Q. My father has gifted me a large amount of money and with it we intend buying a house and setting up a trust for the children. I understand that my father has to survive 7 years before the gift escapes inheritance tax. What would happen if he did not survive 7 years?
A. The gift will be treated as a potentially exempt transfer. Assuming your Father’s total estate is valued in excess of the Inheritance Tax Nil Rate band (either £325,000 or £650,000) Inheritance Tax may be payable if your Father dies within seven years of making the gift. If this happens, the gift would first be set against the available nil rate band, and tax would become due on any excess, as well as the remainder of the estate. Usually after 3 years the amount of tax that would be due on the gift would be reduced by 20% and each year thereafter under taper relief rules. Clearly if money is tied up in property or in trusts it is not easy to extract it and therefore it would be wise to consider insurance on your father’s life to fund the tax liability. This would usually be a combination of seven year term assurance, and what is known as “Gift Inter Vivos” Insurance. The level term assurance would fund the extra tax on the rest of the estate due to the lost nil rate band, whilst the Gift Inter Vivos policy sum assured would reduce in line with taper relief over the seven year period. Neither policy has any encashment value and they are designed to be as cheap as possible. If your father pays the premium, this increases the value of the gift, and therefore the sum assured required. I recommend you consult a Chartered Financial Planner to explore the requirement for any such policy and perhaps consider other methods of Inheritance Tax mitigation.
Q. You have previously answered a question about the tax situation for a holiday cottage rented out for part of the year, and empty for part of the year. What is the situation with Council Tax?
A. If the cottage is in England and is available to rent as a holiday cottage for more than 140 days each year, you can apply to be subject to business rates rather than council tax. The good news is Small Business Rate Relief, which is set by the chancellor each year, is currently at 100%, meaning most holiday cottage owners with a single property don’t pay any business rates or council tax. The relevant county council can provide further information on how to apply to be subject to business rates, and obtaining a ratable value from the Valuation Office. Slightly different qualification rules apply for properties in Wales and Scotland.
Q. I have recently joined a very small company and whilst my salary is very good it provides no frills. All I get on top of my basic salary and potential bonus is a 5% contribution to a personal pension of my choice. With my previous employer I had life insurance of 3 x salary automatically provided and with a young family I think this is something I need to set up for myself. What is the best way to go about this?
A. I find that a number of employers these days both small and large provide a very simple salary package. “This is your salary and if you want any add on’s you go and get it and you pay”. You could ask your employer to set up a “Relevant Life Policy” and do this by salary sacrifice. This would be underwritten on your life and the premiums paid for by your employer. There would be advantages to both you and your employer in doing this. You would save income tax and national insurance on the salary given up to pay the premium. Your employer would also save national insurance. A number of smaller employers I have dealt with are happy to do these arrangements as it is beneficial to both them as the employer and you as the employee. You should ask a Chartered Financial Planner to explore this option for you.
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.
0191 217 3340
