Tax
7 ways to minimise your tax bill
Since the new rules on the taxation of trusts, there are very few alternatives left for individuals who want to give away some of their assets without attracting an inheritance tax charge. However, there are still some options open to people wanting to minimise their IHT bills.

Annual exemptions on gifts
‘Potentially exempt transfers’ allow individuals to gift money away and escape IHT. Gifts to spouses are IHT-free and other IHT exemptions include giving an annual amount of £3,000 to family members and small gifts of up to £250 per person a year. You can also give larger amounts away without incurring tax but it has to be out of income. As long as the donor outlives the gift by seven years, the gift falls outside of the estate for inheritance tax purposes. Even if the person making the gift dies within seven years, there are still possible benefits. Taper relief offers some tax breaks on the IHT bill if the donor dies between three and seven years after making the gift.

Nil-rate band trusts
Anyone can make a gift of an amount below the nil-rate band for IHT into a trust every seven years and avoid paying IHT on that amount. Creating a new discretionary trust every seven years with such an amount could allow a traditional trust route for succession planning but without the new tax charges. However, the ability to do this will be reliant on being able to start the process much earlier in life than people usually do.

Put AIM shares into a trust
Setting up a trust using shares listed on the Alternative Investment Market (AIM), if done correctly, could allow them to bypass the 20 per cent tax set-up charge on these trusts. The AIM shares could then be sold and the proceeds moved into less volatile assets such as cash.
Careful asset allocation can even allow investors to avoid the 6 per cent tax levied on every ten-year anniversary of trusts. Provided eligible AIM shares are held in the trust for at least two years ahead of the ten-year anniversary, this additional tax charge could also be avoided as well.

Agricultural assets
Agricultural land and assets can qualify for Agricultural Property Relief (APR) and therefore will not attract IHT. So, an ex-farmer who gave away his farm some time ago to his successor


 but retained non-agricultural assets could use those assets to buy the farm business back again. The farmer will have successfully passed on his wealth to his successor and, when he dies, the farm will not attract IHT.

Corporate ownership of family assets
A corporate structure can be established to hold and transfer a family’s wealth to different generations through share ownership. The usual IHT rules may apply, but as these assets are less liquid, they can be passed to younger generations with less risk that they will be frittered away.

Child trust funds
In addition to any IHT benefits, Child Trust Fund (CTF) accounts allow any income or gains to add up tax-free until the child can access the money at age 18. The Government has provided £250 vouchers to all children born on or after 1 September 2002, with another £250 promised at age seven, and speculation about a third contribution during secondary-school years. CTF accounts can then be topped up by parents, grandparents, other relatives or friends to the tune of £1,200 a year. Topping up the Government vouchers should make a real difference to the money available for, say, university fees or a deposit on a first flat when the child turns 18.

Stakeholder pensions
Grandparents who appreciate the need for income in retirement can also pay up to £2,808 a year into a stakeholder pension for their grandchild. Not only will the payments be free from IHT but, as an added incentive, the contribution will be topped up with basic-rate tax relief to £3,600. The stakeholder pension offers tax efficiency as there is income tax relief on the contributions you invest, all capital gains are tax-free, and there are IHT benefits where the £3,000-a-year annual gift allowance is available to be used. Payments as part of regular expenditure from income should also be exempt from IHT. However, this really is an example of very long-term financial planning. At present, pension cash can only be accessed at the minimum retirement age of 50, but this limit is set to increase to 55 from 2010.

If you would like to find out more, please email or contact us for further information.

Levels and bases of, and reliefs from, taxation are subject to change.
Quote source: Financial Times Media 28.07.06