Cracking the afterlife

Inheritance tax is unpopular. Nobody wants to pay tax on already taxed earnings, so how can you minimise your losses to IHT?

tax havens

The Panama Papers and Prime Minister David Cameron’s family’s financial affairs have dominated the headlines over the past few weeks – and, consequently, the attention of all of our political leaders.

“Tax evasion, tax avoidance, lifetime gifts, offshore tax havens and family trusts” have left many confused about just what sort of a world our politicians and celebrities are living in.

Once again, the Tories’ mantra that “we are all in this together” appears rather misleading.

These complicated off-shore tax situations make for plenty of work (and money) for lawyers and bankers; but paying less tax and as little inheritance tax as necessary is something we should all be interested in.

What has also been clear in the past days are the many misunderstandings concerning some of the ways a tax liability can be reduced legally.

Avoiding tax legally

“Tax avoidance” is legal – “tax evasion” is not; “lifetime gifts” do not attract Inheritance Tax (IHT) if the donor survives a further seven years and are permitted. There is a whole list of “gifts” allowed by Her Majesty’s Revenue & Customs (HMRC).

Perhaps the most important regulation to remember is that gifts made from income (and which do not impact on the donor’s lifestyle, i.e. they don’t lead to a reduction in their standard of living) are permitted without reference to HMRC.

Much of the above activity leads us back to IHT and our annoyance at paying that tax, much of it on money on which we have already paid tax, at the end of our lives. We work hard to provide for our children’s future and don’t see why the government should take 40%, even after an allowance of £325,000 per person.

IHT is not only a sensitive issue, but also a vote winner.

In 2007 the then shadow-chancellor George Osborne announced to the Party conference that IHT would be raised to £1m per person when the Tories got back in power. It spooked Gordon Brown enough to postpone calling a General Election, which the experts agree Labour would almost certainly have won.      

At last year’s budget Osborne announce that IHT was going to be raised to £1m, boasting of “a promise made, a promise delivered.” As ever, the chancellor was being economical with the truth.

The 2007 “promise” was to raise the IHT threshold to £1m PER PERSON. His “promise delivered” raised the IHT threshold to £1m PER COUPLE – and then only if the couple owned property and had children – and this £1m threshold is only reached in 2020!

If you are childless and homeless (perhaps renting) your IHT threshold will remain stuck at £325,000, where it’s been since April 2009, all the way through to 2020.

Changes in the future

Many of Osborne’s “giveaways” are some way down the road when the small print is studied; while much of the additional tax measures come in sooner, like the extra 3% stamp duty that is now payable on second homes.

April Fool’s Day 2016 was the deadline for that switch and led to frantic activity in the buy-to-let market the government are supposedly trying to dampen.

Enjoying the services of an Independent Financial Adviser (IFA) has never been more important than in this never-ending regulatory roundabout of changes to all aspects of our personal finance and investments.

Whether it’s buy-to-let properties, pensions, Individual Savings Accounts (ISA) and other asset/investment purchase, it’s not the goal-posts that keeping moving, but the field itself. Trying to keep up to date is a full-time job.

Previous government policies can do a 180% turn and come straight back to haunt you. Take those who turned part of their home into a self-contained annexe so that a senior or junior member of their family could live independently, but remain close.

It became apparent that Mr Osborne’s extra 3% stamp duty on second homes had, perhaps unwittingly, caught these “granny-annexe’s” in its net. And attempts to wriggle out has only led to more confusion and, of course, complication.     

The Treasury were forced to announce a new set of rules early in April after the original outcry. The new rules state “any annexe that is worth less than one third of the total property value will no longer qualify for the extra charge.”

The official explanation is that the change was made “to iron out technical unfairness.” 

To be liable for the higher rate, annexes must also – be capable of being sold separately from the main house, have their own entrance, have their own water and electricity supply, receive their own Council Tax bill and be worth more than £40,000 on their own.

What may still appear unfair is that where a home with an annexe or cottage does qualify for the Stamp Duty surcharge, that rate (an extra 3%) applies to the whole property, not just the annexe.            

The more the Treasury tries to correct these situations, the more complicated they become.

Back to the list of gifts that are always tax-free and are currently permitted by HMRC.

Gifts between a husband and wife or civil partners (who are both domiciled in the UK). If the receiver is not domiciled in the UK, only gifts up to £55,000 are exempt.

Gifts to UK-established charities, national museums, universities, the National Trust and certain other bodies; gifts to people getting married, any number of £250 gifts, gifts for maintenance and gifts up to £3000 in each tax year. There are more – for full details go to

For a free, no obligation initial chat about your individual finances, call us on 0800 0112825, e-mail inf[email protected] or take a look at our website

Last modified: April 27, 2016

Written by 4:39 pm Savings & Investments