Friday, 30 December 2011

Give away your assets as soon as possible to save your beneficiaries inheritance tax!

The longer you delay to gift your assets during your lifetime, the higher the inheritance tax your inheritors will have to pay on your death (because some of the inheritance tax exempt band will go towards the lifetime gifts, thus leaving more of the estate taxable).

Tuesday, 27 December 2011

Have it your way with inheritance tax where asset values go up or down between gift and death!

If inheritance tax is due on the death of the donor because the gift was made to you within 7 years prior to the death, you can make a claim to ensure that the tax you pay is based on the value of the gift on death as opposed to the value at the date of the gift, provided the asset has fallen in value between the gift date and the donor's death date. This works well with property and cash.

However, extra care needs to be taken with assets which are valued differently for inheritance tax (and hence, the reduction in the value of the donor's estate after the gift is not equal to the value of the gift for the donee (that is very much the case with shares).

So, the inheritance taxman is quite generous (for once!) and allows you to have it both ways, because as the normal rules say, the gift date value is used by default to value gifts on death. Hence, there is protection in-built from increased asset values between gift and death!

Friday, 23 December 2011

Inheritance tax on lifetime gifts that become taxable on death

Inheritance tax works on the cumulation principle. Hence, any lifetime gifts made by the deceased to individuals in the 7 years prior to death will become chargeable to inheritance tax on the donor's death. The amount of tax to be paid on those gifts (by the donees) will depend on the value of other lifetime gifts to certain trusts (as well as on the value of gifts to individuals that become chargeable on death) in the last 7 years prior to the chargeable gift on death.

Lesson: make lifetime gifts first to the persons you love the most and leave the others for later!

How to escape Inheritance tax on lifetime gifts

UK inheritance tax works on the principle that you pay IHT even though the lifetime gift to a trust is  valued less than £325k, if you have made other gifts to certain trusts in the last 7 years.

Lesson: if you often make gifts to individuals and to trusts, make sure that the gifts to trusts chronologically come before the gifts to individuals in each tax year. This will reduce any inheritance tax on the latest gift.

If you make more than one gifts to trusts in the same tax year and on some gifts the trustees pay the tax whilst on others you do, to minimise your own inheritance tax bill, make sure that the gift you pay the tax is made earlier than the gift the trustees pay the tax.

Tuesday, 20 December 2011

Have you NOT lost your UK-resident status by going abroad?

These words are important to decide in which country a person pays income and capital gains tax: Residency, ordinary residence and domicile. The rules have been laid out by court cases over the years, but no definite legislation exists (statutory residence test comes into effect from April 2012), hence a lot of grey stuff at the moment!

There have been two cases recently, which (although different between them) (Gaines Cooper, Davies & James), seem to have moved the goalposts in the taxman's favour and made it more difficult for taxpayers to benefit from non-residency.

The critical question for many people who emigrate to another country is: When do I lose my UK-residency status? The answer should be straight forward by reading the taxman's guidance as contained in their IR20: From the day of departure if your move abroad is permanent or for at least 3 years or for a settled purpose and in all cases you have been absent for a whole tax year (with any visits to the UK totalling less than 183 days in any tax year and averaging less than 91 days per tax year over a four-year period).

The difficult part is, defining "permanent" . The HMRC seems to interpret the "going abroad" test very strictly, as a distinct break from the UK (incorporating taking up home permanently in a different country and breaking significant links with the UK) as opposed to just a mere change in circumstances (e.g. accommodation) for a number of years.

When it comes to employment taken up abroad, by concession IR20 states that you become non-UK resident if you are employed abroad for a complete tax year (the understanding has been so far that if not a complete tax year of employment in the year of leaving, then reliance could be placed on having full-time employment in the whole of the next tax year). Again, non-residency begins for date of departure if conditions are satisfied. The Supreme Court, however, in the Davies & James case saw that you have to be working full time for the whole of the relevant tax year in which a capital gain arises to qualify for non-residence status for capital gains tax!

I think what these two cases have done is that, unless you fit precisely into the words or examples given by the taxman in IR20 or HMRC6), you cannot expect the courts to extend the HMRC guidance to cover your non-residency claim, especially when there is a lot of tax at stake!

Bottom line is, some taxpayers, who have left the UK to escape UK income tax or capital gains tax, may have never left the UK for those taxes and they don't even know it! For example, those who left the UK for 5 complete tax years to escape capital gains tax on gains that arose in the tax year of their departure and worked as full-time employees abroad, may find to their detriment that the 5-year period never commenced!

Monday, 12 December 2011

Quick and easy protection from inheritance tax for non-UK domiciled persons

If you are of non-UK domicile (or of non-UK deemed domicile as defined for inheritance tax), you will still be liable to inheritance tax on any assets in your estate which are situated (i.e. physically located) in the UK! In layman words, this applies to people who were neither born or live in the UK. Does it sound bizarre?

Anything that can be done to escape the tax? 

Put your money on authorised unit trusts or shares in open ended investment companies or hold your cash in UK banks in overseas currency.

For those on the other side of the fence: 

What about those persons who, though born abroad by a non-UK father (and hence non-UK domiciled), are about to become UK-domiciled for inheritance tax because they have lived long enough in the UK? Is there anything they can do to protect their foreign assets from UK inheritance tax? The trick is to create a so called  "excluded property trust", into which to put all their foreign assets, before they acquire UK domicile. 

Saturday, 3 December 2011

Chancellor's help for small businesses: Is this enough?

The Chancellor announced some measures to help small businesses during the November Statement. Among those are:
  • The small businesses rates relief holiday is extended to April 2013.
  • Businesses will be able to defer 60% of the increase in their 2012/13 business rates as result of RPI updating, and pay the increase equally in the following two years.
  • The National Loan Guarantee Scheme is introduced for businesses with turnover less than £50m. The scheme will make banks' lending to small businesses easier by offering low interest rates loans underwritten by the Government.
  • The corporation tax rate will fall in April to 25% (that will not have an effect on small companies though!)
The question is: Is this enough? How many small businesses will benefit and will actually those measures help the economy back into growth given that small businesses are the backbone of the economy? What is your take on this?