Despite HMRC being committed to recovering tax owed, there are several legitimate tax planning strategies you can deploy, one of which has been around for more than 500 years.
When It Comes To Tax Planning, People Don’t Plan To Pay Tax, But Often They Don’t Plan Not To!
Tax Planning Could Save You And Your Family Some Big Money
The Government has recently revealed the amount of Inheritance Tax it collected in the latest year has risen by 12 per cent to £4 billion. This inflation-busting increase follows on from a rise of 8.6 per cent in the previous year. It’s not just the amount of Inheritance Tax that’s increasing significantly. The number of estates that are now caught by Inheritance Tax is also on the up.
It’s likely these upward trends will continue. But in the summer Budget, some measures were put in place to increase the amount of IHT a couple can pass on, particularly in respect of their family home. Currently, a couple has a combined ‘tax free’ nil rate band of £650,000. But this will rise to £1 million by 2020/2021.
Whilst this increase has to be welcomed, the rate at which IHT is being collected is growing far more quickly than the rate of this increase in IHT. The Government’s own forecasts show almost 60,000 estates will be liable for IHT by 2020/2021. That’s double the current number of estates paying IHT, and yet the allowance is not set to double in this period.
Unfortunately, it’s not going to be particularly easy to qualify for the maximum allowance. There are lots of hurdles to clear to benefit from the full £1 million IHT allowance, as you can see in this tax planning article. One expert warns that a third of wills in the UK may have to be rewritten to stop families missing out on the £1 million IHT allowance, increasing the importance of proper tax planning.
The biggest risk is that the £1 million threshold sounds so high, many people will wrongly assume they won’t be affected and decide that proper tax planning isn’t necessary. But when you look at the details and the stringent qualification criteria, it’s clear this is arguably another headline grabbing sound-bite. Failure to understand the rules could mean your family won’t benefit in the way you might expect them to.
With tax planning in mind, it’s worth a quick review of what tax planning strategies are currently available.
Tax Planning Area 1 - SIPPs
The good news is that SIPPs aren't subject to Inheritance Tax (IHT). The 55 per cent tax charge on passing on your SIPP assets at death aged 75 or over has been reduced to 45 per cent and will come down further for most people from April 2016 when it will be linked to your beneficiary’s income tax rate. However, in a ‘giving with one hand, taking away with the other’ sort of a way, to offset the loss of tax revenue, SIPP contribution limits will be reduced for high earners, as will the lifetime allowance limit. That said, following the recent 'pension freedoms' changes, SIPPs are well worth considering as a tax planning tool.
Tax Planning Area 2 - Trusts
Trust-based planning has been used since Henry VIII’s time to mitigate estate tax. It involves your assets being held by trustees on behalf of your beneficiaries. When it comes to IHT, it typically takes seven years for Trust assets to be passed outside of your estate to avoid tax altogether. The downside of putting your assets in Trust to save tax is that you lose ownership, access to and control of those assets, but Trusts can save an awful lot of tax.
Tax Planning Area 3 - Business Relief
Business Relief underpins a wide range of IHT planning strategies. This includes Enterprise Investment Schemes (EIS), Seed Enterprise Investment Schemes (SEIS) and investment in other businesses that carry out qualifying trades to Alternative Investment Market (AIM) shares. The advantage of claiming Business Relief is that you retain access to and control of your assets, which is a significant advantage over Trusts. If you claim Business Relief, you’re exempt from IHT after just two years, providing you’re holding the qualifying investment on your death.
Tax Planning Area 4 - EIS and SEIS
EIS and SEIS offer complete exemption from IHT if you’ve held your investments for at least two years and you’re still holding the qualifying company shares on your death. EIS and SEIS also offer 30 or 50 per cent income tax relief and no capital gains tax on profits. If the investments fall in value, you can apply for loss relief. Whilst this combination of tax incentives are clearly very inviting, it’s worth stating schemes are designed to attract investment into small, unlisted companies, which are very much at the higher end of risk. It’s a sad fact that many of them are likely to fail.
Tax Planning Area 5 - AIM Shares
The Alternative Investment Market is less liquid than larger stock exchanges. Not every AIM-listed company is eligible for Business Relief. However, the average market capitalisation of AIM shares continues to rise, indicating the growing depth and breadth of the market. Just like share on large stockmarkets, AIM shares can be held in an ISA and a SIPP, making them free of capital gains and income taxes.
Tax Planning Area 6 - Other Business Relief Qualifying Trades
You could consider investment in companies that are regarded as lower-risk compared to those found in AIM or EIS portfolios. These investments are usually made in relatively stable business sectors such as land and property, renewable energy and financing. A similar approach involves establishing a private limited company in your name to invest in Business Relief qualifying companies. This method has the added benefit that your company can be passed to beneficiaries of your choice as a ‘going concern’, enabling it to continue to trade indefinitely in Business Relief qualifying companies.
Tax Planning Usually Needs Advice
Unless you’ve studied tax planning in detail, or you’re professionally qualified in the subject, it would be a good idea to consult your trusted adviser. If you don’t have someone to call upon to help you, feel free to send us a message, providing as much detail as possible on what aspect of tax planning that interests you most.
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