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19

Jun 2020

Why paying for advice saves you money

I often get asked by clients what the benefits of paying for advice are as far as their tax and personal circumstances are concerned.

There are a whole host of reasons why clients might think it appropriate to do so. We live in an increasingly complicated world with many of our clients in second or third marriages with children from previous relationships. Lots of our clients have business interests or assets overseas or have issues of what is called domicile, where they were born abroad but have relocated to the UK, or simply the value of their house has increased exponentially over the last ten, twenty or even thirty years, pushing them into or above their Inheritance Tax Allowances.

If you fall into any of those categories or even if you don’t, the value of getting good quality advice cannot be overstated. We have seen lots of examples where people have either taken poor advice or tried to draft their own documents, and often in the long run it is much more expensive and for the family they leave behind, extremely stressful and an unhappy situation where things do not go as planned. They often end up paying far more tax than they would otherwise have done had they taken that advice.

The tax rules, especially since the introduction of the Residence nil-rate Band over the past few years have meant that Inheritance Tax planning is more complex than ever. Not everyone qualifies for the residence nil-rate band and not every Estate gets the benefit of it. It is not only dependent on the value of your assets but also who you leave behind.

Quite often in discussions with clients we talk about structuring arrangements and they usually revolve around making gifts both during your lifetime and also on death.

I have two recent examples amongst dozens I could use which show in no uncertain terms the effect and costs of not taking advice and the benefits and savings of doing so. The outcomes are very stark.

In the first scenario a client came into see us to review his Will. As a result of our conversation it turned out that about a year before he had gifted an investment flat to his son. He had gone to another firm of solicitors to deal with the Transfer. He did not unfortunately take any Tax Advice regarding the effect of the gift.

A gift is a disposal for Capital Gains Tax purposes, and as it turned out the client had owned the property since the early 1980s, and therefore it’s value had gone up considerably. I recommended that he urgently go to see his accountant, as a result of which he ended up with a Capital Gains Tax bill of something approaching £70,000, which as you can imagine was an extremely unwelcome surprise.

In the second scenario, we had a client who took advice from us. He was originally going to buy a property for his adult child and the plan initially for that was that he was going to go on the Title, although it was always understood that it would be the child’s property. The client had of course another property which he lived in, being the family home. Because of the value of the property they were thinking of buying, that would have led to an additional Stamp Duty Charge because of the current legislation, of something approaching £20,000.

We discussed this at some length with the client and as it turned out, he would have been comfortable in simply gifting the cash to the child to purchase the property themselves. By structuring the arrangement in that way, no additional Stamp Duty was payable, saving the client almost £20,000 which was many multiples of the cost of getting the advice.

When it comes to tax planning and structuring arrangements, to coin a phrase, people simply don’t know what the don’t know, and there are lots of quirks in the legislation which with good quality advice would enable you to plot a path appropriate to you.

The other thing to bear in mind is that every client’s circumstances are different to every other client, no one size fits all, so you have to ensure the advice you receive is appropriate and tailored to your particular circumstances. Most clients have slightly different attitudes to paying tax and every client’s family circumstances are different. Getting quality advice recognises those differences and is crucial to ensure the outcome you are looking for is the best that you can hope to achieve in the circumstances.

Sometimes we tell clients that they can’t do something, but by doing so, potentially saving them substantial sums of unwanted tax.

In the first scenario we certainly would have advised the client not to make the gift, or certainly not to make the gift in that way. He would have had two or three options, the first would be to not make the gift at all, although the asset would still be a part of his Estate for Inheritance Tax. Another option which we often advise clients on is what I call “salami slicing” where you gift enough of a share in a property to simply use up your annual Capital Gains Tax Allowances but you would need to spread the gift over a number of years. The third option is to look at other assets you might give without creating a Capital Gains Tax Liability, such as cash.

At the end of the day, the best advice I can give is to get advice before undertaking any tax planning or transferring any value.

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