The past 18 months have seen much change across the tax landscape, with the last few weeks alone witnessing a significant proportion of tax planning taking a trip back to the drawing board as the result of recent changes in the Finance Act, which have seen a number of tax reliefs and cuts being removed.
In spite of this, there are still some valuable reliefs and allowances available but making sure you don’t lose them is another potential obstacle in the tax planning process. And yes, you might well ask just how is it possible to lose the tax reliefs and allowances that the government has supposed to have made available. As ever, the devil is in the detail.
Three immediate areas spring to mind when it comes to advising individuals where they need to pay extra attention:-
1) Business Property Relief (BPR) is a relief that is often taken for granted but if you don’t look after it you can quite easily lose it. Available on certain business interests and business assets, BRP can provide relief of up to 100% of the value of such items from Inheritance Tax. However, when these assets or interests are passed on to another family member, the protection against Inheritance Tax is lost. By putting in place a Business Property Relief Trust, the value passed on to family members can continue to benefit from the relief. Say, for example, shares worth £500,000 are passed on from husband to wife, the wife sells them and later dies. The £500,000 that is now cash in the wife’s bank account is now subject to 40% Inheritance Tax on her estate. If a Business Property Relief Trust had been set up, the shares would have been passed within the Trust meaning that the wife could sell the shares and hold the funds in the Trust. She would have had access to the Trust during her lifetime, spending it all if she so wished, but if she didn’t, the Trust would pass on to the other beneficiaries without forming part of her estate and therefore not subject to Inheritance Tax. In this scenario, that would mean a staggering £200,000 being saved in Inheritance Tax.
2)Personal Allowance is another area that is often taken for granted. Many people are under the impression that everyone is entitled to receive the first £11,500 of their income tax free. What they often don’t realise is that when their income level hits £100,000, the personal allowance begins to taper away. And once your earnings hit £123,000 you lose the personal allowance altogether. Ensuring that family members’ Personal Allowances are shared across the family unit means that income generating assets can be held in the lower taxpayer’s name thereby helping to preserve the Personal Allowance.
3)The Residence Nil Rate Band has been presented as a welcome increase to the amount that is exempt before Inheritance Tax is payable. However, it’s not quite what it seems and again, it’s easy to take it for granted that this new relief will apply to you. Due to be phased in over the next four years, this top-up of the Nil Rate Band promises married couples and civil partnerships exemption from Inheritance Tax up to £1million by 2020. However, where estates exceed £2m the relief starts to taper away and by 2020 an estate worth £2.35m or above won’t qualify for the additional exemption at all. Furthermore, the property must be passed on to a direct descendant. This means that any past planning that has involved putting the main residence into a Trust must be reviewed as this may mean you cannot claim this relief. To benefit from this potential £140,000 tax saving, there are a number of further conditions and considerations to take into account to check whether or not you qualify for the relief. Considerations include downsizing your main residence, whether you have multiple dwellings, whether you hold the property as Joint Tenants as opposed to Tenants in Common, which will provide more flexibility in retaining the RBRB, and what the terms of your Will set out. It may be that by addressing and updating your Will, you can ensure that you qualify.
As with many other tax reliefs and allowances available, the key, as ever, is to ensure that you are aware of the rules and qualifying criteria surrounding each one and that you understand just how they affect your own personal circumstances.
For more information on these and other tax reliefs and the best way to address them, please contact Jennie Brown on 07554 553 844 or via email on firstname.lastname@example.org