There is no question that some transactions which result in the lowering of a person’s tax bill are perfectly legitimate whilst others are not. However separating out those transactions which should be banned is not always straightforward.
For example, when a person makes pension contributions they are at the same time reducing their tax bill as a result of a wealth of government legislation designed to encourage the “good behaviour” of saving towards a comfortable retirement. This therefore can be seen to be a perfectly legitimate way to behave.
However consider the situation, which has been much reported in the press recently, of David Cameron following the death of his father. His father left him £300,000 and left the remainder of his estate to his wife. She then made a gift of £200,000 to David. Provided she survives 7 years there will be no Inheritance tax to pay on this gift of £200,000. However, had David been left £500,000 by his father instead of £300,000, there would have been an Inheritance Tax bill of £70,000.
Also consider the following example; Oxfam, like other charities, receives a government bonus for cash gifts made by the taxpayer. Importantly, this government bonus does not apply to gifts of clothes as these are not cash. However if the taxpayer appoints Oxfam as its agent to sell goods for him or her and then make a gift of the proceeds, then the gift becomes cash which will therefore be eligible for the government bonus.
These two examples show how difficult it can be to decide which tax avoidance behaviours should be banned. One way of approaching such a decision would be to consider what real transaction has taken place and what tax charge this real transaction would have attracted.
Considering the Oxfam example, therefore, it can be argued that the real transaction was in fact a donation of clothing which is not eligible for the government bonus. By this reasoning this would seem to be non-legitimate tax avoidance.
The example involving David Cameron however, is much less clear simply because we cannot know the intentions of the principle characters. Whether this was a deliberate act on the part of David Cameron’s father to avoid Inheritance Tax or whether David Cameron’s mother made a separate decision to gift some money to David after her husband’s death is something we shall probably never know. However, this knowledge is key to determining whether tax avoidance took place; whether the real transaction was in fact a gift of £500,000, which would have attracted an inheritance tax charge, or whether there were in fact two separate real transactions.
One thing, however, is clear; the area of Estate Planning is a complex one and we recommend that you seek the help of an Independent Financial Adviser before you act.
Estate Planning Awareness in Later Life Benefits You and Your Family
It is reasonable to suppose that most people would like their financial affairs to run smoothly when they become too old to manage such matters efficiently or easily themselves. It is also reasonable to suppose that most people want to pass as much of their wealth to their family as they can rather than to the tax man when they pass away. Both of these objectives can be achieved through timely estate and financial planning as you enter your later life years. The benefit such planning will bring you and your family is considerable.
People are living longer and the probability that at some point in the future it may not be possible to manage one’s financial affairs as physical and mental health declines deserves careful consideration. There is a very simple solution to this problem and that is to make sure that you have put a Lasting Power of Attorney (LPA) in place. This will give the person or persons that you nominate the legal authority to make financial transactions on your behalf. Without doing this there is a real risk that when you are unable to manage your finances yourself the Office of the Public Guardian could appoint someone to this role. Not only would this not be someone you have specifically chosen but it would also make the process significantly more complicated. There is also the possibility that your assets could be frozen and managed by the Court of Protection, again adding unnecessary complication.
Estate Planning awareness in later life can also be of huge financial benefit to your family. Currently the value of your estate in excess of £325,000 is liable to an Inheritance Tax Charge of 40%. However, year on year, you can reduce your estate by giving away £3,000. You are allowed to carry this allowance forward one year so if you failed to do this last year, you will actually be able to give away £6,000 this year. In addition you can make as many gifts as you like of £250 per person to people other than those to whom you have made a gift of £3,000.
Another thing to be aware of is the importance of making a Will. Not only can Estate Planning awareness in this area avoid family disputes and make the management of your estate more straight forward, it can also reduce the amount of Inheritance Tax payable on your estate. For example, if you die without a will in place, IHT would be payable on the value of your estate in excess of £325,000 that passes to your children. However by creating a Will which specifies that all of your estate should pass to your surviving spouse, all of this Inheritance Tax can be avoided. Furthermore, if you are living with someone but are not married or civil partnered and you do not have a Will, then on your death the laws of intestacy will apply. Under these laws only married and civil partners benefit from your estate so your partner will have no right to inherit anything from you.
Estate Planning to reduce the amount of Inheritance Tax payable on death can be complicated and it is therefore worth seeking independent professional advice before taking action.