How to legally avoid IHT: consider your financial future and wealth

Financial, wealth and tax planning was a recent topic of conversation in our offices, a subject made more topical by the media burst of interest over the recent government announcement regarding state funding for elderly and social care.

Thousands more people will pay inheritance tax (IHT) to fund a watered-down version of the Dilnot plan for universal state funding for elderly and social care.  Pensioners and disabled adults will have to pay up to £75,000 of any care bills they incur before the state steps in under the new arrangement.  The new measures will directly affect IHT, in that the proposed changes will be funded by maintaining a freeze until 2019 the IHT tax threshold, commonly referred to as the nil rate band (NRB).

WEALTH PLANNING AND IHT

I want to focus on a particular aspect of Wealth planning, namely IHT, a tax that is bringing more people into the tax net.  If we have good fortune and health, then we will all become elderly, however comfort and quality of expected lifestyles will be dependent on a number of factors, personal financial, wealth and tax planning being one of them. 

IHT is, perversely an avoidable tax, if some planning and consideration is applied – even if planning is not carried out during your lifetime it is still possible to mitigate the effects of IHT at death, for example rewriting wills. 

The UK IHT regime affects those that are considered UK domiciled (actual or deemed), and IHT will normally be applicable if the value of your worldwide estate at death and transfers over the last 7 years exceed  the NRB, currently for the tax years 2012-13 to 2014-15 this will be £325,000.  It is estimated that the proposed freezing of the band until at least 2019 will bring 5,000 more families a year into the tax trap. It will increase IHT bills by an average £95,000 compared to what they would have been had the allowance had been increased as planned.

GIVING AWAY YOUR WEALTH WHILE STILL LIVING
Lifetime transfers are divided into two groups, potentially exempt transfers (PET) and chargeable lifetime transfers (CLT).

NO IHT TO PAY WHILE STILL LIVNG
Any transfer that is made to another individual is classified as a PET; a PET only becomes chargeable to IHT if the donor dies within seven years of making the gift. If the donor survives for seven years then the PET becomes exempt and can be completely ignored.
If the donor dies within seven years of making a PET then it becomes chargeable. Tax will be charged according to the rates and allowances applicable to the tax year in which the donor dies. However, the value of a PET is fixed at the time that the gift is made.

POSSIBLE IHT TO PAY WHILE STILL ALIVE
Any transfer that is made to a trust is a chargeable lifetime transfer, a trust is a widely used legal device and arises where a person transfers assets to people (the trustees) to hold for the benefit of other people (the beneficiaries). For example, parents may think that gifting assets and wealth to their offspring presents too much of a temptation for them.  Instead, assets can be put into a trust with the trust being controlled by trustees until their offspring are older.

Unlike a PET, a CLT is immediately charged to IHT based on the rates and allowances applicable to the tax year in which the CLT is made; if chargeable it will be at 20% (current life time rate).  An additional tax liability may then arise if the donor dies within seven years of making the gift. Just as for a PET, the value of a CLT is fixed at the time that the gift is made, but the additional tax liability is calculated using the rates and allowances applicable to the tax year in which the donor dies.

Unlike capital gains tax where, for example, a principal private residence is exempt, all of a person’s estate is generally chargeable to IHT.

TAX LIABILITY ON DEATH ESTATE
A person’s estate includes the value of all UK and wordlwide assets which they own at the date of death, such as property, shares, motor vehicles, cash and other investments.  A person’s estate also includes the proceeds from life assurance policies even though these proceeds will not be received until after the date of death. The actual market value of a life assurance policy at the date of death is irrelevant.

RATES OF TAX
IHT is payable once a person’s cumulative chargeable transfers over a seven year period exceed the NRB.  For the tax year 2012–13 & 2013-14 the NRB is £325,000, the rate of IHT payable as a result of a person’s death is 40%.  This is the rate that is charged on a person’s estate at death, on PETs that become chargeable as a result of death within seven years, and is also the rate used to see if any additional tax is payable on CLTs made within seven years of death.The rate of IHT payable on CLTs at the time they are made is 20% (half the death rate).

SOME THINGS TO CONSIDER
MAKE A WILL
• Making a will and being sure people know where to find it is the first step to making sure that your estate is shared out exactly as you want it to be when you die.
• If you don't leave a will, your estate will be shared out among your next of kin according to a strict order of priority called the 'rules of intestacy'.

GIVE WEALTH AWAY WHILE STILL LIVING
Lifetime transfers are the easiest way for a person to reduce their potential IHTliability.
• A PET is completely exempt after seven years.
• A CLT will not incurany additional IHT liability after seven years.
• Even if the donor does not survive for seven years, taper relief will reduce the amount of IHT payable after three years.
• The value of PETs and CLTs is fixed at the timethey are made, so it can be beneficial to make gifts of assets that are expected to increase in value such as property or shares
• Consider equity release
• Put life assurance policies under trust

TRUSTS
• Not just for the rich and famous

INVESTMENTS
• There are certain investments that become IHT free after 2 years.  Qualifying AIM shares is one, and Enterprise Investment Schemes are another.  After a period of two years, the value of any EIS investment will be outside that person's estate, therefore after death, beneficiaries will receive 100 per cent of the return. This is known as Business Property Relief.'

IHT RELIEFS
• Taper relief reduces the amount of tax payable where a donor lives for more than three years, but less than seven years, after making a gift, taper relief ranges from 20% to 100%.
• Transfer of a spouse’s & registered civil partners unused NRB
• Intra-spouse transfers are exempt from IHT (and CGT)
• Small gifts exemption (up to £250 per annum per donee while alive)
• Annual exemption of £3,000, unused annual exemptions available to carry forward
• Normal expenditure out of income, IHT is not intended to apply to gifts of income.
• Gifts in consideration of marriage, up to £5,000 if made by parent gift; £1,000 if anyone else

In future blogs we will look at the subject of Capital Gains Tax and the relationship with IHT.  I hope you found this information useful and as with all these things, it of general application.  More news and stories can be found on this site, future blogs and by connecting to me on Linkedin http://www.linkedin.com/profile/view?id=60867303&trk=hb_tab_pro_top

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Posted on February 18th, 2013

Goodbye 2012, Welcome 2013

I find the Xmas break an enjoyable one, not just from the point of view of seeing friends and family, eating, socialising, enjoying the quiet roads and being able to take a few days off from the frenetic activity of running a business.

This time of the year gives me a chance to reflect on the year gone by and plan (i.e. put pen to paper, or keyboard to computer) in preparation for the years ahead.  I can take advantage of the relatively quiet time – with most of staff having a deserved break – to review the past, plan and re-energise for next year.

Two things that help us to deal with the continuing challenges of the present and future is in the quality of our planning and thought process.  Planning is an essential discipline, however it is applied, albeit the exactness of the plan may not happen, the thought processes it involves are important.  For example, consider business plans, of which during 2012 I was involved in developing and assessing a number.  Business plans represent (in words) the journey that we are going to make, informing our ‘audience’ as to why we are making the journey (mission), what we wish to get from that journey (objectives), the people we wish to visit (clients), the route we wish to take (how to), our ability to make such a journey and the terrain out there (financial and other risks).

We know that one certainty is that the reality will not match the reality of the actual business journey.    However, this does not relegate planning to a redundant activity, the process of producing the plan enables us to look at the journey through a wider lens and not the narrow focus of just our skills and experiences.

My general approach to ‘business’ is to identify and maintain core underlying activities, whilst developing additional services & products.  At the end of 2012 I have achieved some things that I set out to achieve, been involved in work that I had not anticipated (unforeseen but welcome opportunities), but core activities help sustain the business.

One of my wishes for 2013, apart from the obvious desires for world peace, food and shelter for all, and business success is a new approach of better quality, integrity, thought, discussion, consideration & application by policy makers & media. Critical, objective thinking & analysis that is deemed important in our business & working lives seems to be abandoned and ends up in a cul-de-sac when it relates to wider societal issues.

Very best wishes for 2013

 

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Posted on December 31st, 2012

Self Assessment Deadline and Counting

Winter months are taking their grip, the end of the year is approaching, festivities are building up slowly and (at the date of writing this article) there are 46 days before the Self Assessment (SA) deadline – by which time the 2011-12 tax return has to be filed, and any balancing payments and payments on account have to be paid. 

It would seem appropriate to outline some important points about SA, with particular reference to the property landlord, albeit a number of the points are relevant to other taxpayers..

Requirement to be part of Self Assessment

If an individual only has income from non-PAYE sources, such as income from renting properties then a tax return will need to be completed if all of the following apply:

  • you have income to declare, for example income from savings, trusts or abroad, rental income from land or property
  • your total income exceeds your total allowances and reliefs
  • you have tax to pay on this income 

The completion of a tax return will be required if a taxpayer wishes to claim any loss reliefs. 

Record keeping

Taxpayers are under a legal duty to keep sufficient records to back up their Self Assessment submission.  HMRC take this matter very seriously and are continuing with (redesigned) business record checks.  Their selection criteria are based on risk assessment; cash based businesses being more likely to be selected for business record checks. 

For income tax purposes, HMRC advise landlords to keep details of: 

  • the dates when you let out your property
  • all rent you get
  • any income from services you give to tenants (eg if you charge for maintenance or repairs)
  • rent books, receipts, invoices and bank statements
  • allowable expenses you pay to run your property (eg services you pay for such as cleaning or gardening) 

Taxpayers must retain records for a certain length of time, for example, for a 2011-12 return filed on or before 31 January 2013, records must be kept until 31 January 2014. 

Income tax

Tax is payable on the net rental ‘profits’ of the property, effectively rental income due minus any running costs that are incurred in connection with the letting of the property. 

Details of what can be claimed have been discussed in previous articles, remember that tax allowable costs must normally be “wholly and exclusively” for the purpose of the rental business.

Capital gains tax

Property gains are calculated by deducting the capital costs from the value of the disposal, the disposal is normally by sale or transfer; net gains will be after further deduction of capital losses and the annual exemption of £10,600 for 2011-12. 

Tax rates 2011-12

Income tax is payable at 20% on taxable rental profits up to £35,000, 40% is payable on the excess and an additional 50% on profits over £150,000.  

Net capital gains will be taxed according to the ‘income tax’ status of the taxpayer, 18% for ‘basic rate’ gains, and up to 28% if the taxpayer is a ‘higher rate payer’, a higher rate taxpayer is one who has a gross income in excess of £42,475. 

Capital gains tax reliefs

These include capital losses and the annual exemption, are the principal private relief (PPR); letting relief (gains up to £40,000 tax free); transfers to a trust, non residence and death of the individual. 

Paying HMRC

It is vital that taxpayers do not miss payment deadlines, HMRC are more flexible in the methods of payment and encourage internet and telephone payments, if this method is adopted it is important that the correct bank accounts and number formats are adopted.  HMRC have updated their own website to include a lookup tool that sets out which bank account to use and the required format to use for the reference numbers. 

Problems paying

Do not impersonate an ostrich and contact HMRC at the earliest arrangement and negotiate a time to pay.  Payment plans are not guaranteed, and will be dependant on a number of factors, such as level of tax owed, affordability (evidence may be required), previous tax history.  HMRC have certainly been more assertive in collecting tax and are under increasing political pressure to be more so.  HMRC more readily move to legal action for uncollected debts, having the use of (currently) 11 private debt collection agencies. 

Keep warm, have a great festive period and happy Self Assessment.

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Posted on December 15th, 2012

Pension Changes, The New Landscape

Employers already have a number of legal and financial obligations to their employees, an additional one has been imposed concerning the provision of workplace pension schemes, this came into effect in October 2012. The two main changes for employers are (1) the automatic enrolment of certain workers into a pension scheme; (2) making a financial contribution into that pension scheme.

In addition employers have to tell all eligible jobholders that:
• they have been automatically enrolled and
• they have the right to opt out if they want to do so
• register with the pension’s regulator and provide details of your qualifying scheme and the number of people that have been automatically enrolled.

The main reasons given for the change in the provision of workplace pensions is to help people save for their retirement and not rely on the state pension, it is argued by the government that we are likely to live 20 years after thus this sort of scheme is critical. The purpose of this blog is to focus on the changes and outline the impact on employers of the new regulations, not to discuss the relative merits of the scheme.

The new regulations are being phased in (effectively) monthly blocks over a number of years, and it becomes ‘live’ and applicable for employers based on what is called the ‘staging date’. The staging date is determined predominantly on the number of workers in an employer’s PAYE scheme, summarised as follows

> 50,000 workers, staging date 01-Nov-12
> 500 workers,  staging date 01-Nov-13
> 59 workers, staging date 01-Nov-14
> 30 workers, staging date 01-Oct-15
< 30 workers, latest staging date 01-Apr-17

Where an employer has less than  workers this is being phased in based on their PAYE reference numbers

It is worth noting that employers will be contacted prior to the staging date, and that employers can always elect to bring the staging date forward and implement the regulations earlier.

It is critical that employers are in a position to comply with their new (legal) duties on the staging date. In order to prevent employers adopting practices to prevent employee’s joining the workplace pension scheme, legal safeguards were introduced in July 2012 to protect individuals – this applies to all employers.
The contributions into the pension scheme will come from employers and employees, the minimum contribution rates that an employer must pay into their worker's pension scheme are being introduced gradually (known as 'phasing')
.
The minimum contributions are currently a total contribution of 2% with at least 1% employer contribution. Employers can always pay more than the minimum contribution %, if employers do pay more than the minimum then the employee can pay less (the total % level must still be met)

Staging date to 30-Sep-17, employer contribution 1%, employee contribution 1%,  total contribution 2%

Staging date to 30-Sep-18, employer contribution 2%, employee contribution 3%,  total contribution 5%

Staging date 01-Oct-18 onwards, employer contribution 3%, employee contribution 5%,  total contribution 8%

The % rates are the minimum contribution levels

There are other issues to consider, for example record keeping, compliance and selecting an appropriate scheme (existing schemes may qualify). Planning and preparation is the name of the game, especially when there are other planned government initiatives being rolled out over the coming years!

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Posted on October 10th, 2012

Cash and survival – it's a question of control

The vast majority of businesses and freelancers  face a delay between generating income and subsequently receiving the cash, example sources being from sales, fees, grants, sales, grants and donations.  From a financial perspective cash is critical in the short, medium and long term; weak control will lead to a lack of sustainability.

The subject of credit control is a critical topic, and is an issue that is vital to business start-ups and established ones; unfortunately it is a management issue that is not prioritised as much as it should be.  Survival, sustainability and growth is determined by adequacy of cash flow, not necessarily generating profits/surpluses.

If cash is not pulled in on time to (at least) meet cash debts then sustainability is normally maintained by additional borrowings and/or payment delays of debts – whether it can continue to be maintained is a separate issue.

There are effectively two stages to the management of credit control, namely the initial granting of credit facilities and its subsequent management.   Granting credit always carries an element of risk (of not receiving the cash), credit control is about the management of that risk.

Clients should be assessed for their credit worthiness (credit scoring), the size and status of the client is not a determinant of their credit worthiness, large organisations are as likely to default as small ones.

Credit scoring can be carried out using trade and bank references, Companies House information, county court register, client visits, rumours, first impressions and credit reference agencies.  The internet is a useful tool in credit scoring and one has an access to a large amount of relevant information and credit ratings.

Written agreements should be drawn up starting the terms and conditions of payment, for example, number of days to pay, interest charges on late payments.   This is important if legal action is to be pursued, and helps maintain financial discipline.

Once the invoice is issued then call the client within a few days (as part of a “post sales” review) to check that the client is happy, that there are no problems and that the invoice was received (and by the correct person/department).  If payment is not received by the due date then reminder letters/faxes and phone calls need to be made, the letters or faxes will go up in severity from the “friendly” to potential court action – at this stage client relationships would have deteriorated – court actions can be instigated online and are procedurally efficient.

Technology can play an important part in credit control, for example the issuing of invoices via e-mail, setting up time alerts (Microsoft Outlook), and the production of credit reports showing outstanding invoices and days outstanding.  Electronic delivery methods will quicken the collection processes, provide confirmation that the invoice was sent, and save money on consumables and postage.

 

 


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Posted on June 4th, 2012

Budget 2012: An overview

There has been a lot of comment and headlines on the recent 2012 budget, with its usual mixture of winners and losers – from pasty eaters (cold is 'tax' good, above ambient temparature is not so 'tax' good, caviar is VAT free!). One thing that always perplexes me is peoples perception of what constitutes a tax and who actually pays it. As I have previously commented, if it looks, feels like & takes money like a tax it is a tax – this therefore includes income tax, VAT, national insurance, fuel, alcohol and other duties, corporation tax, inheritance tax, capital gains tax to name but a few. Who pays? we all do from the cradle to the grave.

Politicians and newspapers are blurring the lines between tax avoidance (perfectly legal) and tax evasion (not legal), the difference between avoidance and evasion is, according to Dennis Healey "..the thickness of a prison wall). Claiming personal allowances and business expenses are examples of tax avoidance, to my mind we are criminalising by attitude something that should not be.

The increase in personal allowances lifts some people out of paying 20% income tax, but not NIC and other taxes and duties – however the Chancellors slight of hand is such that more people will start paying 40% tax, and it will yield more to the Treasury.

There is a planned cap of £50,000 on what donors can claim back in tax by way of Gift Aid payments – it is broadly equivalent to cash donations in a year of £250,000 – this in my opinion will not impact on the majority of charities who do normally receive such amounts. In a perverse way there is an opportunity for Charities to utilise Gift Aid to mutual advantage, for both higher rate taxpayers (total income of £42,475 for 2012-13 and £41,450 for 2013-14) and the charities.

One area of particular interest is for landlords and property investors, if we look beyond the announced stamp duty 'crackdown' there are plans, for example to alter the position regarding CGT and non-residents, and IHT for transfers to non-domiciled persons.

We have published an article overviewing the Budget impact on landlords and property investors which is freely available.

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Posted on March 29th, 2012

A Fresh Start

I consider that I have been fortunate in my ‘working’ life to have gained, developed and been exposed to a wide and varied business background, skills and knowledge – gained from working within the commercial, not for profit and educational sectors and via academic study.  For those that might be interested there is a more detailed personal profile published on the website.

Our new website reflects the main areas that Pro Active Resolutions works in, namely self-employment, the creative and voluntary sector, businesses, education and training.  We provide practical accounting, management, training and consultancy support to businesses, the not for profit and individuals. 

The purpose of my blog is to contribute to, share information, and facilitate dialogue on a wide variety of topics.   Hopefully this will strike a chord and will provide a positive contribution to an ever changing landscape.

We have a growing library of free resources and information, such as our acclaimed freelancer guide, business planning tools and fact sheets.   Over time we will be increasing the range and variety of these resources and be announcing some new developments.

Happy reading and please feel free to comment and contribute.

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Posted on January 23rd, 2012