Thackray Williams

Every time you open a newspaper or turn on the television we are bombarded with stories of doom and gloom.  Falling house prices and share values have both been a common theme over the last year to 18 months.

While it is too early to say that we have turned a corner, in the last few weeks there does seem to be a slightly more positive note from economists that things may have reached the bottom of the trough so to speak.

An economic downturn is a difficult time for both the country and individuals, but it does give rise to some tax planning opportunities both during the course of dealing with an administration of an estate and during lifetime.

DURING THE ADMINISTRATION OF AN ESTATE

We have a large probate administration department which specialises in dealing with implementing Wills and passing assets to beneficiaries.  We also specialise in advising beneficiaries in relation to their own Inheritance Tax (IHT) positions upon receiving an inheritance.

IHT is paid on the value of assets at the date of death.  Within the legislation, however, there is an ability for executors to reclaim IHT on the loss on sale of both the deceased’s property and their stocks and shares.

This has been particularly relevant in recent months with falling house prices.  For example, we recently dealt with an estate where from the date of death to the date of sale the property fell in value some £80,000 or thereabouts.  We were able to reclaim the IHT, which ended up being a saving of £32,000 in the estate’s overall liability to tax.

We have also seen the same situation arise with falling share prices and the same principles apply, although the time limits are different.  The shares need to be sold within one year of the date of death and you need to take into account the whole of the portfolio of shares, some of which may have been sold at a gain. 

We do, however, have links with brokers who can put in place a back to back scheme, which means you can sell the shares and reclaim the IHT on the loss on sale.  It is then open to the individual beneficiaries to almost immediately, if they so wish, buy the shares back at the reduced price in the hope that the market will pick up in the years to come.  You will of course need to take professional advice both in relation to the IHT implications and the advisability or otherwise of buying back the shares even at a reduced value.

LIFETIME TAX PLANNING

You may be aware that over the last decade or so, since the Labour Government came in, a whole range of lifetime tax planning arrangements have been attacked by the Revenue and Parliament.

There are few tax planning opportunities left.  One of the easiest ways in which a person’s IHT liability can be limited is for them to reduce their estate by making lifetime gifts.  There are a number of rules relating to lifetime gifts.  If you were to make a substantial gift, and by that we mean anything over £3,000 per annum, you would normally need to survive for 7 years from the date of the gift for the value of the gift to fall outside of your estate for IHT purposes.  You would also have to properly give the asset away and not continue to receive any benefit otherwise you would fall foul of what are called the “reservation of benefit” rules, and you will still be taxed as if you still owned the gifted asset..

One of the problems with lifetime gifting is that many assets which a person may consider passing have within them an inbuilt Capital Gains Tax (CGT) liability.  A gift is a disposal for CGT purposes. Even if you do not to receive any cash in return you could still be liable for CGT on that gift if the value of the asset has greatly increased from when it was acquired.

Due to the fall in asset values over the past 18 months the CGT burden could be far lower than it would have been, say two years ago and does give an individual an opportunity to consider making those gifts.

CGT is now also at a flat rate of 18% rather than anything up to 40% as was previously the case, making it an even more attractive proposition. For example, if you purchased shares worth £200,000 in 2002 and by 2007 these shares are worth £300,000.  If you were to gift them at that time there could have been a potential CGT bill of anything up to £40,000, being 40% of the £100,000 increase.

If, however, those shares had fallen in value to £240,000 today, a gain of just £40,000 on the acquisition cost, you could give those shares away and using your CGT allowance (now £10,100) that would reduce the gain to £29,900. This would be taxable at 18% leading to a liability of £5,382 as compared to a potential CGT bill of anything up to £40,000 a couple of years ago.  Furthermore, if you survived for 7 years from the date of gift the value of those assets would fall out of your estate for IHT purposes. If the assets are worth  £300,000, this could save a further £120,000 in IHT if it would otherwise have been taxed at 40%.

You could further reduce your CGT liability by gifting your share to your spouse and then each of you subsequently making gifts to your children.  You would then have the use of two CGT allowances.  Any gifts between husband and wife do not give rise to a CGT liability.  The only proviso is that you acquire the shares at our spouse’s original acquisition cost so in this example, £200,000, the effect of the additional CGT allowance would be to reduce the overall liability to capital gains tax to just over £3,500; compared to potentially £40,000 just two years ago.

GIFTING ASSETS WITH LOW CURRENT VALUES

If you do make lifetime gifts, the value at which the gift is brought into account should you fail to survive 7 years is the value at the date of the gift.  If you gift an asset with the  potential for considerable growth over the next few years then all of that growth could be outside of your estate for IHT purposes even if you fail to survive the 7 years.  You can therefore make significant IHT savings by making gifts whilst markets are low.

For example, if you gift shares today worth £200,000 and die 5 years later, at which stage the shares are worth £300,000, the value brought into account is only £200,000. The £100,000 increase in value is outside of your estate potentially saving up to £40,000 in IHT.

WHAT TO DO NEXT

You will see that there are opportunities which arise as a result of the downturn and significant tax savings to be had whilst asset values remain low.  It is important to obtain specialist advice to ensure that your affairs are structured in as tax efficient a manner as possible.

For more information contact Elliot Lewis on 020 8777 6698 or email: elliot.lewis@thackraywilliams.com