Tax traps all families should look to avoid

There are a number of tax traps that families can fall into that may cost them dearly in terms of lost reliefs and larger Inheritance Tax bills. Here are a few key areas to look at as you plan your family’s long-term strategy, which people of all ages should pay attention to.

There is widespread speculation that Inheritance Tax (IHT) will be subject to significant increases at the next Budget, this being an obvious target for the government to attempt to raise funds from. An alignment of Capital Gains Tax with Income Tax is another alarming proposal supposedly up for consideration, but it is the prospect of IHT change that seems to have people particularly exercised.

IHT is hated by many as it taxes money which has already been levied a number of times in all likelihood

IHT is hated by many as it taxes money which has already been levied a number of times in all likelihood. There are many perfectly legitimate ways to reduce how much is owed upon your estate, however. In addition to the £325,000 per individual/£650,000 per couple that is already shielded, family homes can benefit from relief that tapers only from £1 million value threshold. Gifting is another popular tool, although like others should be treated with care.

As you review your strategy for keeping as much of your money as possible with loved ones and out of the taxman’s clutches, here a some key errors to avoid.

Letting gifting go wrong

Legal experts are warning of gifting scenarios going very wrong as a result of the pandemic upheaval.

Legal experts are warning of gifting scenarios going very wrong as a result of the pandemic upheaval

Older people who have gifted property to their children to take advantage of the seven-year gifting rule and then moved in with them to shield during the pandemic risk being caught by Gift with Reservation of Benefit strictures – and thus having the value of the gifted property remain in their estate.

Gifting is a powerful estate planning tool, but expert advice must be taken to ensure it is optimally – and safely – deployed, otherwise beneficiaries might find themselves landed with large Inheritance Tax Bills that they are ill-prepared to pay.

Gifting is a powerful estate planning tool, but expert advice must be taken to ensure it is optimally – and safely – deployed, otherwise beneficiaries might find themselves landed with large Inheritance Tax Bills that they are ill-prepared to pay

Some dispensations and loopholes like paying market rent may apply. Even still, HMRC is said to have clawed back more than £300 million in IHT as a result of clampdowns under the GROB rules in the past three years alone.

Not claiming overpaid taxes

The value of investments fluctuates over time, and particularly so during the volatility associated with the pandemic. What many might not realise is that under loss relief they are entitled to reclaim overpaid tax on value of any assets (including property) sold in the year after the holder passes, where its value fell.

To be eligible, the sale needs to have been undertaken by the executor rather than the beneficiary and claims have to be made within four years.

The Telegraph reported that falling share prices caused 1,850 people to apply to have overpaid death duties returned in the 2019-20 tax year, more than double just two years before

Those making claims join a rapidly growing number. The Telegraph reported that falling share prices caused 1,850 people to apply to have overpaid death duties returned in the 2019-20 tax year, more than double just two years before. Additionally, some 5,000 refund claims relating to loss in property value were made, a number expected to soar if house prices plummet as some predict.

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Top Tip

Potential increases to Inheritance Tax are certainly coming up more and more in our conversations with affluent individuals. People tend to know there are many ways to legitimately mitigate IHT but still don’t do anything about it, until it’s too late. Many of the best weapons in the armoury need a little time to work best, so why not let us arrange a no-obligation consultation to help get the ball rolling?

Lee Goggin - Co-Founder

Lee Goggin

Co-Founder

Letting pensions paperwork get the upper hand

Many people have several pensions from a varied career. Dedicating a few hours to pinpointing them all with a view to consolidation has a number of benefits.

Firstly, this is step one in ensuring your pension investments are managed optimally (and it’s not a case of higher than ideal fees for suboptimal performance).

Second, it allows you to ensure the named beneficiaries of any pensions are as you would want them to be – and document who those are.

A deceased person’s pensions must be claimed within two years or will be counted as part of their estate, attracting the normal rates of IHT and income tax on the beneficiary

A deceased person’s pensions must be claimed within two years or will be counted as part of their estate, attracting the normal rates of IHT and income tax on the beneficiary. Most damaging of all, the tax-free spousal exemption also expires, which could be a very costly mistake.

Failing to consider FICs

As we have previously explained in more depth, Family Investment Companies are an attractive wealth management vehicle for the wealthy, particularly since the introduction of the 20% upfront tax on assets placed into trust. As a company, the profits a FIC makes are subject to corporate tax at the normal rate.

Perhaps more important is the flexibility and control for the founders that FICs allow. Each family member is a shareholder, but with several classes of shares issues so that junior members may have the right to receive dividends and assets of the FIC, but not voting rights, before eventually replacing a founder.

The benefits are broad in terms of both tax-efficiencies and facilitating succession planning, but HNWIs should also bear in mind that last year HMRC set up a special FIC taskforce to review the structure’s use

The benefits are broad in terms of both tax-efficiencies and facilitating succession planning, but HNWIs should also bear in mind that last year HMRC set up a special FIC taskforce to review the structure’s use. In particular, experts are warning families to really focus on getting the rights of share classes correct.

Does your family need expert guidance?

These are just a few of the perhaps lesser known tax quirks that people should be aware of as they structure their affairs, and discuss them with their families.

Death is something of a taboo subject and though understandable this reluctance to speak about inevitabilities adds confusion and the potential to lose a lot of money to what is already a distressing time. Having frank discussions about finances at every stage of life can be beneficial in so many ways.

An adviser will make the whole process easy. And, as many of the wealth managers on our panel offer the entire suite of investment management and financial/wealth planning services in a “one-stop-shop” style, getting the right solution in place can often be a lot faster and more cost-effective than one might think. Why not start your free 3-minute search now?

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