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substantial gifts out of your taxable estate into trust now, and
as a trustee retain control over the assets (this may well be
subject to CGT or IHT charges).
The IHT main residence nil-rate band
The ‘residence nil-rate band’ (RNRB) applies where a residence
is passed on death to direct descendants such as a child or
a grandchild. This is set at £125,000 for 2018/19 and rises
each year thereafter (to reach £175,000 in 2020/21, and
then increasing in line with CPI inflation from 2021/22). The
additional band can only be used in respect of one residential
property which has, at some point, been a residence of
the deceased.
Any unused nil-rate band may be transferred to a surviving
spouse or civil partner. It will also be available where a person
downsizes or ceases to own a home on or after 8 July 2015 and
assets of an equivalent value, up to the value of the additional
nil-rate band, are passed on death to direct descendants.
There will be a tapered withdrawal of the additional nil-rate
band for estates with a net value (after deducting any liabilities
but before reliefs and exemptions) of more than £2 million.
This will be at a withdrawal rate of £1 for every £2 over
this threshold.
Gifting strategies
Business assets
Under current rules, there will be no CGT and perhaps little
or no IHT to pay if you retain business property until your
death. This is fine, as long as you wish to continue to hold your
business interests until death, and recognise that the rules
may change.
Alternatively, you may wish to hand your business over to the
next generation. A gift of business property today will probably
qualify for up to 100% IHT relief, and any capital gain can
more than likely be held over to the new owner, so there will
be no current CGT liability. If business or agricultural property
is included in the estate, it may be appropriate to leave it to
someone other than your spouse; otherwise the benefit of the
special reliefs may be lost.
Appreciating assets
Gifts do not have to be in cash. You could save more IHT and/or
CGT by gifting assets with the potential for growth in value.
Gift while the asset has a lower value, and the appreciation then
accrues outside your estate.
Gifting income
Another way to build up capital outside your own estate is to
make regular gifts out of income, perhaps by way of premiums
on an insurance policy written in trust for your heirs. Regular
payments of this type will be exempt from IHT, but please note
that your executors may need to be able to prove the payments
were (a) regular and (b) out of surplus income, so you will need
to keep some records to support the claim.
Charitable gifts
Gifts to charity can take many forms and result in significant
tax reliefs for both lifetime giving and on death. Perhaps you
are already making regular donations to one or more charities,
coupled with one-off donations in response to natural disasters
or televised appeals. Here we look at some of the ways you can
increase the value of your gift to your chosen charities through
the various forms of tax relief available.
Gift Aid
Donations made under Gift Aid are made net of tax. What that
means is that for every £1 you donate, the charity can recover
25p from HMRC. Furthermore, if you are paying tax at the 40%
higher (or 45% additional) rate, you can claim tax relief equal to
25p (31p). Consequently, at a net cost to you of only 75p (69p
additional rate), the charity receives £1.25.
A payment made in the current tax year can, subject to certain
deadlines, be treated for tax purposes as if it had been made in
2017/18. This may not appear important to many people, but if
you paid additional rate tax in 2017/18 and do not expect to do
so this year, a claim will allow you to obtain relief at last year’s
rate. (Note: The carry-back election must be made before we
file your 2018 Tax Return – another example of the importance
of keeping us informed!) You must pay enough tax in the
relevant year to cover the tax the charity will recover (that is,
25p for every £1 you gift).
Payroll giving
You can make regular donations to charity through your payroll,
if your employer agrees to operate the scheme. It operates by
deducting an amount from your gross pay equal to the net cost
to you of the monthly net donation you want to make.
Gifts of assets
Not all donations need to be monetary. You can make a gift
of assets, and if the assets fall within the approved categories
the gift can obtain a triple tax relief. Any gain which would
accrue on the gift is exempt from CGT and the asset is removed
from your estate for IHT. In addition the value of the asset is
deductible against your income for the purposes of calculating
your income tax liability.
Charitable legacies on death
A reduced rate of IHT applies where 10% or more of a
deceased’s net estate (after deducting IHT exemptions, reliefs
and the nil-rate band) is left to charity. In those cases the 40%
rate will be reduced to 36%.