Tax and Estate Planning
Nobody wants to pay more tax than they have to, but it is a truism that “in this world nothing can be said to be certain, except death and taxes” (Benjamin Franklin – 13th November 1789). |
However, this is no reason why people should not seek legally to minimise the amount of tax they pay.
Income and capital gains tax
Most people could potentially reduce the impact of tax by investing in personal pensions, because even with little or no earnings are allowed to put £2,808 into a pension scheme each year and have this “grossed up” to an investment value of £3,600, by HM Revenue & Customs adding a further £792 to the pot on their behalf.
Those with earnings can contribute as much as they earn into a pension scheme (excluding investment income and claim tax relief up to an annual allowance set at £235,000 for 2008/9 and rising thereafter).
The money invested in pensions is not subject to UK income or capital gains taxes, although it is no longer possible to recover the 10% tax deducted from dividends from UK companies. When pension benefits are taken the income will generated will be taxed as earned income.
What is more, when the time comes to take benefits, it is currently possible to take as much as 25% of the total fund (but not more than 25% of the lifetime allowance, which is set at £1.65 million for 2008/9 and rising thereafter) as tax free cash – even if you do not wish to draw a taxable income from the fund at the same time. (The minimum age to take benefits is currently 50, but on 6 April 2010 this will rise to 55.) Any income drawn, either directly from the fund or though the purchase of an annuity, is taxed in the normal way.
It is also possible to protect savings from tax through Individual Savings Accounts (ISAs), which the current government has expressed its commitment to making a permanent feature of the investment landscape. The maximum that can be invested by each individual during a year is now £7,200, up to half of which can be in a cash, the balance can be invested in stocks and shares. Alternatively the full £7,200 can be invested in stocks and shares.
It is now possible to move monies previously invested in the cash element of an ISA (or an old-style mini Cash-ISA) without affecting your annual investment limit.
We may also offer advice on strategies to minimise the impact of capital gains tax.
Inheritance tax
There are ways of managing your estate in order to minimise the impact of inheritance tax. In particular, the transfer of unused allowance between husband and wife (or civil partners) following the “first death” may reduce the overall impact of inheritance tax significantly.
The inheritance tax threshold for 2008/9 is £312,000, so if a husband died in June 2008 and left his entire estate to his widow, who subsequently died in January 2009, there would be no inheritance tax liability on her death, on the first £624,000. Thereafter, it would be levied at 40%.
Other ways of minimising the potential inheritance tax liability are by transferring money to family and friends by using exempt transfers, which include:
- Up to £3,000 a year, per donor;
- Small gifts of up to £250 per recipient;
- Gifts on consideration of marriage (or civil partnership) from £1,000 to £5,000 depending on relationship to the couple;
- Gifts from normal income expenditure.
There are also potentially exempt transfers (PETs). These are gifts made between three and seven years prior to death, where the tax can be reduced by as much as 80% and gifts made more than seven years before death, which are totally free of inheritance tax.
LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE AND THEIR VALUE DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF THE INVESTOR. THE FINANCIAL SERVICES AUTHORITY DOES NOT REGULATE TAXATION ADVICE.