewed their own future needs to help reduce the IHT potentially payable on death.
- Reliefs are also available of up to 100% on Business Property and Agricultural Property.
- Finally, rather more complex tax planning can be undertaken through the use of Trusts. These arrangements can be used to maintain some degree of control over assets given away, which might be especially important for gifts made to children.
The extent to which the above points will be of interest will, of course, depend on the level of potential tax liabilities. They are, however, intended as a very brief outline of some extremely complex tax legislation, and professional advice should be taken in advance of any transactions.
Tal Kalsi is a Senior Partner at Saffron Tax Partners and can be contacted on 020 7337 6025.
October 2010