Q. I have been advised that I can reduce my beneficiaries’ liability to inheritance tax by making gifts and that, up to a certain level, these will be immediately outside my estate. How does this work, and are there any pitfalls to be aware of?
A. Most gifts made to, for example, your children, would usually be classed as “Potentially Exempt Transfers” or PETs for short. If you survive for seven years from the date of the gift, they become “Exempt” and are not brought back into account in your estate for the purpose of calculating inheritance tax. Some gifts, however, are immediately exempt. Everyone can give away £3,000 each year, and if you did not use last year’s allowance, you can use that too. There are also allowances for gifts to children or others who are getting married, and unlimited numbers of gifts of up to £250 to different beneficiaries. Also gifts to charities or political parties are free from inheritance tax. However an allowance which is often overlooked, and can be difficult to quantify, is the “Normal expenditure from income”. If your income is more than the expenditure required to maintain your usual standard of living, you can give away the excess and it will be immediately outside your estate. The difficulty is that it must come from your income, rather than capital, and you, or rather the executors of your estate, must be able to demonstrate how much you spend on your usual standard of living. To do this, it is best to keep some sort of record of your spending and income. Some things people often regard as income, for example regular withdrawals from investment bonds or a life annuity, are actually treated as withdrawals of capital so it is best to check with a legal or financial adviser.
Q. We are considering purchasing a new property with a purpose built annex, to allow my ageing father to live alongside us. We are somewhat concerned that the new rules on stamp duty “for second homes” might have an impact on us. Surely this can’t be correct?
A. Whilst the legislation as drafted potentially caused an issue for you, there has been a recent change in policy and the increases will now not apply to the majority of ‘granny annexes’ despite the fact that they may be treated as a separate dwelling.
In last year’s Autumn Statement, the chancellor, George Osborne, announced plans to increase stamp duty on buy-to-let properties by 3%.
Based on this announcement alone it appeared that family homes with a ‘granny annex’ could also be hit by this tax increase on the basis that it would be classed as a second property. Essentially the buyer would be deemed to be acquiring a second home if the so-called ‘granny annex’ is part of the dwelling on the basis that it could be deemed to be a separate dwelling regardless of whether it shares a wall with the main property. Campaigners raised concerns of the position. However, the Treasury Minister David Gauke has now reassured campaigners that this was not the intention and an amendment will be made to the Finance Bill 2016 which would exempt the majority of ‘granny annexes’ from the tax increase.
This is a welcomed change as one wonders whether or not this potential issue was considered when the legislation was initially drafted.
If you have a question you would like Trevor to answer, please email it to: yourmoney@rwpfg.co.uk or post it to Your Money, Rutherford Wilkinson Ltd, Northumbria House, 21-23 Brenkley Way, Blezard Business Park, Newcastle upon Tyne, NE13 6DS.
