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TAX TIPS – These are regularly updated.  The dates written are shown in square brackets at the end of each tip. Example [31.12.02]
TAX RATES – visit HM Revenue & Customs Website for up to date current Rates and Allowances on


Inheritance Tax

After spending many years in tax minimisation, the elderly are exposed to Care Home Charges.  There is currently a novel way doing the rounds:

The children might be grown up, but, if they cannot afford the current high costs of housing, and the family home is sufficiently large enough, they could consider moving back to share the family home with their parents.  They should contribute a half-share of council tax, water rates, electricity, and gas bills along with any receipts for repairs and maintenance.  Retaining of these receipts will be essential in case of any dispute with third parties, including the Revenue.  In return, the parents will have taken advantage of “gifting half their home to the child that lives with them”.  This is an effective gift for Inheritance Tax purposes, as long as the “child” pays his or her share of the expenses.

Who does it work for?  Those with very large properties where there is adequate space for two separate generations to co-exist.  We all know of the strains where “children”-parental relationships are strained.

Advantages? No stamp duty is payable where the transfer is a half-share, provided it is a gift.

Other advantages? The parent’s half-share is reduced by a further 10%, as it is acknowledged by the Revenue that it is not so easy to sell a half-share in a property.   Commercially, the price of property is increasingly expensive, and so the younger generation who find it difficult to get started on the property ladder would find this attractive. There would also, be no Capital Gains tax for either the child or the parent if the property is sold, and once the parent survives the seven-year rule, no Inheritance tax. [30.06.03]

Inheritance Tax Tips [05.02.07]

Start Today As after 7 years, all outright Gifts of any value, drop out of the taxman’s net.  These are potentially exempt transfers (PETs).  If made more than 3 years before the donor’s death, it may reduce the tax liabilities by means of a taper.  So, when it comes to being generous, it is better to start late, than never. [05.02.07]

Annual Allowances – Nothing could be simpler than making regular use of these. Everyone is allowed to give away up to £3,000 a year to anyone – or a trust – of their choice.  It is important to understand that this is a case of “use it – or lose it”.  Any unused exemption from the previous year can be carried forward to the current year but no further. Therefore, a husband and wife could give away £12,000 in the current tax year if they both have the previous tax year’s exemptions available.  If they remember to use their annual exemptions over a 20-year period, they could give away up to £120,000 from their combined estates tax-free: avoiding a potential IHT bill of £48,000.  [05.02.07]

Little and Often  Where you wish to help several relatives and friends with regular donations of modest amounts, the small, gifts allowance (often termed “the Santa Clause”) enables up to £250 to be given to any number of beneficiaries free of IHT.  So, a pair of Grandparents could each give of their 8 grandchildren, £250 annually over 20 years, distributing a total of £80,000, and avoiding a potential IHT bill of £32,000.  [05.02.07]

Special Occasions – such as Weddings, as each parent can give £5,000 to their child when they get married (or as the law originally termed it: in contemplation of marriage). Similarly grandparents and other relatives can give £2,500, while any other person can give £1,000 IHT free.  [05.02.07]

Equal Rights – many families could reduce liabilities by “equalising” their estates.  This applies not only to married couples, but also to officially recognised civil partnerships. So making IHT-free transfers to each other during their lifetime or on death could be done. By equalising their estates, they can avoid up to £114,000 of IHT by making sure that both partners sure that both partners make full use of their £285,000 nil-rate band.  By contrast, many couples merely leave everything to the surviving spouse, which means that when the first partner dies, no use is made of the nil-rate band, and up to £114,000 unnecessary tax is paid when the second partner dies.  [05.02.07]

Gifts from Income – at the more rarefied end of tax planning, wealthy individuals can make substantial savings, without any fixed maximum value, by making use of the exemption for regular gifts out of income.  The donor must be able to show that the gifts are habitual – although that does not necessarily mean every year.  These gifts must be made out of post-tax income, and leave the donor with sufficient income to maintain his/her usual standard of living.  [05.02.07]

Agricultural Land and AIM Stocks – if the estate is sufficiently large, investing in Agricultural Land, or Business Assets, or Shares traded in the Alternative Investment Market (AIM).  Unfortunately, the rules about which shares qualify for IHT exemption are subject to differing interpretations.  There is also the risk that these investments could fall in value by more than the potential tax savings which prompted them.  As a rule, the tax tail should not wag the investment (or commercial) dog.  [05.02.07]

Write a will – and keep it up to date This is the first step, but most people fail to do so.  Therefore their assets are distributed according to the laws which govern intestate estates.  IHT liabilities are calculated in relation to your worldwide estate, and the laws at the time of your death – not when the beneficiaries’ will were drawn up, or other arrangements made.  So it makes sense to reconsider your will from time to time – or even after an event – such as the birth of grandchildren.  [05.02.07]

The Government has introduced, yet another new tax.  It’s called “Pre-Owned Assets”.  Professional advice should now be sought to see if this affects any plan that you might consider implementing [31.05.04]

Tax Freedom Day is the date, as calculated every year by the Adam Smith Institute of Fiscal Studies, represents the day after which, what we earn, we keep.  This date has fallen increasingly later every year.  That also means that we work for the government, and its departments, for the first part of the year.  This year the Day was again 31 May 2005.  [16.08.05]

In order for us to keep up with the time, and to keep as much of our clients’ wealth in their hands, here’s some “tax tips” that could so easily get overlooked:

Claim the “tax” credit – Why it was called “tax” credits is beyond me.  It has nothing to do with “tax”.  The only common ground that I can think of is that the data to fill in the claim was, initially, the tax return form for the year ended 5 April 2002.  Nevertheless it is worth cash and so fill in the claim form (before 6 July 2003).  Admittedly, it does have 12 pages, and the “explanatory notes” take up another 47 pages. It has been calculated that to complete these for clients, and read the accompanying booklets of notes will take “7,000 trees, and 4,658 years to complete”. But as “it’s money with your name on it”, claim it. [30.06.03]

Rent a Room £4,250– You can have an income of up to your Personal Tax Allowance [£4,895 for 2005-06, £5,035 for 2006-07]  tax free from renting a room in your house to a lodger.  Even if you later want to sell, the Capital Gains Tax exemption is not affected if the garden (or “surrounding grounds”) do not exceed up to half a hectare. [17.11.06]

Maximise Personal Allowances £4895 for 2005-06, £5,035 for 2006-07 is allowed against all forms of income (earned and investment).  So, if there is a member of the household over 18, why not transfer the capital to generate income of this figure.  Even if the income exceeds this by £2090 for 2005-06, [£2150 for 2006-07], then that is taxed at 10%, before the excess is taxed at Basic Rate.  The wealth warning still exists that if the person who receives the capital is then subject to marriage breakdown, then the “donor” can kiss goodbye to the capital as well as the marriage. [17.11.06]

Capital Gains Tax Allowances – The use of “bare trusts” can be used by parents to pass ownership of assets to their children.  The future gains belong to the child, who can utilise the Annual Exemption (£8,500 for 2005-06, £8,800 for 2006-07) against it. [17.11.06]

Tax relief on Pensions and Gift Aid – Once you have the all too precious certificate, showing the date of the donation and address of the Charity) it is a simple process to ensure that each Annual Tax Return includes this claim.  The same goes for the Personal Pension certificate¸which must be obtained every year.  It is surprising how many Retirement Annuities were revealed when the certificates were obtained.  Clients thought they were Personal Pension plans.  The result of these claims does affect Higher Rate taxpayers – to their benefit. Note, the Pension/Insurance Companies have yet to grasp the fact that a certificate should show Gross, Nett, and the year ended 5 April xxx.  Please join my campaign to get them on board, as all they can say to third parties (such as me), is “can’t talk to you, Data Protection Act” [31.05.04]

Inheritance Tax - £3,000 per year, for each grandparent, for 10 years, will pass over £60,000 from their estate.  This would save the grandparents £24,000 in Inheritance Tax.  The receivers, could use this for, say, School Fees, etc. [30.06.03]

Income from Investments – Dividends are taxed at 10%, and Other Savings income at 20%, provided your total income does not exceed £ =(30500+4615)*0+(32400+4895) \# "#,##0" 37,295 for 2005-06 (£ =(31400+4745)*0+(33300+5035) \# "#,##0" 38,335 for 2006-07).  After that level, the Tax Rates become 32.5% for Dividends, and 40% for Savings.  So watch these Rate Bands to use them up effectively, especially if closely controlled companies are involved, and the opportunities for Dividends instead of Salary arise.  In April/May 2003, the Revenue announced plans to tackle Dividends given to the Wife in a close company.  Interesting?  Watch out for developments, as there are grounds for contesting this attack.  The Chancellor announced in December 2003, that measures would be introduced to combat this.  This took the form in the March 2004 Finance Bill, to tax distributed profits (dividends) at, effectively, 19%.  This meant that, in simple terms, a small company’s Corporation Tax bill would rise by £1,900.  Nevertheless, commercially, it is often better to incorporate (have a limited company) than continue to be self-employed or in a Partnership.  Professional advice needs to be taken on each case, though. [31.05.04]

Benefits-in-Kind Forms P11D and P11D(b) – must be filed with the Revenue by 5 July annually– hint: if these were filed as “Nil” corrective forms can be filed at a later date, without triggering a late filing fee penalty. 
Hint: Consider debiting the Directors Loan Accounts with any potential “benefits”, and clearing any overdrawn debit balance with a Dividend?  Naturally, one has to watch out for the current revenue attack under Section 660 (should it be “666”?) regarding Husband and Wife Company Dividends. See also Investment Income above [31.05.04]

Child and Other tax Credits – If a claim was not in place by that date, the “welfare” benefits are lost for that three month period, and cannot be back-dated.  Also, with variable incomes, although the current limit may, on the face of it, put the “money with your name on it” out of reach currently, what happens if the Income decreases, and one can claim the credit?  Well, if a claim has been made, but was “refused” as the provisional income was too high, then it can be re-opened.  So, it was worth “registering”, just to keep the door open.  Did you “forget”?  Oh, well, there’s always next quarter.  Contact the Inland Revenue via its website  or telephone its helpline 0845 9000 444 [17.11.06]

Ways to beat the means test or help meet the costs of care

Joint Tenancy: If your partner needs to move in to a care home, consider changing the ownership of your property from joint tenancy to tenants in common.  You can then will your half to your beneficiaries rather than it being caught up in the means test for care should you predecease your partner in the care home, saving half the value of your house.

Attendance Allowance: this is a non-means tested non-taxable Department for Work and Pensions benefit paid weekly at the lower rate of £41.65 (as at 29.07.06) if you need care by day or night and the higher rate of £62.25 (as at 29.07.06) if you need care by day and night, saving up to £3,237 a year (as at 29.07.06).

Twelve-week property disregard and deferred loan agreements: The local authority must disregard the value of your property for the first 12 weeks of residential care, and assist with your fees, if your other capital is below £21,000 in England, saving approximately £3,500.

Pension Credit: you may also be able to claim Pension Credit withAttendance Allowance while your property is on the market, saving £160.80 a week.

Claim NHS Nursing Care Contribution in nursing homes, even if you are staying for a short respite period, saving up to £133 a week.

NHS Continuing Care double-check your eligibility for fully funded care, if you get the middle or highest level of NHS Contribution.  If you do not qualify now, keep it under review, as your health may deteriorate in the future.

Couple Savings: the local authority only has the right to financially assess the member of a couple that requires the care.  Split joint accounts into separate single accounts to benefit from State assistance as early as possible.

Enduring Power of Attorney: consider drawing up an enduring power of attorney when you are fit and well.  This will prevent future problems and potentially involving Court of Protection, saving the cost of the Court.

Choosing appropriate accommodation: choose a care home you are sure of being able to afford over the long term.  If your assets are likely to fall below the means test limit, ensure the local authority social services department will fund your care in that home.  If not, you may find yourself moving home, or asking for costly family top-ups.

Section 117 after-care: if an older person needs care for mental illness, make sure they have not previously been admitted to hospital under Section 117 aftercare under the same act, which can include full funding for aq care home place, saving the full cost of care.

Immediate need care fee payment plans: these plans give a regular guaranteed tax-free income higher than can normally be achieved from traditional investments or annuities.  You should be able to meet care costs for life using part of the capital from, say, the sale of your home.  This can leave an inheritance for the family.  Warning: Be careful, although there are only four companies that offer this product, their views of life expectancy can vary, and consequently, so does the price.  To combat this, and obtain the best possible price, the NHFA (*) uses a common application form and health questionnaire, which is submitted to all companies, potentially capping the cost of care to the cost of the plan.

Investment bonds: if you have savings or surplus capital from downsizing your property, consider investing in investment bonds.  Those that contain an element life insurance, usually 1% of the value of the fund as a death benefit, are currently disregarded in the means tests for both care and pension credit, saving your savings.

Seek advice: much of this information is not readily available.  A specialist adviser with CF8 long-term care qualification can advise on these issues.

Reproduced from Daily Telegraph Money Section – Saturday 29 July 2006 – page 3. [06.08.06] by kind permission. [17.11.06]