A turbulent year for stock markets and further uncertainty around the future have caused despair for many investors. There are, however, planning opportunities to take advantage of recent market slumps.
Inheritance tax (IHT) planning
Market 'corrections' can provide scope to gift assets directly to another individual, or via a trust, with various benefits for the donor.
Most gifts are classed as disposals, and therefore could realise a capital loss for the donor, which they may then carry forward to future tax years to offset against gains. Any growth achieved by the gifted asset is also outside of the donor’s estate for inheritance tax purpose and, importantly, if a potentially exempt gift fails (death occurs within seven years from the date of the gift), it is the original value of the gift which would fall into the donor’s estate for IHT purposes.
Taking an example;
Karen was planning on gifting an asset to her daughter which was worth £100,000.
Following market losses, the value of the asset had decreased to £75,000.
Rather than wait for the asset value to recover, Karen makes the gift immediately.
- If she dies within seven years, she has used £25,000 less of her nil rate band.
- When the value of the asset does recover, the £25,000 growth is outside of her estate for IHT purposes.
- This potentially saves £10,000 in IHT.
- Assuming the initial cost of the asset was £100,000, she can elect to carry forward the £25,000 capital loss to offset against future tax years.
Pension contributions for children
Taking the above example further, gifting for children by way of pension contributions can be particularly effective, particularly where:
- The parent is a basic rate taxpayer
- The son/daughter is a higher rate taxpayer
- The contributions paid by the parent qualify as an exemption under normal expenditure of income
As an example, a parent pays £8,000 into a pension scheme on behalf of their son/daughter. The contribution is treated as if it were made by the son/daughter for tax relief purposes.
- The £8,000 is outside of the parents’ estate immediately for IHT purposes (assuming that the contribution qualifies as an exemption) .
- £2,000 is immediately added to the pension fund via basic rate tax relief.
- A further £2,000 relief is obtained by the son/daughter through their tax return.
- The pension fund is outside of the estate for IHT purposes for both parent and son/daughter.
If you wish to explore these options further, then please speak to your adviser at Hazlewoods. If you are not already a Hazlewoods client, then please get in touch and ask to speak to someone in Financial Planning.
Hazlewoods Financial Planning LLP is authorised and regulated by the Financial Conduct Authority (FCA). This article is intended for information purposes only and should not be taken as advice. If you have any doubts about your own situation then you should seek financial advice. The value of investments or income from them may go down as well as up.