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substantial gifts out of your taxable estate into trust now, and as a trustee retain control over the assets (this may well be subject to CGT or IHT charges).
The IHT main residence nil-rate band
The ‘residence nil-rate band’ (RNRB) applies where a residence is passed on death to direct descendants such as a child or a grandchild. This is set at £175,000 for 2021/22 (frozen until
5 April 2026). The RNRB can only be used in respect of one residential property which has, at some point, been a residence of the deceased.
Any unused RNRB may be transferred to a surviving spouse or civil partner. It is also available where a person downsizes or ceases to own a home on or after 8 July 2015 and assets of an equivalent value, up to the value of the RNRB, are passed to direct descendants on death.
There is a tapered withdrawal of the RNRB for estates with a net value (after deducting any liabilities but before reliefs and exemptions) of more than £2 million. This will be at a withdrawal rate of £1 for every £2 over this threshold.
Gifting strategies Business assets
Under current rules, there will be no CGT and perhaps little
or no IHT to pay if you retain business property until your death. This is fine, as long as you wish to continue to hold your business interests until death, and recognise that the rules
may change.
Alternatively, you may wish to hand your business over to the next generation. A gift of business property today will probably qualify for up to 100% IHT relief, and any capital gain can more than likely be held over to the new owner, so there will be no current CGT liability. If business or agricultural property is included in the estate, it may be appropriate to leave it to someone other than your spouse; otherwise the benefit of the special reliefs may be lost.
Appreciating assets
Gifts do not have to be in cash. You could save more IHT and/or CGT by gifting assets with the potential for growth in value. Gift while the asset has a lower value, and the appreciation then accrues outside your estate.
Gifting income
Another way to build up capital outside your own estate is to make regular gifts out of income, perhaps by way of premiums on an insurance policy written in trust for your heirs. Regular payments of this type will be exempt from IHT, but please note that your executors may need to be able to prove the payments were (a) regular and (b) out of surplus income, so you will need to keep some records to support the claim.
Charitable gifts
Gifts to charity can take many forms and result in significant tax reliefs for both lifetime giving and on death. Perhaps you are already making regular donations to one or more charities, coupled with one-off donations in response to natural disasters or televised appeals. Here we look at some of the ways you can increase the value of your gift to your chosen charities through the various forms of tax relief available.
Gift Aid
Donations made under Gift Aid are made net of tax. What that means is that for every £1 you donate, the charity can recover 25p from HMRC. Furthermore, if you are paying tax at the 40% higher (or 45% additional) rate, you can claim tax relief equal to 25p (31p). Consequently, at a net cost to you of only 75p (69p additional rate), the charity receives £1.25.
Scottish taxpayers now pay different income tax rates than taxpayers in the rest of the UK. Donations by Scottish taxpayers paying at the starter rate of 19% will be treated in the same way as 20% taxpayers in the rest of the UK. Donors may need to check that they have paid enough tax to cover the Gift Aid claim, however. Scottish taxpayers using Gift Aid who pay tax
at 21%, 41% or 46% claim the difference between this and the basic rate.
A payment made in the current tax year can, subject to certain deadlines, be treated for tax purposes as if it had been made in 2020/21. This may not appear important to many people, but if you paid additional rate tax in 2020/21 and do not expect to do so this year, a claim will allow you to obtain relief at last year’s rate. (Note: the carry-back election must be made before we file your 2021 Tax Return – another example of the importance of keeping us informed!) You must pay enough tax in the relevant year to cover the tax the charity will recover (that is, 25p for every £1 you gift).
Payroll giving
You can make regular donations to charity through your payroll, if your employer agrees to operate the scheme. It operates by deducting an amount from your gross pay equal to the net cost to you of the monthly net donation you want to make.
Gifts of assets
Not all donations need to be monetary. You can make a gift
of assets, and if the assets fall within the approved categories the gift can obtain a triple tax relief. Any gain which would accrue on the gift is exempt from CGT and the asset is removed from your estate for IHT. In addition the value of the asset is deductible against your income for the purposes of calculating your income tax liability.
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