Finance

A different angle

by Ian Williams FCA TEP - Campbell Dallas Chartered Accountants

With house prices continuing to rise, more and more people are falling into the Inheritance Tax (IHT) net and Bridge of Allan homeowners will be high on the list of volunteers for Gordon’s insatiable appetite for cash.

To make life difficult, Gordon has introduced a series of measures designed to block IHT avoidance schemes and, for those who transgress, pain awaits, with a series of unpleasant (some might say, vindictive) tax changes.

In the “Gordon dislikes tax avoidance” era, there are, however, a number of simple and effective means of avoiding IHT which people should consider, as part of a wider succession plan. The aim is to keep it simple, to start early and to stick to your guns.

Consider “gifting out of income”. By definition, income is not capital. In theory this is correct, however, income soon converts to capital if you do not spend it. As a simple test, examine your outgoings, either monthly or annually. If consistently you have more than you need, consider giving the excess to your children. It is maybe difficult to argue with the taxman if you give periodic dollops of cash away that it is all income, however, if you put a standing order or covenant in place which sets-out your intention to consistently give away your income this will go some considerable way to proving that it is income and not capital. This is a very effective form of IHT planning.

Second. You could give away up to £3,000 per annum without charge to IHT. If you did not give away last year you could gift £6,000 this year and £3,000 per annum, thereafter. This is simple and effective planning.

IHT has two rates of tax, 0% and 40%. The nil rate band is presently £285,000 (this block is taxed at 0%). Capital in excess of £285,000 is subject to IHT @ 40%, which hurts.

Another way, which is often overlooked, is to chop your life into seven year slices. If you make a gift out of capital it is on the tax slate for seven years, after which is gets rubbed-off. Once that slice is consumed, start again. All you need is the will and ability to transfer slices of capital which, to some, is possible, however, to the majority is difficult. The gift out of income, particularly for those couples who have funded their property and children’s education, is certainly achievable and provided the evidence is there to back-up it is perhaps the most effective way to start to plan for IHT.

There are, within the IHT arena, some no go areas. First, please remember it is only tax and you should not sacrifice your wellbeing to save IHT. Do not give away your main residence because your personal wellbeing could be at risk and, if you give and continue to live in the property, it probably will not work for IHT avoidance.

Perhaps the best means of avoiding IHT is to abolish the tax altogether and it is interesting to note that most of our competitor countries have done just that. Lobby your MP/MSP to put pressure on Gordon to abolish IHT, on the grounds it is unfair, a tax on the thrifty and, please do not forget, it is a tax on income and capital which has already been taxed before.

In summary, if you stick to a simple regime as early as you are able, it is effective and will make a difference. Last thing, please make sure your will is up to date and talk to your accountant and solicitor.