Sensible Tax Planning

In his December pre-Budget statement the Chancellor again showed his determination to close what the Government and the Revenue perceive to be loop holes in our tax legislation with particular reference to Inheritance Tax.  There are some very expensive and very fancy schemes on the market, many of which could safely be described as artificial, and it is those that the Chancellor wishes to attack.  He will do so, either by amending Inheritance Tax legislation or, as he appears to favour in his December statement, by incorporating those schemes into the pre-owned assets tax regime introduced in the last Budget.

What this means is that tax planning is becoming more difficult, but perhaps the quid pro quo is that it is becoming more sensible and more obvious.  The trick is to persuade clients to do it.  Let me give you a couple of examples from my recent experience.

Firstly, my client Mr A who was, very sadly, terminally ill.  He and his wife owned their matrimonial home together, but they also owned a country cottage.  They had bought this property many years ago, and it was in their joint names.  Mrs. A thought that she might want to sell it after her husband died, but was concerned as to the incidences of Capital Gains Tax.  On the death of Mr. A his capital gains would be written off, but Mrs. A would have quite a sizeable tax liability of her own.  My advice, callous though it may seem, was for Mrs. A to make a gift of her share of the property to her husband.  This she did.  There is, of course, no tax between husband and wife, and so the gift by Mrs. A to Mr A of her half share in the country cottage attracted no tax and, for capital gains tax purposes, Mr. A was deemed to have acquired Mrs. A’s share at her base cost.

Sadly Mr. A died some two or three weeks after this transaction was completed.  His Will had been amended so in it he left the property back to his wife.  On his death, of course, all capital gains were written off, and the property passed back to Mrs. A free of Inheritance Tax, because of surviving spouse exemption.  She was then free to sell the house without any tax liability at all, having in effect washed the tax through her husband’s estate.

In a similar case, I have elderly clients, where Mr B the husband has a modest estate and Mrs. B the wife, a rather large one.  Their matrimonial property is held jointly, and Mrs. B has a property in the country.  Mr & Mrs  B are joint tenants of their matrimonial home, which means that the property will pass to the survivor on the first death.  Mr. B is several years old than Mrs B, and his Will leaves all his estate to his wife.  I am therefore persuading them that a sensible course of action would be for Mrs. B to gift to her husband her share in the matrimonial home and for him to gift his estate, which is less than the nil rate band for inheritance tax, directly to his children on his death, rather than into his wife’s estate.  The result will be that Mr B’s modest estate will pass down a generation free of tax.  Had he left it to his wife, tax free, it would be subject to tax on her death.

I suppose that the moral of this story is that it is never too late to consider sensible tax planning, deciding where assets should be held, so as legitimately to minimize your tax liability.  This is the sort of tax planning that I suspect will never be attacked, it is not expensive, and it is very effective.

January 2006