TAX PLANNING TIPS | May 2023 8 Cut your IHTrateby leavinggifts tocharity inyourWill By writing your Will so that at least 10% of your net estate is left to charities, the IHT on the remainder of your taxable estate will be charged at 36% instead of 40%. The exact calculation of your net estate is complex, so take professional advice when drawing up or amending your Will. Legalise your relationship to save IHT Being married or in a civil partnership will save IHT as your spouse/civil partner can inherit any amount from you tax free, as long as they are UK domiciled. This tax exemption doesn’t apply if you are not legally married to your partner. Your surviving spouse/civil partner can also inherit your unused nil rate band and residence nil rate band (together worth up to £500,000), which will save further IHT payable on their own death. Make regular IHT-free gifts out of your annual income Regular gifts out your net income are free of IHT provided the gifts don’t change your normal standard of living or reduce your capital assets. The amounts of the gifts and/or the recipients can be different each year. Use your IHT-free gift allowances In addition to regular gifts out of your net income (see above), you can make IHT-free gifts of up to £3,000 each tax year, and gifts on marriage/civil partnership ranging from £1,000 to £5,000 (depending on your relationship to those who are marrying). If you miss making the gifts totalling £3,000 in one year, you can catch up in the next tax year by giving a total of £6,000, but you can only carry forward the £3,000 allowance for one tax year. Invest in businesses to save IHT The value of shares in unquoted trading companies, including companies listed on the AIM stock exchange, are free of IHT if you hold them for at least two years. You don’t have to be involved in the company for the shares to qualify. The investment risk can be mitigated by investing in AIM portfolios, including AIM ISAs. Any interest you hold in an unincorporated business will generally also be free of IHT. Value let property correctly on death. To assess the amount of IHT due after a death, the executors must value assets at their open market value on the date of death. However, if a property was let at that time, the value should take into account the sitting tenant and the time left until the tenancy or lease can be surrendered. The value of a property where there is a sitting tenant can be lower than if there is vacant possession. Your business –making the rules work for you Choose the most tax-advantageous structure for your new business When starting a new business venture, it can be difficult to predict the level of income it will generate. If losses are a real possibility, running the business as a sole trader or partnership will give you maximum flexibility to set off those losses against your other income (see below). Where regular profits of £50,270 or more are expected, operating as a company will allow you to shelter undrawn profits (which would have been subject to higher rates of tax if received by an unincorporated business) and make tax-efficient pension contributions. The current rates of corporation tax are 25% on profits above £250,000 and 19% on profits up to £50,000, but a marginal rate of 26.5% applies on profits between these limits. This is still a favourable rate compared to the higher income tax rates of 40% and 45% (42% and 47% in Scotland). The amount of tax you pay overall will depend on the manner in which you extract funds from your business. Use the £1,000 trading allowance Sometimes it is difficult to know exactly when a business begins, as many start gradually in order to test an idea in the market. You can receive up to £1,000 per year of tax-free income from a trade without having to declare this to HMRC. Once you generate more than £1,000 of sales in a year you need to register your business with HMRC or risk a penalty. EXAMPLE Rebecca pays the quarterly gas and electricity bills of her niece and nephew out of her surplus net income. These regular gifts are free of IHT as they do not affect Rebecca’s lifestyle or eat into her capital assets.
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