Okay, so the title of this blog post might be a little misleading, but there are certain taxes and events upon which the payment of tax is completely optional. Primarily this applies to both Inheritance Tax (IHT) and Capital Gains Tax (CGT). Still I hear dissenters among my audience, well listen up as even a former Chancellor of the Exchequer held this same opinion...
Roy Jenkins famously said “Inheritance Tax, is broadly speaking a voluntary levy paid by those who distrust their Heirs more than they dislike the Inland Revenue.”
As we all know IHT is a tax levied on our death, and CGT a tax levied when we sell something for a profit. So how can we prevent payment of these taxes when we clearly have no (or at least little) control of our own personal demise, or an event that may cause us to sell an asset?
Well, as a tax adviser I like to think I'm pretty good, but I do lack any genuine messiah likeproperties so I can't offer the option of raising you from the dead like Lazarus! The one divinity that I would like to imbue however, in our current political climate where the words "tax" and "moral" are being bandied about, is that the word "avoid" simply means to "keep from happening" or "to move clear of" something.
Right, so how do we do this? There are a number of simple answers insofar as IHT is concerned. The first being to have given away (as gifts) sufficient of your estate to leave you under the IHT threshold (£325,000 or £650,000 of a married couple/civil partners). However, all gifts must have been made over seven years prior to death. Another is to hold property or investments that are exempt, such as a trading business or a farm. Finally there are a broad swathe of options out there from financial products and tax structured schemes that can remove the IHT burden. So, the reason that it is optional is that there are a plethora of things that can be done to avoid it.
Well, that's covered IHT (which I'm guessing you knew something about), so how do I avoid paying CGT you say? Well, the simple answer is not to sell something unless you absolutely have to. Another is that each of you currently have an exemption for CGT each year of £11,000, yes that's right you can make £11,000 completely tax free each and every year! Most of us aren't aware of this, and subsequently don't use it, so if over ten years for example you had used this exemption each year you could have mitigated £110,000 worth of gain in a share portfolio for example without paying any tax whatsoever!
However, if we are doing IHT planning above, the gifting of an asset, or its sale to convert into cash which you then gift is unavoidable. CGT would then arise and a tax bill would land on your doormat, right? So, have I come unstuck here, well no I haven't. Thanks to the use of a trust and a little known piece of legislation (even amongst those in the financial profession) it can be arranged that the gain and subsequent tax arising on a gift can be deferred until such time as the recipient sells the asset that has been gifted. This can be especially beneficial where the gift is of real estate or share portfolios.
Obviously this blog does not constitute tax advice, and is only intended to demonstrate that there are things you can do rather than pay tax where IHT and CGT are concerned. All (well in terms of what I advise on at least) are perfectly legal and within the bounds of existing legislation, rather than being overly clever and attempting to exploit a loophole that Government later close. It is this that I hold as the primary reason for still being a successful tax adviser for almost 15 years now, and why I continue to help my clients arrange their tax affairs in a safe way. Hopefully I can help you too...