Opportunity to Mitigate Inheritance Tax

Monday 17 November 2008

Collapse in asset values gives prize opportunity to mitigate inheritance tax

Low 18% CGT rate encouraging disposals
HMRC focusing on lifetime gifts

The collapse in the value of assets such as shares, buy-to-let properties and holiday homes to their lowest levels in years combined with capital gains being taxed at its lowest rate in 40 years is prompting taxpayers to give away surplus assets to minimise future inheritance tax (IHT) bills, says Dixon Wilson, the accountancy firm based in the City of London.

Dixon Wilson says that with the FTSE 100 at its lowest level in more than five years and the price of UK residential property having fallen 15% in a year, the firm is receiving a growing number of enquiries from taxpayers looking to take advantage of low asset values by gifting assets to family and friends.

According to Dixon Wilson, the slump in asset values is presenting taxpayers with a rare opportunity to pass on assets while paying substantially reduced capital gains tax (CGT).

Dixon Wilson points out that the reduction in the CGT rate from up to 40% to a flat rate of 18% in April this year will also reduce the potential tax bill on assets gifted away. With the IHT rate at 40%, the long term tax savings could be very significant.

James Kidgell, Partner, comments: “The silver lining in the collapse in the value of assets is the opportunity taxpayers now have to reduce future inheritance tax liabilities by disposing of surplus investments. In many cases, the slump in asset values will mean there is little or no CGT to pay.”

“The number of taxpayers we have advised on making gifts has risen significantly over the last few months and we would expect growing numbers of taxpayers to consider making disposals of surplus assets if values fall further.”

He adds: “Taxpayers are keen to take advantage of the cut in capital gains tax to 18% in April, which is at a historically very low level. With inheritance tax at 40% there are potentially very significant savings on paying a reduced level of CGT now on any assets which are given away.  So long as the gift is an outright gift to an individual and the donor survives seven years after making the gift there will be a significant long term tax saving.”

Dixon Wilson also points out that a new drive by HM Revenue & Customs (HMRC) to collect tax on gifts made prior to death has made it doubly important that taxpayers consider making gifts while asset values are low. In a recent statement HMRC said that it will begin comparing information provided on IHT returns with information provided to HMRC during taxpayers’ lifetimes to identify where taxpayers may have made gifts prior to death which should be included in their estates for IHT purposes.

James Kidgell says: “For lifetime gifts the value of assets for IHT purposes is determined at the time they are given away, so it is therefore beneficial for taxpayers to consider gifting assets while valuations are low - particularly as HMRC will be paying much closer attention to this kind of disposal in future.”