Inheritance Tax (IHT)
The draft Finance Bill clauses released in December confirmed that the IHT nil rate band will be index-linked to the Consumer Prices Index…from 6th April 2015. Until then the nil rate band will remain at the 2009/10 level of £ 325,000. Inflation has already devalued the nil rate band and will continue to do so.
However, there could be significant changes to IHT before 2015 arrives. The Office for Tax Simplification has said that IHT is in need of a radical overhaul, given that its roots go back to 1974 and Denis Healey, with a rework by Nigel Lawson in 1986. Whether or not Mr Osborne adds his name to that list, before 6th April a sensible precaution would be to consider the existing three main yearly IHT exemptions:
1. The annual exemption
Each tax year you can give away £ 3,000 free of IHT. If you do not use all of the exemption in one year, you can carry forward the unused element, but only to the following tax year, when it can only be used after that year’s exemption has been exhausted.
For instance, if you did not use the annual exemption in the last tax year, 2010/11, you can still use it by 5th April 2012, but only once you have fully used the 2011/12 exemption. Thus a gift of up to £ 6,000 (£ 12,000 for a couple) can escape IHT.
2. The small gifts exemption
You can give £ 250 outright per tax year free of IHT to as many people as you wish, provided that none of the recipients are also beneficiaries of your £ 3,000 annual exemption.
3. The normal expenditure exemption
The normal expenditure exemption can be the most valuable of the yearly IHT exemptions, particularly when combined with pension planning. A gift is exempt from IHT provided that you make it regularly, it is out of income (not capital) and it does not reduce your standard of living.
Unlike the other yearly exemptions, there are no cash limits. You could give away dividend or interest income which would otherwise usually be reinvested, with the normal expenditure exemption covering the gift.
Capital Gains Tax (CGT)
Capital Gains Tax underwent a radical overhaul in 2010. However, the Chancellor has now put the tax structure on ice by announcing that he will not increase the annual exemption (£ 10,600) from April. If you are in a position to realise gains on your investments, you ought to think about doing so before 6th April so that you do not waste your annual exemption. With CGT at 28% if you are a higher or additional rate taxpayer, the annual exemption could save you nearly £ 3,000 in tax.
If you cannot avoid capital gains tax, then take care with the timing of your gains and losses:
• A gain realised on 5th April 2012 will mean tax payable on 31st January 2013
• A gain realised on 10th April 2012 (after Easter) will mean tax payable on 31st January 2014.
The opposite is true of losses; the earlier you realise them, the quicker your tax bill could be reduced. However, as losses are always set against gains made in the same tax year before the annual exemption, you should avoid realising losses which take your net gains below £ 10,600.