Specialist Dental Tax & Accounting Advice 

“IN THIS WORLD nothing can be said to be certain,

except death and taxes.”

(Attributed to Benjamin Franklin.)

While we may not be able to avoid either of these inevitabilities, there are ways to lessen the burden of one of them: inheritance tax (IHT). Inheritance tax can be a significant concern for individuals and families, as it can erode the value of an estate and limit the assets that can be passed on to loved ones. Fortunately, there are some basic strategies that can be employed to reduce IHT, from making gifts during your lifetime to setting up trusts.

In today’s Shipleys Tax note, we will look at some effective ways of reducing IHT, thus ensuring that your loved ones inherit as much of your wealth as possible.

What is IHT?

Inheritance tax (IHT) is a tax on the value of an individual’s estate exceeding the IHT threshold (£325,000) when they pass away. In the UK, the current rate of IHT is 40%, which can significantly reduce the amount of assets that can be passed on to heirs.

5 tips to reduce IHT

However, there are several ways in which you can reduce the amount of IHT that will be payable on your estate. Here are some basic tips to help you minimise your IHT liability:

1. Use your annual exemption: Each individual is entitled to an annual exemption of £3,000 for IHT purposes. This means that you can give away up to £3,000 each year without incurring any IHT liability. This can be a useful way to gradually reduce the value of your estate over time.

Illustration: If Adam has an estate worth £500,000, he can give away £3,000 each year to his children without incurring any IHT liability. Over a period of 10 years, John will have reduced the value of his estate by £30,000.

2. Make gifts out of your surplus income: You can make gifts out of your surplus income without incurring any IHT liability. To qualify as surplus income, the gifts must be regular, made from your income (after tax) and must not affect your standard of living. This can be a useful way to pass on wealth to your loved ones during your lifetime.

Illustration: If Sara has an income of £60,000 per year and her living expenses amount to £40,000, she has a surplus income of £20,000. She can make gifts of up to £20,000 each year to her children without incurring any IHT liability.

3. Make use of the annual small gifts exemption: You can make gifts of up to £250 to any number of individuals each year without incurring any IHT liability. This can be a useful way to pass on small amounts of wealth to family and friends.

Illustration: If Tom has 10 grandchildren, he can make gifts of £250 to each of them each year, without incurring any IHT liability.

4. Set up a trust: You can set up a trust to hold assets for the benefit of your heirs. This can be a useful way to reduce the value of your estate for IHT purposes. There are different types of trusts available, and it’s important to seek professional advice to ensure that you choose the right one for your needs.

Illustration: If Imran has an estate worth £1 million, he can set up a trust and transfer £500,000 of assets into it. As long as he survives for 7 years after making the transfer, the value of the assets in the trust will not be subject to IHT.

5. Give gifts to charity: Gifts to charity are exempt from IHT. This can be a useful way to reduce the value of your estate and support a cause that you care about.

Illustration: If Maryam has an estate worth £1 million, she can leave a gift of £100,000 to her favourite charity in her will. This will reduce the value of her estate to £900,000 and the amount of IHT payable.

In general, reducing Inheritance Tax (IHT) can be a complex and sensitive issue, but it is an important consideration for individuals with significant assets. While the current IHT threshold may seem generous, many estates can quickly exceed it, resulting in a substantial tax bill for heirs. It is therefore important to seek professional advice to ensure that you choose the right strategy for your individual circumstances.

Working with a tax specialist at Shipleys Tax can help you navigate the various options and create a tailored plan to minimize IHT while ensuring that your assets are passed on to your intended beneficiaries. By taking proactive steps to reduce IHT, you can ensure that your hard-earned wealth is preserved for future generations, rather than being absorbed by the taxman.

If you are affected by any of the issues above and would like more information, please call 0114 272 4984 or email info@shipleystax.com.

Please note that Shipleys Tax do not give free advice by email or telephone.

CURRENTLY, there’s an extended window for individuals to plug holes in their state pension qualifying years record using voluntary NI contributions. However, this is coming to a close after 5 April 2023.

In todays Shipley’s Tax blog we look at what you need to do check if can you have full National Insurance credits on retirement.

UPDATE: 08/03/2023

Deadline now extended:

The government has just announced an extension of the deadline below to 31 July 2023. Further information below.

What’s happening?

As the end of the current tax year approaches, UK taxpayers have until 5 April 2023, to make voluntary Class 3 National Insurance (NI) contributions to fill any gaps in their NI record. This is particularly important for individuals who have missed payments due to career breaks or other reasons.

NI contributions are paid by employees and the self-employed if their earnings exceed a set threshold. Providing you earn enough in any given year, you will be treated as having a “qualifying year” for NI purposes which will be added to your NI record which can directly affect your entitlement to the state pension and other benefits. This is important because the contributions help individuals build up entitlements to state benefits such as the state pension, bereavement benefits, and Jobseeker’s Allowance. The amount of contributions a person makes over their working life determines their entitlement to these benefits.

What happens if I have gaps in my NI record?

Missing years can result in a shortfall when retirement age is attained, meaning only a partial pension is paid. So if the gap is substantial, there may be no entitlement at all. To permit people to catch up on missing years, the government allows payment of Class 3 NI at a fixed rate – known as “voluntary contributions” – to be paid. Making voluntary contributions can help to ensure you have a complete record of contributions and therefore maximize your entitlement to state benefits. This is crucial for individuals who have taken career breaks or periods of unemployment, as this can have a significant impact on your NI record.

How far can you go back?

Normally, you can only go back the last six years. However, there is a current HMRC incentive extending the window back to 6 April 2006 -meaning you can check your NI records going back over seventeen years.

From 6 April 2023 this will revert to the standard six years. It is therefore crucial that you check your NI record and make good any missing years’ contributions for tax years prior to 2017/18 before that date or the opportunity may be lost for good.

Update 08/03/2023: This deadline has now been extended to 31 July 2023.

In summary, if you have missed any NI contributions over your working life, it’s important to consider making voluntary contributions before the extended deadline closes. This will help you to maximize your entitlement to state benefits and ensure that you have a complete record of contributions. However, it’s important to consider your own circumstances and seek professional advice before making any decisions.

If you are affected by any of the issues above and would like more information, please call 0114 272 4984 or email info@shipleystax.com.

Please note that Shipleys Tax do not give free advice by email or telephone.

UNDER PRESSURE FROM his party, the Chancellor in his November 2022 budget made a significant alteration to the annual allowance for gains made on disposal of property assets.

In today’s Shipleys Tax brief, we look at the consequences of the upcoming change in the Capital Gains Tax (“CGT”) allowance and what it means for you and how you could save tax by being a little pro-active.

So, what’s happened?

Currently, the annual exemption for profits on disposal of property (amongst other assets) is £12,300. The government will reduce this to £6,000 on 6 April 2023 with a further reduction to £3,000 on 6 April 2024.

What does this mean for me?

Any gains made in excess of the annual exemptions above will be subject to capital gains tax at 10%, 20%, 18% and/or 28%, depending on the nature of the assets sold and on your individual taxable position.

Also, as the basic threshold for inheritance tax (IHT) has been frozen at £325,000 since 6 April 2009 (and will be until at least 2026), property tax planning is increasingly important to mitigate the charge.

Gifting an asset to remove it from your estate as soon as possible is something many will consider. For example, an individual who makes a gift but survives them by seven years will not be charged inheritance tax on its value on death.

For CGT purposes, when an asset is gifted, this is treated as a “deemed disposal” meaning that even though no money has exchanged, the market value of the asset will replace sale proceeds.

Accordingly, the CGT allowance is a valuable relief. The allowance at its current level is worth up to £3,444 in cash terms. Once fully reduced, it will be worth a maximum of £840. This reduction greatly diminishes the value of the allowance as an effective planning tool.

So, what should you do?

If you were already thinking of making some gifts, it is worth giving some serious thought to doing so ahead of the reduction in the allowance to maximise tax relief.

As each person has their own annual exemption and transfers between spouses are generally tax-free of CGT, the benefit can be doubled.

Married couples tax planning

Consider a rental property worth £300,00, purchased for £150,000, owned in the sole name of a spouse. If the spouse gifted his half of the property to his wife and together they gifted the whole property to their son, they would remove the £300,000 from their estates, saving up to £120,000 in inheritance tax (assuming they survive seven years).

If the gift took place on or before 5 April 2023, the capital gain of £150,000 is reduced by the two annual exemptions, which means they will have a total CGT allowance of £24,600. At the 40% band, this represents a tax relief of £9,840.

If they took this same action in May 2024, the annual exemptions would reduce and their maximum CGT allowance would be £6,000 between the two. This is a loss of £18,600 tax relief, which at 40% tax band means extra tax payable of £7,440!

The CGT annual tax exemption is a valuable tax relief, and used carefully in the right manner, could help you save significant amounts of tax by being pro-active.

If you are affected by any of the issues above and would like more information, please call 0114 272 4984 or email info@shipleystax.com.

Please note that Shipleys Tax do not give free advice by email or telephone.