Day 3 – Essential Year End Tax Planning – Inheritance Tax and Charitable Giving


In this week’s blog series our Tax and Wealth Management specialists will be discussing essential tax and financial planning tips which should be considered prior to the end of the tax year on 5th April 2013. In the third in a series of five blogs, Tony Medcalf talks about plans for Inheritance Tax and Charitable Giving.


 Plan for the freeze in Inheritance Tax (IHT) thresholds


The Government have signalled they intend to freeze the thresholds for IHT exempt estates for the next few years.   As part of a person’s on-going Inheritance Tax planning, full use should be made of available exemptions.  The exemptions are relatively small but over time, the effect can be substantial:


Annual Exemption – An amount of up to £3,000 can be given away each tax year, and if unused in a year, that amount can be carried forward for one year and utilised in that later year.


Small Gifts Exemption – You can give up to £250 to as many people as you wish each tax year.


Gifts out of Income – If your income regularly exceeds your expenditure, you can give away the excess every year. You do need to record the intention to make these gifts and you do need records of your income and expenditure.


Lifetime Giving – A person may also consider making lifetime gifts in excess of the above exemptions. A person must survive such a gift by seven years for it to fall out of their estates entirely, and the donor must not benefit from the assets once they are gifted. The gifts might be absolute gifts to family members, or they could be gifts into trust. Trusts can be very beneficial, but specialist advice would be needed.


IHT Efficient Investments – Another alternative can be to place funds into IHT efficient investments, as such investments can pass free of Inheritance Tax after they have been owned for two years. Appropriate investment advice would be needed when considering such planning.


 Charitable Giving


If a higher rate or additional rate taxpayer makes a Gift Aid donation, further tax relief is available to the donor over and above the tax relief claimed by the charity.


A gift aid donation of £80 is worth £100 to the charity. A higher rate taxpayer will qualify for further tax relief of £20 so that the net cost of the donation is only £60. For an additional rate taxpayer, the further tax relief is worth £30, so that the net cost of the donation is only £50.


You need to keep a record of gift aid donations made in the year and this can include sponsorship.


The tax benefit of a gift aid donation can be carried back to the previous tax year, if a claim is made. With the reduction in the additional rate from 50% to 45%, affected taxpayers should consider carrying back gift aid donations made in 2013/14 to 2012/13, so as to maximise the further tax relief on the gift donations.


Finally please remember that if you are not a UK taxpayer, you cannot make gift donations.


This is an extract from our Essential End of Tax Year Planning Guide 2012/13