Many were expecting the chancellor to announce changes to inheritance tax (IHT) in his Autumn Budget, however, like capital gains tax (CGT), the rules have remained broadly the same as last year.
That means that each tax year individuals may make gifts of up to £3,000 in total and that amount is not included in their cumulative total of gifts for IHT. Even if the £3,000 annual exempt amount is exceeded, provided it is an outright gift to an individual, there would be no inheritance tax payable provided the donor survives for 7 years.
Remember that the gift of an asset other than cash may give rise to a capital gain and CGT may be payable where the asset has increased in value. Note however that if you give away a business asset such as shares in your trading company it is possible to make a claim to hold over the gain so that no CGT is payable. We can of course advise you on the procedure to follow.
Regular gifts out of your income is tax efficient
One tax planning opportunity that many thought the chancellor might restrict was the exemption from inheritance tax for regular gifts out of an employee’s income. Inheritance tax is designed to tax transfers of capital so if the donor can demonstrate that the gifts are made out of surplus income then the transfers are not taken into consideration for IHT. The exemption applies where there is a regularity to the payments, such as a standing order to pay school fees. HMRC will also require proof that the payments are paid out of post-tax income and do not limit the donor’s normal lifestyle. Detailed records are required, and we can help you with a suitable spreadsheet.
Trust planning opportunity still available
Another tax planning strategy that is still available despite rumours that it would be closed in the Budget was the CGT hold over relief when assets are transferred into or out of a trust.
This relief currently enables a non-business asset, such as an investment property, to be transferred without paying CGT. The relief applies where the transfer is subject to inheritance tax, but where the value transferred is no more than the £325,000 IHT nil rate band the transfer of the asset can take place without IHT or CGT being payable.
For example, Colin, a higher rate taxpayer, wants to gift his adult daughter Liz an investment property worth £300,000.
The property cost him £100,000 a number of years ago. If he were to transfer the property to Liz directly there could be up to £56,000 CGT payable on the £200,000 gain.
If the property is transferred to a trust for the benefit of Liz then the transaction would be immediately chargeable to IHT but covered by the £325,000 nil rate band. The resulting gain could then be held over so that no CGT is payable.
At a later date the property could be transferred from the trustees to Liz providing another opportunity to hold over the capital gain.
If this strategy may be of interest to you please get in touch. You will also need to instruct a competent trust lawyer to set up the trust on your behalf.
Kate Thorburn is Private Client Tax Manager and can help with your personal tax-related queries, please feel free to call 01242 776000 or email tax@randall-payne.co.uk.
