Tax planning is a crucial aspect of managing your finances. You can look for specialist tax planning lawyers near you here.
The two big taxes are inheritance tax and capital gains tax, and it’s important to take an integrated approach to minimise the overall impact on your wealth and future needs.
Inheritance tax (IHT) is a tax paid on the value of your estate when you die; in simple terms your estate refers to everything you own – your money, property, possessions, investments, and any other valuable things you have. Careful planning can help minimise the burden of IHT and ensure your loved ones inherit more. Capital gains tax (CGT) applies when you sell or give away things like property, investments, or personal possessions that have increased in value. While minimising IHT or CGT individually may seem appealing, a successful tax planning strategy needs to take a holistic approach, taking into account the broader financial landscape. Factors such as income tax position, business implications, future care funding needs, and overall financial circumstances must be considered to ensure an effective plan.
Tax planning can be daunting and complex – it can be tempting to put it off. Members of The Association of Lifetime Lawyers are specialist tax planning lawyers who can help you navigate this intricate landscape.
They are experienced in advising older and vulnerable people and can guide you through the tax planning process step-by-step, providing you with peace of mind and security for your financial future.
Inheritance tax (IHT)
IHT planning is essential to ensure your estate incurs no more tax than necessary once you die; there are numerous ways and means of minimising or eradicating your tax bill.
The basics of IHT:
- Nil rate band (NRB) – every individual in the UK has a tax-free allowance for inheritance tax known as the nil rate band, currently set at £325,000. This means that the first £325,000 of your estate can be passed on tax-free, and the remainder might be taxed at a rate of 40%.
- Lifetime gifts – if you make any gifts by giving away money, property or anything else of value within the seven years before your death this will reduce your available NRB.
- There are a few exemptions to this though, including any gifts made to your spouse or civil partner, gifts to charity, a combined annual exemption of £3,000 for gifts to individuals, small gifts of up to £250 per person to any many individuals as you like, gifts for maintenance to an older relative or child under 18, wedding gifts to close relatives (the amount varies based on your relationship to the recipient: up to £5,000 for a child, up to £2,500 for a grandchild or great-grandchild, and up to £1,000 for anyone else) gifts from surplus income (if you have a regular income and the gift doesn't affect your normal lifestyle, it's considered a gift from surplus income and might be exempt from Inheritance Tax.)
- Residence Nil Rate Band (RNRB) – in addition to the NRB, there is the Residence Nil Rate Band. This allowance is currently £175,000 (in 2023/2024) and will be frozen at this amount until April 2028. To benefit from the RNRB, you must own a property worth at least the specified amount and leave it to direct descendants. The definition of who counts as a lineal descendant is quite wide and includes children, grandchildren or other lineal descendants; the spouse or civil partner of a lineal descendant (including their widow, widower or surviving civil partner); a child who is, or was at any time, your stepchild; adopted children; a child fostered by you at any time; and children for whom you were appointed as guardian or special guardian when they were under 18.
- Taper relief – if your total estate exceeds £2 million, the RNRB may be subject to a taper, reducing it by £1 for every £2 your estate exceeds the limit.
- Gifts to spouse and charity – gifts left to your spouse, civil partner, or charity within your will are free from inheritance tax.
Effective inheritance tax planning strategies:
- Lifetime giving – consider making lifetime gifts to your loved ones. Gifts made more than seven years before your death have no tax impact on your estate.
- Utilising flexible freedoms – stay updated on tax legislation changes and make use of available flexible allowances to maximise tax efficiency.
- Life insurance – explore the option of life insurance to cover any potential tax bill on gifts made within the last seven years.
- Creating trusts – trusts can be a valuable tool for inheritance tax planning, providing control and flexibility over the distribution of assets.
- Business property investments – seek advice on how to take advantage of business property relief to reduce the tax burden on your estate.
- Gifts of the family home – making gifts of your family home where relatives live with you may be a viable strategy for inheritance tax planning.
- Gifts of holiday homes - making a gift of your holiday home and paying to use it going forward will take the asset out of your estate and the rental payments will also reduce your cash assets.
- Charitable giving – consider including charitable donations in your estate planning to reduce the inheritance tax liability.
- Making a considered will – having a well-thought-out and up to date will is essential to ensure your assets are distributed according to your wishes and in a tax-efficient manner.
- Making a lasting power of attorney – appointing an attorney ensures that someone you trust can manage your affairs if you become unable to do so.
Capital gains tax
Capital gains tax (CGT) is a crucial consideration in any inheritance tax reduction strategy; there would be no benefit to minimising your inheritance tax liability and creating a large capital gains tax liability, or vice versa.
- Taxable assets – whilst giving away cash is not subject to CGT, gifts of assets that have increased in value during your ownership may trigger tax. CGT is essentially levied on profit made from selling or gifting assets.
- Taxable gain calculation – if you gift an asset that has increased significantly in value, the taxable gain is calculated after deducting relevant costs and expenses associated with the asset.
- Annual exemption – each individual has an annual CGT exemption they can deduct from the taxable gain. However, any remaining gain beyond the exemption amount becomes taxable.
- CGT rates – the CGT rates vary between 10%, 18%, 20%, and 28% depending on the type of asset and the taxpayer's income tax position.
- Tax on chargeable assets – CGT is chargeable regardless of whether you sell or give away the chargeable asset. This means that gifts of assets may still incur CGT.
When devising an estate plan to reduce inheritance tax, it is essential to consider the impact of CGT alongside other financial aspects. An effective strategy should consider both taxes simultaneously to ensure a comprehensive and efficient approach. By seeking expert guidance from a member of The Association of Lifetime Lawyers, you can confidently manage your tax obligations and secure a more financially stable future for you and your loved ones.