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DON'T FALL INTO THE TAX TRAP |
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A recent survey published in the national media outlined some surprising aspects of the supposed North/South divide in terms of wealth and personal income. It identified the top 20 parliamentary constituencies in terms of per capita income. Not surprisingly areas such as Kensington and Chelsea featured prominently at the head of the list. There were, however, several northern constituencies which featured – for example the Alderley Edge area of Cheshire (home to several Manchester United footballers) and in Yorkshire the Harrogate area. Interestingly, in our neck of the woods, the Haltemprice and Howden constituency was featured. Although I am not aware of enclaves of Premiership footballers living in East Yorkshire there is obviously a substantial amount of wealth distributed throughout the area.
In recent years the North/South divide has therefore been reduced and this is particularly noticeable in the housing market.
The latest national figures give the average price of a house in the UK as around £150,000. Whilst we all know of places where you can buy a house for substantially less than this, equally there are many houses which cost substantially more – many over £275,000.
The significance of a property valuation of £275,000 and over is that the Inheritance Tax (IHT) nil rate band i.e. the value of your assets you can give away on death without attracting IHT, is now set at £275,000 each.
When it was introduced the IHT nil rate band was supposed to equate to the value of a decent house, but if the increase in the IHT nil rate band had kept up with the rapid increases in house prices it would now be over £500,000 each!
As far as the Inland Revenue is concerned the Tax Gap is the gap between what we actually pay in tax and what we think we should pay. Actually however the Government has been closing the Tax Gap by not increasing tax allowances in line with inflation, particularly house price inflation – IHT being a classic case – and introducing subtle stealth taxes for example taxing company earnings on pension fund investments.
There are of course many small ways in which you can save IHT such as an IHT free gift allowance of £3,000 per year, but it is important for many people to look at more far reaching plans to avoid IHT on their Estate and ensure that more of their accumulated wealth is passed on to future generations of the family and not swallowed up in tax.
We believe that, in this regard, IHT is still reasonably close to being an optional tax for the prudent person prepared to put their affairs in order. For most couples simply ensuring that each partner makes full use of their individual nil rate band will ensure that there is little or no IHT to pay. By contrast ‘bunching’ an estate with a gift of all of one partners assets to the other and only then onto children will cost 40% of £275,000 i.e. £110,000. Planned properly this can be done so that the surviving spouse still effectively enjoys the benefits of the assets with little or no liability to IHT – a saving of £110,000. For others the size and composition of their Estate means that more complex planning is required.
To summarise, each of us should endeavour to minimise our own Tax Gap and it is perfectly legal and morally proper to seek to minimise the burden of tax that you pay.
The whole subject of taxation is however a complex one with regulations and legislation being constantly reviewed. You should therefore seek expert advice from a tax specialist. Sandersons Solicitors has specialised in mitigating tax of all sorts, both personal and corporate for over 25 years. They also have links with none of the Isle of Man’s leading tax specialists so that they can offer advice on offshore tax planning too.
If you would like any further information or advice please contact
Duncan Rann or Geraldine Martin Sandersons Solicitors 17-19 Parliament Street Hull HU1 2BH Tel: 01482 324662 Email: enquiries@sandersonssolicitors.co.uk
Source: The Journal, December 2005
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