Vantis has given its top tips for passing money on tax-free
11 ways to minimise inheritance tax
Thursday, 25 Jan 2007 09:52
Tax adviser Vantis has suggested 11 ways for parents and grandparents to pass money on and minimise their inheritance tax liability.
Figures released this week show 41 per cent of households are now liable for the inheritance tax - which takes 40 per cent of all assets passed on above its £285,000 threshold (
full story).
And with this in mind, Vantis has released a series of tips to let parents and grandparents pass cash on to their nearest and dearest in a tax-efficient way.
"It’s difficult for many to now save the capital to build up a substantial nest egg," said Alan Ford, client partner at Vantis.
"However, there are some useful tax incentives that can be used to give children and grandchildren a helping hand.
"We would urge people to use new year to review their finances and investigate tax efficient methods of passing capital on to the next generation. Professional advice should always be sought in advance."
Tax efficient tactics for passing on cash
Personal allowances - Children have their own personal allowance, which is currently £5,035. Capital gains are tax-free for everyone including children if they do not exceed £8,800. Grandparents should consider building a nest egg for grandchildren by starting a regular savings plan on their behalf. However, income on gifts by parents doing something similar remains taxable on the parents.
Child trust fund - Parents can contribute towards the permitted £1,200 a year investment to a child trust fund account for a child born after August 31st 2002 for whom child benefit is payable. No withdrawals are allowed until the child is 18.
Stakeholder pensions - For the long term, consider starting a stakeholder pension for your child or grandchild. The child cannot access the funds until retirement, but this will provide a good base for their retirement fund. The government will add basic rate tax relief to the amount that you contribute. There are limits to the amount that can be invested - the current limit is £3,600 gross a year, which means a monthly contribution limit of £234 (£2,808) allowing for tax relief.
Holding funds in trust – Grandparents could consider holding funds in bare trust for their grandchildren. This means you retain control over the investment, but pay tax on income earned from it at the child’s rate rather than yours. If this is done, you have total control over when the child gets hold of the money up until the age of 18. And in most cases money you put in trust no longer counts as your estate for inheritance tax purposes. Professional advice should be sought as to the most appropriate trust for your purposes
Small gifts - In any tax year, an individual may gift up to £250 to any number of donees free of tax. Each grandparent, for example, could give each of their 8 grandchildren £250 annually over a twenty year period. This would dilute their combined estates by £80,000 and secure an Inheritance Tax saving of £32,000 on current rates.
Gifting your annual exemption - In any tax year, an individual can gift up to the annual exemption of £3,000 to individuals or trusts of their choice. Any unused exemption from the previous tax year can be carried forward to the current tax year but no further. Over a 20 year period, both husband and wife could gift up to £126,000 out of their combined estates tax-free, and achieve a combined potential inheritance tax saving of £50,400.
Regular gifts out of income – Those with income in excess of their needs should consider this option. Making regular cash gifts to someone can provide a significant inheritance tax exemption, yet it is possibly the most under-used device by high income earning individuals. The donor must be able to show that the gifts are habitual, are made from post-tax income, and leave the donor with sufficient income following the gift to maintain their usual standard of living. The recipient should always seek advice on how to utilise the funds.
PETS make a great gift - Give someone a PET, and both the donee and your estate could benefit: gifts to individuals qualify as potentially exempt transfers (PETs). As long as the donor survives the gift by seven years, the value of the gift falls outside the donor’s estate for inheritance tax purposes, provided the donor does not retain either a direct or indirect benefit in the assets being gifted. There is no limit on the amount of the gift allowing individuals to provide a substantial sum for a deposit on a house, for example. Surviving the gift by at least three years should see a measure of inheritance tax saving due to the tapering provisions.
Say "I do" to the wedding gift – The UK divorce rate fell by seven per cent in 2005 and marriage seems as popular as ever – perhaps because of the glittering gift list the couple is able to compile. Subject to certain conditions, each parent can gift £5,000 to their child on the occasion of their marriage (known as "gifts in consideration of marriage"). Grandparents or more distant relatives can gift £2,500 and any other person £1,000 free of tax.
Passing wealth to your spouse - Married couples and civil partners can take advantage of the exemption for transfers between spouses whether made during their lifetime or on death. It is not uncommon for one spouse to hold all – or a majority – of the wealth in their name and couples in this situation should ensure that assets to the value of the inheritance tax nil rate limit (currently £285,000) are transferred to ensure that the amount of inheritance tax payable on the death of the surviving spouse is minimised. Similarly inheritance tax inefficient wills could exacerbate the liability on the death of the surviving spouse by £114,000 at current rates and couples should have these health checked as a matter of course.
Alternative investment market (Aim) shares – Consider creating a portfolio of Aim shares to pass onto relatives. Aim shares can qualify for exemption from inheritance tax after being held for two years so could be passed by will (or into trusts). There are investment management companies that can provide specialist Aim portfolios and specialist advice should always be sought.