What would Dr Mo Lar do? Part 10

Richard Lishman

Thu. 23 November 2017

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Over the course of an 11-part series, the 4dentists group is exploring ways to tackle a number of personal and professional challenges by providing advice and guidance to fictional character Dr Mo Lar. In this tenth article of the series, Managing Director of the 4dentists group Richard Lishman explains the best ways Lar can manage his finances to minimise tax.

Now that he is working towards retirement, Lar is concerned that HM Revenue and Customs will end up with more of his hard-earned money than his loved ones will. Here is what he will need to consider to ensure that does not happen:

Chargeable lifetime transfer
It is in Lar’s interest to know that inheritance tax (IHT) can be triggered at any time, not just upon death. Where a lifetime gift is chargeable, for instance money is gifted to a company or property trust, and the rate of tax exceeds the nil band, the transfer of assets would be subject to a rate of 20 per cent. If Lar were to dissolve his assets, however, and then die within seven years of making the transfer, an additional charge would be activated.

After death, the value of Lar’s estate would be calculated upon the value of all of his possessions and assets, minus any exemptions and relief that might be available. Any estate over the nil rate tax band, which is currently £325,000, is taxed at 40 per cent, though as it is now possible for a spouse or civil partner to inherit his or her consort’s unused nil rate band, Lar could leave his to his wife and vice versa. As long as all property and assets pass to the surviving spouse as an inter-spouse transfer, one can legally double one’s exemption. Naturally, there are pros and cons to each pathway, so it is always wise to seek specialist advice.

Potentially exempt transfer
With no limit on such transfers and exempt from IHT, potentially exempt transfers would be a canny way for Lar to dissolve assets that he does not need to keep hold of. The only catch is that he would need to survive the transfer by seven years, otherwise tax would be due on the total value of the gift, the amount of which would vary depending on how many years before death the gift was made. As it stands, the rates are: 0 per cent reduction for zero to three years, 20 per cent reduction for three to four years, 40 per cent reduction for four to five years, 60 per cent reduction for five to six years and 80 per cent reduction for between six and seven years.

Exemptions
Lar could also minimise his tax liabilities by making the most of exempted gifts. These include annual exemption, for example, which is where the first £3,000 of lifetime transfers in any tax year is exempt from IHT. Conveniently, any unused annual exemption can be carried forward to the next year, but not thereafter.

Each year, wedding or civil ceremony gifts worth up to £1,000 per person, or £2,500 for a grandchild or great-grandchild and £5,000 for a child, can be given away. Any gift below £250 is free from IHT, as long as no other form of exemption has been used. Payments to an elderly relative or minor to help with living costs are also exempted.

Pension benefits
As Lar’s pension promises to pay a lump sum benefit if he were to die before taking his pension benefits, he will need to plan how he is going to leave this asset behind. If he were to nominate his wife, for instance, her inherited estate would have an increased IHT liability, which would, in turn, have a knock-on effect for his children and grandchildren.

Fortunately, there is another option. By establishing a trust and naming his wife and children as the beneficiaries, he could ensure that his loved ones are provided for without incurring any charges. The same principle could be applied to both death in service and life assurance policies. Indeed, as the trust itself would receive the policy benefits rather than Lar’s family directly, the assets would not form part of the estate. There are a number of rules that have to be followed, however, so it is best to seek legal advice before committing to any trust.

Above all, Lar should endeavour to keep a watchful eye over his estate, with the help of a specialist adviser. With meticulous preparation and a carefully considered plan, he will be able to keep the threat of the taxman at bay.