Tax Planning and Avoidance

Question 1

Tax avoidance and evasion

Answer 1

Tax avoidance/planning: efficient and lawful arrangement of a client’s affairs in a manner which minimises their liability to tax

Aggressive tax avoidance: Schemes which comply with legislation but often exploits loopholes. HMRC usually introduces legislation to cover these gaps when they become aware of it

Tax evasion: where tax payer withholds information about assets or income or otherwise takes steps to avoid paying the tax they are liable for. Unlawful

Question 2

Anti-avoidance rules: BPR, APR, Woodlands relief

Answer 2

Any loans taken out against business assets must first be offset against the value of the qualifying asset.

This has the effect of reducing the value of the assets which attract relief.

Question 3

Gift with reservation of benefit

Answer 3

GROB - purpose is to prevent individuals attempting to manipulate the IHT regime by giving away property during their lifetime but retaining a personal benefit in that property.

That property will be treated as part of the donor’s estate and ensures it will be taxed upon their death.

Question 4

Free CGT uplift

Answer 4

There is no CGT for items inherited in the death estate.

They inherit the item at market value at the date of death.

This can be a significant justification for leaving it until death to make a gift of valuable property.

Question 5

Tax planning: Annual exemption

Answer 5

• using the AE each year to make gifts without IHT consequences
• consistent giving over a number of years can enable a significant amount of money to be given away
• AE should be used after any other available exemptions or reliefs are applied

Question 6

Family maintenance

Answer 6

Important to ask clients if this relief applies as education and care costs can be significant

Question 7

Small gift exemption

Answer 7

Good for giving where the client has a large family - christmas and birthday gifts etc.

Question 8

Marriage exemption

Answer 8

• Good to ask the client about their family to see if there are any upcoming marriages

Question 9

Normal expenditure out of income

Answer 9

• Regular payments of spare income which do not affect standard of living
• May not be appropriate for elderly clients who are asset rich but cash poor

Question 10

Spousal exemption

Answer 10

A couple can make more exempt transfers than if one party holds most of the money

Question 11

BPR and APR

Answer 11

Should recommend clients choose investments which qualify for BPR

• Including AIM (alternative investment market) shares which are unquoted for purposes of BPR

Question 12

Benefits of PETs and LCTs

Answer 12

Tax planning can involve looking at whether money or assets can be given away via PETs or LCTs without triggering IHT as a result.

Make sure the client retains enough or their capital.

Risk: not surviving 7 years - but can also take out a fixed termed life insurance policy to cover the cost of any IHT.

Question 13

Assets not subject to IHT

Answer 13

Clients should be encouraged to take out life insurance policies and/or pay into a pension and write these into a trust.

Question 14

Capital Gains tax

Answer 14

If makes a PET the IHT will be on the value of the gift at the time of the transfer - so if gifts are expected to increase in value over time then it may be worth considering making them sooner rather than later.

If wants to gift multiple items that attract CGT - should consider making them over different years to claim CGT annual exemptions

Question 15

Exempt beneficiaries

Answer 15

• Spouse/civil partner of deceased
• Charities

Question 16

Advice for couples

Answer 16

Get married to take advantage of the spousal exemption

Question 17

Interaction of different exemptions

Answer 17

Certain exemptions will be wasted if they are given to a specific beneficiary.

For example, BPR is wasted if given to a spouse.

Question 18

Unmarried couples

Answer 18

As there is no spouse exemption it may be preferable to leave assets in a discretionary trust which includes children etc.

This means that they will pay the same amount of inheritance tax when they die - but there will not be a second charge when their partner dies.

May also be worth considering equalising assets more so both can take advantage of the NRB.

Question 19

Drafting gifts of the NRB

Answer 19

” I give my daughter an amount equal to the value of my nil rate band available on the date I die”

This is preferable drafting because:
- the NRB could change from the time of drafting
- some NRB could be taken up by PETs

or maybe “gift of the maximum amount that can be given without tax being payable”

Question 20

Wording required for a Will trust

Answer 20

Must:
- set out the terms of the trust
- appoint trustees
- identify beneficiaries
- identify which part of the estate the trust will apply to
- Set out the scope fo the trustees’ powers

Question 21

Spousal exemption and discretionary trust

Answer 21

Spousal exemption will not apply if estate is given into a discretionary trust

Question 22

Discretionary Will trust

Answer 22

• although no IHT saving at the time, may save IHT in the future as the beneficiaries will not pay IHT on the contents of the trust
• no need to determine distributions - can leave a letter of wishes

Question 23

Two-year discretionary will trust

Answer 23

Drafted with the intention that the will trust will only lasts the period of two years.

Gives testator flexibility insofar as they do not have to decide how their estate should be distributed.

Only appropriate where they trust trustees to make appropriate decisions

Then distributions are taxed as if made from the Will.