No, I'm not talking about Alternative Investment Markets (although they can form part of tax planning). Rather I'm looking at the three key components that should be involved in any tax advice that you receive, which are the three steps of the process to make sure that good advice actually works for you, rather than just being good advice. It was Oscar Wilde who said "I always pass on good advice, it is rarely of use to ones self.".
A) Of course, the first step on the path to mitigating your exposure to any form of taxation is advice, and its usually where the process for many clients starts, and unfortunately ends. Good advice should look at your tax affairs in the round, and not just the tax problem you thought you had when you walked through the door. Almost all of the direct taxes (income, capital gains, inheritance) and some of the indirect taxes (VAT, stamp duty) interact at some level on any transaction, and you ognore the other areas of tax at your peril. If your accountant or tax adviser isn't doing this, get a new one. Also, rather than focussing on the problems, is the advice you're getting offering solutions rather than just telling you what the bill is?
I) Okay, if you got to this step we've established that you're getting the right advice. I stand for implementation. Normally, after seeking out the tax advice, part of the solution you have is to put in place some sort of structure, be this a will, a trust, a company or another legal entity. So, what happens next, your tax adviser sends you off to your lawyer, or recommends one to you. You need to make sure that your tax adviser and lawyer are talking to one another so that the advice is correctly interpreted and implemented by the lawyer. Also, is your lawyer a specialist in that field? If not, I heartily recommend you seek one out.
M) Right, we've done to most what seem like the most important parts of the process in tax advice, time to put your feet up now yes? Wrong, the most important part of dealing with a tax issue is M for management. If the advice you receive isn't reviewed from time to time, it might no longer work, or have been rendered irrelevant by retrospective legislation. If you don't fulfil the legal requirements of say a trust, it can be shown to be a sham by the tax authorities (or worse by the divorce courts). Its important to ensure that you keep getting the right advice, as tax advice isn't a band-aid one time fix, its a constantly evolving process that involves your accountant, tax adviser, lawyer and financial adviser.
Even if all of these steps are in place, you can still hit rocky shores if your advisers don't talk to each other, or simply don't understand what one another are trying to acheive. Where possible try and include all parties in the initial advice, or better yet look for someone who can fulfil the role within one firm (we are out there!). So in order to ensure that your aims and desires are followed through, make sure you take AIM at your tax affairs and act on the advice you receive!
Friday 16 March 2012
Thursday 1 March 2012
5 top tips to help you save Inheritance Tax
1. Utilise your tax free gifts reliefs
Lifetime giving can over time reduce your estate substantially, however there are limits to what you can give and to whom tax-free. The individual allowance is £3,000, and if you have not used this in the preceeding year, you can claim that too, so potentially £6,000. This is per person, so a married couple/civil partners could gift up to £12,000 tax free in one year. There are some other tax-free gifts such as wedding gifts, small annual gifts of up to £250 per recipient, and last but not least gifts out of income that are normal expenditure that do not affect your standard of living. This last one has the potential to stop your estate growing, by giving away, rather than saving surplus income.
2. Reduce your estate by making potentially exempt transfers
4. Make gifts to charity
Gifts to charity are exempt from IHT, and so you can use them to reduce the size of your taxable estate in much the same way as the tax free reliefs mentioned above. Also, from April 2012, charitable bequests made through your Will can also reduce the rate of IHT your heirs have to pay. If you give at least 10% of your estate to charity, the rate of tax levied on the rest will be reduced by 10%, from 40% to 36%. This does not have to be a recognised charity, indeed if your estate is sufficient you may even wish to leave a charitable trust as a legacy that can then contribute to local charitable purposes.
5. Finally, claim a partner's unused IHT allowance
It is possible now for the executors of married couples and civil partners to claim any IHT allowance that their deceased partner has not used, currently set at £325,000 per person. If the first partner has made no use of their nil-rate band (by leaving everything to their spouse, for example), the second partner effectively has a double allowance of £650,000. If the first partner used part of their allowance, the unused proportion is carried over to the second - and applied at the rate in force on second death.
Lifetime giving can over time reduce your estate substantially, however there are limits to what you can give and to whom tax-free. The individual allowance is £3,000, and if you have not used this in the preceeding year, you can claim that too, so potentially £6,000. This is per person, so a married couple/civil partners could gift up to £12,000 tax free in one year. There are some other tax-free gifts such as wedding gifts, small annual gifts of up to £250 per recipient, and last but not least gifts out of income that are normal expenditure that do not affect your standard of living. This last one has the potential to stop your estate growing, by giving away, rather than saving surplus income.
2. Reduce your estate by making potentially exempt transfers
Potentially exempt transfers (PETs) are gifts in excess of the tax free limits set out above, but these larger lifetime gifts may escape IHT if you live for seven years after making them. If you do not survive the seven year period, they are added back into your estate if they 'fail'. So your beneficiaries are no worse off than they would have been had you not made the PET.
3. Consider using trusts
Sometimes giving away larger assets can be a problem, because there may be substantial capital gains involved in making such a gift. One way to get around this is to settle the assets you wish to make a gift of into a family trust. Provided that neither you, nor your spouse/civil partner can benefit from that trust, you can defer any capital gains arising from the gift. The same IHT savings can then be made without incurring a CGT bill. Two words of caution though, first make sure you get proper advice on how to set a trust up, and two, if you put more than £325,000 into a trust the excess will suffer IHT at 20%. Plan carefully though and they're still a useful tool for minimising IHT.
3. Consider using trusts
Sometimes giving away larger assets can be a problem, because there may be substantial capital gains involved in making such a gift. One way to get around this is to settle the assets you wish to make a gift of into a family trust. Provided that neither you, nor your spouse/civil partner can benefit from that trust, you can defer any capital gains arising from the gift. The same IHT savings can then be made without incurring a CGT bill. Two words of caution though, first make sure you get proper advice on how to set a trust up, and two, if you put more than £325,000 into a trust the excess will suffer IHT at 20%. Plan carefully though and they're still a useful tool for minimising IHT.
4. Make gifts to charity
Gifts to charity are exempt from IHT, and so you can use them to reduce the size of your taxable estate in much the same way as the tax free reliefs mentioned above. Also, from April 2012, charitable bequests made through your Will can also reduce the rate of IHT your heirs have to pay. If you give at least 10% of your estate to charity, the rate of tax levied on the rest will be reduced by 10%, from 40% to 36%. This does not have to be a recognised charity, indeed if your estate is sufficient you may even wish to leave a charitable trust as a legacy that can then contribute to local charitable purposes.
5. Finally, claim a partner's unused IHT allowance
It is possible now for the executors of married couples and civil partners to claim any IHT allowance that their deceased partner has not used, currently set at £325,000 per person. If the first partner has made no use of their nil-rate band (by leaving everything to their spouse, for example), the second partner effectively has a double allowance of £650,000. If the first partner used part of their allowance, the unused proportion is carried over to the second - and applied at the rate in force on second death.
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