IHT - tax planning in life Flashcards
What is Tax Avoidance?
Efficient and lawful arrangement of a client’s affairs in a manner which minimises their liability to tax
What characterizes Aggressive Tax Avoidance?
Entering into complex arrangements which have the effect of reducing tax liability
Aggressive tax avoidance complies with legislation but does not reflect the intention of the law.
Define Tax Evasion.
Withholding information about assets or income to avoid paying tax
Tax evasion is illegal and can lead to severe penalties.
What must be considered when trying to reduce tax liability?
- Actions to reduce IHT may result in CGT or reduction of future income
- Once gifts are made, not usually possible to get them back
- Anti-avoidance legislation may prevent the effectiveness of certain actions
What is the Annual Exemption for Lifetime Transfers?
Allows individuals to make gifts of up to £3,000 each year tax free
Unused exemptions from the previous year can also be claimed.
What should clients be advised regarding the Annual Exemption?
- Use AE each year
- Consistent giving over many years can enable lots to be given away
- AE should be used after any other available exemption
What is Family Maintenance in the context of exemptions?
Purpose of educating or maintaining family members with no upper limit
When might family maintenance not be a good option?
When the donee is elderly and has assets that exceeds the NRB - would be bad to give them more, loan may be better.
What are Small Gifts in tax exemptions?
£250 gifts can be made free from tax; cannot be used with AE
This exemption is particularly useful in large families.
What are the tax-free wedding gift allowances?
£5,000, £2,500 or £1,000 depending on the relationship with the donee
This allowance can be used in conjunction with the Annual Exemption.
What is meant by Normal Expenditure Out of Income?
Regular payments of spare income which do not affect donor’s standard of living; no upper limit
This is not appropriate for elderly clients who are asset rich but cash poor.
What should clients do to prove Normal Expenditure Out of Income?
Log all payments
Proof of payments is necessary for tax purposes.
What can a taxpayer pay monthly premiums on?
Life insurance policy written into trust for another person
What is the Spousal Exemption?
All transfers between spouses are exempt. It is beneficial for both parties to have assets of their own for tax planning, therefore transferring between spouses is helpful.
How does the Spousal Exemption affect CGT?
For CGT purposes, assets can be transferred from one spouse to another as a ‘no gain and no loss’ transfer, deferred until the donee spouse disposes of the asset later.
What is the Charity Exemption?
All transfers to charity are fully exempt with no limit to the amount that can be claimed.
Large gifts to charities is probably only an option for very wealthy clients.
What benefit does leaving 10% or more of an estate to charity provide?
If a person leaves 10% or more of their net estate to charity when they die, a reduced rate of 36% IHT may apply to the taxable portion of the estate instead of 40%.
What is Business and Agricultural Property Relief?
Transfers of qualifying business/agricultural assets are exempt up to either 100% or 50%, provided the transferor has owned the assets for the minimum qualifying period.
Useful if the client already has qualifying assets - advise them not to ensure they don’t do anything to compromise this.
What should be considered regarding farmhouses in Business and Agricultural Property Relief?
Care should be taken regarding farmhouses where surrounding land is only partly used for agriculture.
How can clients turn non-exempt cash into exempt assets?
By investing in a farming partnership or purchasing Alternative Investment Market shares, clients can turn non-exempt cash into exempt assets.
What assets are not subject to IHT?
Discretionary pension lump sum payments and life insurance policies written in trust are excluded from the taxable estate.
What happens if a life policy is written in trust after it has been set up?
There is a deemed PET of the redemption value of the policy at that date, which is usually a small amount. They may also have to continue to pay premiums which also counts as a PET - although this will be covered by normal expenditure from income.
What is good advice for lifetime tax planning?
Clients should make PETs and LCTS - left with a smaller lump sum.
How can a client mitigate the risk of dying within 7 yrs of the gift?
Clients can take out fixed term life assurance specifically to cover the cost of any IHT.
How is IHT assessed on failed PET?
IHT is charged on the chargeable value of the PET at the time it was made, not the date of death value.
What should clients prioritise giving away as PETs for tax purposes?
Clients should consider giving away assets which are likely to increase in value over time.
What is the CGT implication of a PET?
A PET will usually be a disposal for CGT purposes, and normal rules apply unless hold-over relief is available.
What is the CGT status of cash when making a PET?
Cash is exempt from CGT, making it ideal when making a PET.
What tax implications exist for transfers to unmarried minor children?
If the transfer is to an unmarried minor child, the income arising (if more than £100) is taxed as if it still belongs to the parent.
How can a trust be beneficial for substantial gifts?
A trust can be useful for clients who can afford to make a substantial gift but want to benefit a group of people rather than one particular person.
