In our regular wealth management feature, we asked Katharine Arthur, a partner with chartered accountants and tax advisers, haysmacintyre (business advisers to Boisdale) for a tax planning update.
Nothing can be said to be certain, except death and taxes.” A much over-quoted statement from Benjamin Franklin, but 2017 is proving no exception in continuing uncertainty, with Brexit and the General Election on June 8th. The truncation of this year’s Finance Bill in anticipation of the Election also leaves us wondering when and if some tax changes will take effect.
Neither death nor taxes are of course pleasant topics, and the sum of both, Inheritance Tax (IHT), can prove very costly. IHT is charged at 40% on your estate, subject to a nil rate band (NRB) (exempt amount) of just £325,000. The NRB has remained unchanged for many years, nearly doubling the number of estates subject to IHT this decade. All is not lost though, and planning to reduce your future IHT bill is possible: here I set out some ideas for you to consider.
There is an IHT annual exemption of £3,000, in aggregate on gifts to individuals is £6,000 for 2016/17 where you did not use this exemption in 2015/16 and can reduce your estate. Separately, gifts of up to £250 to any individual during 2016/17 are also exempt. Increased relief for gifts is available if made in consideration of marriage/civil partnership. Other gifts to individuals made during your lifetime, which are potentially exempt transfers (PETs), will be disregarded when calculating any IHT due on your death once you have survived seven years from the making of the gift. Gifts into trust can be considered up to your (unused) nil rate band of £325,000 without creating an IHT charge at lifetime rates. Regular gifts out of income which do not impinge on that needed to support your usual standard of living can be IHT exempt, even if made within seven years before death, and should be carefully recorded.
The existing threshold at which IHT become due of £325,000 will remain fixed until 2020/21.
YOUR MAIN RESIDENCE
An additional nil-rate band will apply where a residence is passed on to descendants on death. It is intended to start in April 2017 at £100,000 and rise to £175,000 by 2020/21. Any unused nil-rate band can be transferred to a surviving spouse for use on their death. The new band only applies to properties used by the deceased as their own residence, so buy-to-let properties will not be covered. The additional band will be tapered away for estates worth more than £2m. Measures will be introduced to allow those who downsize or sell their homes before death to benefit from the increased inheritance tax bands.
BUSINESS PROPERTY RELIEF
With appropriate reviews of investment risks, shares in unquoted trading companies, including those listed on AIM, can qualify for business property relief once held for two years thereby effectively removing their value from your estate.
Previously when your defined contribution pension was passed on following your death, before 75, it was subject to tax at 55%. You can, since April 2015, pass this on to anyone you choose, including non-dependents, free of tax. For people who die over the age of 75, their benefits can be passed on to anyone but will be subject to tax at 45%. Since April 2016 the rate of tax charged has been linked to the beneficiary’s marginal rate of tax. Leaving a pension to your beneficiaries can therefore be an efficient way to pass on wealth and plan for grandchildren’s school and university fees.
Katharine Arthur is head of tax at chartered accountants and tax advisers, haysmacintyre. She advises individuals, businesses and trusts on all aspects of tax compliance responsibilities and planning opportunities. Katharine is a member of the Taxation Committee of the Institute of Chartered Accountants of Scotland. www.haysmacintyre.com
IHT planning, like all tax planning, must be tailored to suit you circumstances and requirements.