Tax Avoidance

Image result for tax avoidance + images

The Times reports that the Miliband family were in good company in using a deed of variation to reduce their potential inheritance tax liability as the same, perfectly legal device was also used to alter the £21 million will of Princess Diana.

But I'm not so sure that Ralph Miliband who was a firebrand figure on the left of politics for many years would have been relaxed about being in such company.

Inheritance tax loophole may close

The £21 million will of Diana, Princess of Wales, was altered to allow her 17 godchildren to receive bequests Tim Graham/Getty Images

By David Budworth - The Times

Families planning to use the legal loophole used by Ed Milliband’s family to cut their inheritance tax bill are being urged to get a move on after George Osborne threatened a crackdown on the use of deeds of variation. In a blatant dig at the Labour leader’s tax affairs, Mr Osborne indicated that he was concerned that the scheme, which allows wills to be altered after someone’s death, was being abused.

Although it might be dismissed as political point-scoring, accountants warn that families need to take the threat that deeds of variation will be abolished seriously.

Julia Rosenbloom, a tax director at Smith & Williamson, the accountancy group, says: “A family has two years after death to use a deed of variation. If they are thinking of doing it they should do it sooner rather that later just in case something changes in the autumn.”

This is when a review on the avoidance of IHT through the use of deeds of variation will report. However, she dismisses the notion that deeds of variation are primarily used for tax planning. “Most are used to alter a badly thought out will.”

It is often used, for example, where a parent leaves their estate to their children who then use a deed of variation to pass the money on to the next generation. The £21 million will of Diana, Princess of Wales, was altered to allow her 17 godchildren to receive bequests.

David Kilshaw, head of private client tax at the accountants EY, says: “Deeds of variation can ensure estates pass as families’ wish where there is no will or where circumstances have changed. When somebody dies without a will, for example, a deed of variation may ensure a widow or widower can stay in their home.”

Provided all the beneficiaries agree, and are over 18, it is a fairly easy operation, though, of course, it is even simpler if the will is written with everyone’s wishes in mind in the first place.

IHT is expected to figure prominently in the imminent election race, with plans to allow parents to pass a family home worth up to £1 million to their children tax free expected to be at the centre of the Conservatives’ election manifesto.

Death duties are paid by relatively few people — about 35,000 over the past year — but are hated by voters and the numbers liable to the tax are on the increase. The Office for Budget Responsibility says that the number of families caught by IHT will double over the next five years, to 64,000 by 2019-20.

At present, when someone dies with assets worth more than £325,000 the excess estate is taxed at 40 per cent. If they are married or in a civil partnership they can pass their limit to their surviving spouse, enabling £650,000 to be passed on to their beneficiaries tax free. The latest Land Registry figures show that in the capital even the average price for a home exceeds the £650,000 threshold in five London boroughs including Camden (£812,868), Hammersmith and Fulham (£791,527) and Islington (£662,198).

Rachael Griffin, of Old Mutual Wealth, says: “The IHT band was frozen at £325,000 back in April 2009. Since then, average house prices have risen by 20 per cent. If IHT had kept pace with house price inflation, the joint IHT allowance would stand at £781,950 today.”

The Tories are believed to favour creating a new tax-free allowance specifically for the family home. This tax-free band would be worth £175,000 per person and like the existing nil-rate band could be transferred between married couples, making it worth a maximum of £350,000. It would only apply to a residence passed on to a direct descendant, including stepchildren and adopted children. By adding the existing maximum allowance of £650,000 to the new maximum relief of £350,000 properties up to £1 million could escape IHT altogether. On a £1 million property that would be a saving of £140,000; the downside is that it could make estate planning more confusing. You might already be feeling muddled about what is and isn’t liable to death duties after a series of recent rule changes. Here we explain how they affect you.

Pensions

On April 6, the 55 per cent “death tax” on unspent money in defined contribution pension schemes will be scrapped, meaning that Mr Osborne has made pensions one of the most tax-efficient ways to pass on your wealth to your children or grandchildren.

Under the new rules, if you die before the age of 75 you can pass funds left in your pension to your beneficiaries completely free of tax and they will pay no tax on the money they withdraw from that pension. If you die aged 75 or over, the only tax they need to pay will be an income tax charge when they take money out of their inherited pension pot.

Jonothan McColgan, chartered financial planner at Combined Financial Strategies, says: “People may want to consider moving savings which would otherwise be subject to IHT into their pension to shelter funds from IHT and benefit from tax-free investment returns. Provided they’re not in serious ill health at the time, any savings will be immediately outside the estate.”

Isas

Since December 3 last year you have been able to pass on an Isa to a surviving husband, wife or civil partner without losing the tax-free wrapper. Previously any tax advantages of the savings account were lost when the owner died.

The surviving spouse will be given an additional one-off allowance that is equal to their deceased partner’s total Isa savings. This can be used from April 6. This will enable them to re-shelter assets that were in a spouse’s Isa into an Isa in their name.

This does not exempt the Isa from inheritance tax, however, transfers of assets between spouses are always IHT free.

How to reduce the bill

The growth in the number of families paying inheritance tax is being largely driven by the increase in the value of people’s homes, and the reason it provokes so much anger is that it is near impossible to escape death duties on family property. However, there are other ways to cut or eliminate an IHT bill.

  • Gifting is one of easiest way. Each year you can give away £3,000 free of tax and you can also legitimately avoid IHT by giving £250 to any number of people every year, but you cannot combine it with any other exemption when giving to the same person. Parents can give £5,000 to each of their children as a wedding or civil partnership gift. Grandparents can give £2,500 and anyone else £1,000.
  • If a gift is regular, comes out of your income and does not affect your standard of living, any amount of money can be given away and ignored for IHT. Regular gifts can be a useful way for grandparents to put money towards school fees and reduce the value of their estate at the same time.
  • It is possible to make further tax-free gifts — potentially exempt transfers — but you have to survive for seven years after making the gift. You can give away most assets, including cash, shares and property. However, it has to be an outright gift from which you can no longer benefit. If you hand your family home to your children and continue to live there, you have to pay a market rent, which can wipe out the tax benefits.
  • If a life insurance policy is put into trust, the proceeds will not form part of your estate. Your insurance company should allow you to do this for free when taking out a policy.
  • Most shares listed on the Alternative Investment Market, or Aim, become free from inheritance tax once you have held them for two years because they qualify for “business property” relief.
  • Commercial woodland also qualifies for business property relief, which means the land and trees become exempt after you have owned them for two years. It applies to property where timber from the forest will be actively marketed and sold.
  • You can deduct funeral expenses “plus a reasonable amount for mourning expenses” from the value of your estate when working out IHT. Expenses can include flowers, refreshments for mourners, necessary expenses and a headstone to mark the grave.

Popular posts from this blog

SNP - Conspiracy of Silence

LGB Rights - Hijacked By Intolerant Zealots!