Written by Merlin Lewis, Associate Solicitor

We are living at a time when capital taxation could not be more favourable to the tax payer. Noises have come from on high as to possibly extending the application of Inheritance Tax (IHT) and Capital Gains Tax (CGT) and closing what are perceived to be loopholes. Talk though has not yet translated into action. What we do know is that allowances will be frozen for another five years even though capital values are likely to increase with inflation.

The following are relatively simple ways of saving tax to the benefit of yourself, your children and grandchildren.

  1. Where there is a gift or sale which will give rise to a CGT chargeable gain which would exceed a single annual allowance if possible split the gift or sale over two tax years to take advantage of two CGT annual allowances.
  2. Divide ownership of an asset between spouses prior to a gift or sale. Any transfer between spouses will be tax neutral. The couple can offset two CGT annual allowances rather than just one. This exercise could be combined with splitting across tax years.
  3. A relatively wealthy couple may each hold a portfolio of shares. Typically a portfolio will contain a high proportion of shares where a disposal would give rise to a chargeable gain. Where it is known that one of the couple is close to death, the other could transfer shares to the one about to die. On death, any chargeable gain to that point will be erased, even if the shares return via the will to the spouse who originally held the shares.
  4. Even though asset values will be rebased for CGT purposes at the date of someone’s death, any delay in subsequent sale of an asset such as a house may result in a chargeable gain. The executors could assign the asset to the beneficiaries so that they sell rather than the executors. The beneficiaries can offset their combined annual allowances against the gain.
  5. Often people are driven by the desire to reduce their estate for IHT purposes but are caught by a CGT charge when making the gift. If a gift is made to most types of trusts (rather than to an individual) the gain can be postponed so that there is nothing payable at the time of the gift.
  6. Those with a taxable estate in their 50s or 60s should consider making gifts of as much as they feel comfortable to make. Once they have survived the gift by 7 years the whole value of the gift disappears from the tax calculation on their death. They could make further substantial gifts after the 7 years have elapsed. It is essential that the person who has made the gift does not reserve any benefit
  7. It is now just about impossible to remove a residence from one’s taxable estate. Any gift will be caught as a reservation of benefit. If however, a gift of a share of the residence is made to someone else such as an adult child who lives at the property and certain criteria are met, there will be no reservation of benefit and after 7 years the value will be gone.
  8. Many people who have sufficient assets for themselves will lend to an adult child. A couple for example may make a series of loans over the years to some or all of their children. If the loans are left in place the value of the loans will remain part of the taxable estate. If however, the loans are formally written off they become gifts and the value will disappear after 7 years.
  9. The IHT residence nil rate band is a useful addition to the standard IHT nil rate band. The residence nil rate band though will be lost or partially lost if the taxable estate at death is over £2 million. Reduction of the estate shortly prior to death by means of a substantial gift could save this loss.
  10. Where there are agricultural or business assets which qualify for IHT relief retain these. Cash following a sale is unlikely to qualify.
  11. Consider investing in AIM shares. These are not “mainstream “ shares but benefit from IHT business property relief. The value will drop out of a taxable estate if death is more than two years after acquisition ( contrast this with 7 years needed for other gifts). While an attorney is unable to make significant gifts from the assets of a person who has lost capacity the attorney would be permitted to invest in AIM shares.
  12. A potentially very useful IHT exemption is Normal Expenditure out of Income. Currently it can be claimed without limit following death where the person who has died has made regular gifts of surplus income, broadly of income which exceeds expenditure and where the gifts do not impact on the person’s standard of living. For example, someone with a good pension income and dividends from a share portfolio could comfortably give away surplus income, especially where their spending may reduce over time.

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