The 5th of April 2018 marks the end of the 2017/2018 tax year and, while many readers will have well-established strategies to take advantage of their allowances, it is often the case that the ‘use it or lose it’ warning goes unheeded. In this blog, which will be one of a series of estate planning blogs from the Private Client department, the writer will outline a variety of available allowances and explain how best to use them.
Inheritance Tax (IHT)
The notion of simply passing assets to loved ones using a Will with no other complementary planning is typically not tax-efficient and absolutely avoidable. By taking advantage of the annual gift allowances, money can be passed to loved ones while simultaneously reducing an IHT liability. The most notable annual gift allowances are as follows:
- You can give away £3,000 worth of gifts in each tax year and any unused annual exemption from the previous tax year may be rolled forward, but for one year only. Essentially, if this allowance has not been used before, an annual exemption for this tax year may amount to £6,000;
- You can gift up to £250 per person during a tax year so long as you have not used another exemption on the same person;
- Wedding or civil ceremony gifts are exempt for up to £1,000 per person, which increases to £2,500 per grand-child or great grand-child, and £5,000 for a child. The average cost for a wedding now exceeds £20,000 so this allowance is certainly worth considering;
- You can make gifts out of ‘normal expenditure’, but we recommend speaking with a financial adviser before doing so.
In addition to the above, it is important to consider making larger gifts if you are in a position to do so. The rules for larger gifts are complex so you should meet with a Private Client solicitor and a financial adviser before making such gifts.
For many, IHT can be mitigated successfully by taking good advice. At Gilson Gray, we have a holistic estate planning service that draws expertise from solicitors from our Conveyancing and Private Client departments and from the financial advisers in Gilson Gray Financial Management, our financial advice arm.
We recommend creating a gift schedule, which should record the date of gift, the amount, the recipient and the allowance used when making the gift. Keeping such records can be time consuming and we will be able to manage this for you as part of our estate planning service.
Generally speaking, the annual allowance for pensions is the lower of your annual income or £40,000, although this is entirely dependent upon your circumstances. If you have any unused annual allowance, this may be carried forward from the previous 3 years.
As with pensions for adults, a tax relief exists for children when making pension contributions. As a child will have no earnings, pension contributions can be made in their favour up to £2,880 per year and the contributions attract a 20% tax relief, which increases the total available annual contribution to £3,600.
Making additional contributions to your pension is tax-efficient in both lifetime and death. We highly recommend conducting a full pension review as part of a holistic estate planning exercise.
UK contractors, directors, and investors have been united in their condemnation of the recent tax treatment of dividends and, sadly, their woes are set to continue in the 2018/2019 tax year as the dividend nil rate for tax is set to drop from £5,000 to £2,000.
If you are impacted by the changes to the dividend allowance, we would be happy to review your options from a financial and legal perspective.
Individual Savings Account
Boasting increased flexibility, the Individual Savings Account (ISA) remains an attractive tax-free option for savers and investors. The annual allowance is £20,000 per person and £40,000 for a couple.
While ISAs are well-established and popular, Junior ISAs (JISA) are often overlooked despite the advantages of being tax-efficient and an effective way of passing money to children and grand-children. The maximum annual subscription limit for a JISA is £4,128 and the child cannot access the money until the age of 18. As with adult pensions, we highly recommend speaking to one of the Firm’s financial advisers as part of a wider estate planning exercise.
As you will appreciate, there are other considerations, including taking advantage of your Capital Gains Tax allowance by selling assets either side of the tax year, but we insist that you do not rely solely on information online to make important decisions about your finances. Tax planning does not exist in a vacuum and all financial and estate planning sits alongside your own goals and circumstances. At Gilson Gray, we offer a holistic estate planning service that draws expertise from both legal and financial experts with each discipline being driven by your objectives. Our Private Client department, headed up by ACQ5 Managing Partner of the Year, Glen Gilson, and the firm’s financial arm, Gilson Gray Financial Management, will be happy to meet with you for a no obligation meeting to discuss your estate planning needs.
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The information and opinions contained in this blog are for information only. They are not intended to constitute advice and should not be relied upon or considered as a replacement for advice. Before acting on any of the information contained in this blog, please seek specific advice from Gilson Gray.