Protecting your family’s assets
Protecting your family’s assets
Inheritance tax: the importance of Wills and lifetime gifts
In times when the economy is struggling, there can be a wide range of effects on the finances of families and individuals, with many seeing the value of their assets fall. In this article, we look at the possible tax implications from low asset values and what individuals can do to help protect their family finances for the long term.An important factor to remember is that when an individual makes a gift, it is the current market value of the asset being gifted that is taken into account for both Inheritance Tax (IHT) and capital gains tax (CGT) purposes.
Review and Update your Will
Regularly reviewing and updating your Will as circumstances and tax rules change is prudent. Ensuring that your Will fully considers charitable gifts, any ISA investments, the family home and pensions is advisable.Trusts
The creation of a trust to hold assets for the benefit of the wider family or dependants has been a long-standing solution for many individuals seeking to pass assets to the next generation.Settling a trust is generally a chargeable IHT event, however, if the Settlor’s nil rate band is fully available individuals can transfer £325,000 of assets into the trust without incurring an IHT liability. This could increase to £650,000 for married couples jointly settling a trust with the availability of two nil rate bands.
CGT hold-over relief may be available so that the gift to trust does not trigger a CGT liability.
If you are considering using a trust or have already established one, now may be a good time to gift or sell assets.
When assets pass out of the trust to a beneficiary, either by way of an entitlement or an appointment by the trustees, any IHT and CGT liabilities are based on the current market value of the assets passing. Trustees may wish to consider whether the trust continues to meet its objectives and whether it is now appropriate to appoint assets to their beneficiaries.
Personal gifts
Gifting an asset to another individual is often a potentially exempt transfer for IHT purposes. As such, if the donor survives for seven years from the date of the gift it falls out of their IHT estate. However, if the donor does die in this period, the value of the assets gifted at the time the gift was made could become taxable.Where a gift fails the seven-year rule, subject to reliefs and the IHT nil rate band (currently £325,000), IHT could be payable on the gift (by the recipient or the executors) or the value of the estate. Clearly, making a gift when asset values are low will mitigate the potential IHT exposure for the individual considering gifting an asset.
For CGT purposes, a gift is treated as being a disposal of the asset at market value by the donor. This could trigger a capital gain if the value exceeds the allowable cost, unless the assets qualify for business assets hold-over relief.
When asset values are lower, the likelihood of a gift triggering a gain is reduced or a gift may give rise to a loss. Care should be taken in generating a loss on gifts as any losses arising from the disposal of an asset to a connected person can only be set against gains which arise from other disposals to that same person.
Charitable gifts
Gifting to a charity is exempt from IHT, however, the charity must be a UK registered charity or CASC in order to qualify for any tax relief – Income Tax, Capital Gains Tax & Inheritance Tax.Gifts to non-UK charities are no longer exempt and will therefore be chargeable lifetime transfers and may be subject to an immediate IHT charge (they do not qualify to be a potentially exempt transfer). However, in many cases it may be possible for donors to continue to support causes in EU/EEA countries, or worldwide, this could be either through a “UK Friends of” charity or other UK charitable vehicle.
Crystallising ‘paper’ losses
Individuals may consider crystallising a current ‘paper’ or book loss on an investment and repurchase a similar asset. Any such loss can then be offset against capital gains arising on assets disposals made in the same or later tax years. However, it is important to note that 'Bed and breakfasting' of shares is often not effective for tax purposes and particular care is required with transactions you do personally, via your ISA or your spouse.As with any investment decisions, independent investment advice should be sought before proceeding.
Non-tax-advantaged Share Option Exercise
Where an individual exercises an option to acquire shares in an employer through a non-tax-advantaged share plan, income tax is charged on that exercise on the difference between the market value of the shares at the date of exercise and the amount paid for the shares under the option. If the shares acquired are ‘readily convertible’ (ie easy to sell for cash) National Insurance Contributions will also be due on exercise of the option.Exercising such options while the value of company is temporarily reduced could reduce tax liabilities in the longer term. However, this is clearly a risk driven investment decision on which independent investment advice should be sought before proceeding. One of the key benefits of holding an option is that it would often be exercised prior to an exit event (eg the sale of the company) so that there is an immediate return of value. In the absence of such an event, the implications of becoming a shareholder in the company, and the risk to the value in invested by way of the exercise, would need to be considered carefully for the option holder. Read more here.
Pensions - Lifetime Allowance
An individual whose pension pot was previously above the Lifetime Allowance of £1,073,100 (and with no protection/enhanced protection) might choose to crystallise pension benefits now that the Lifetime Allowance tax charge has been removed by the current Government.There are many financial, investment and IHT issues to carefully consider before proceeding but, acting on you pension now, may save tax in the long term. However action should only be considered as part of overall wealth planning including advice from independent financial adviser. Read more on the pension tax changes here.