Q. I am considering giving a grandfather clock to my son. I inherited it from my father in 1985, when the probate value was £1000, but it has recently been valued at £20,000. What are the tax implications? As I am a widow, my only son will receive the rest of my estate in my will, and we expect there to be inheritance tax to pay.
A. There are two taxes which can concern a gift such as this. Firstly, because you are “disposing” of an asset, we must consider capital gains tax. Fortunately clocks carry an exemption from capital gains tax as they qualify as “machinery”, and are therefore treated as a wasting asset with an expected working life of 50 years or less. The other concern is inheritance tax. An outright gift such as this is treated as a “potentially exempt transfer” or PET, for inheritance tax purposes. This means that no tax is payable immediately, and none will be payable provided that you live for 7 years from the date of the gift, and you should document the date of the gift accordingly. You have an annual gift exemption of £3,000 in each tax year, so if you have made no other gifts in the current tax year, the value of the transfer can be reduced by this amount. You can also use last year’s £3,000 allowance if you have not already done so. If you survive the 7 years, there is no tax to pay when you die, but if you die within that period, the remaining £14,000 will use up that much of your “nil rate band”, causing inheritance tax to be due on that much extra of the rest of your estate. The current rate of tax is 40%. Finally, it is worth pointing out that if you “give” the clock to your son but leave it in your house, this would be treated as a “gift with reservation”, meaning that you would still be treated as though you own it, since you are still enjoying the benefit of it. So for the gift to work, and “set the clock ticking” on the 7 year period, you will need to pop round to his house to check the time!
Q. Is there a simple explanation of RPI and CPI and their differences?
A. Both the Retail Price Index (RPI) and the Consumer Price Index (CPI) have the aim of measuring the changes in the cost of buying a ‘basket’ of products and services within the UK. The methodology is quite similar, as they both select a “basket” of products and services to monitor the prices of. These prices are then checked for increases. The difference between the two measures is what is included in the “basket”. For example, CPI includes items such as charges for financial services which the RPI does not include. Likewise, the CPI does not include charges for mortgage interest payments and other housing costs. These differences normally result in CPI showing a lower inflation rate than RPI.
Q. My wife and I hold a number of equity based unit trust funds that we bought over 20 years ago which have grown very well in value. All the income (which is very little) is currently reinvested but as we are now both in our mid seventies we feel that our priority should now be for income rather than capital growth. What tax implications might we meet in changing our investment strategy and how can we extract any income generated in the most tax efficient way?
A. You and your wife each have a capital gains tax (CGT) exemption currently £11,000. This is the amount of profit you can make on selling the existing funds without incurring a CGT liability. This sometimes can be a straight forward calculation being the difference between what you paid for the fund and it’s value now with the difference being the capital gain. Over the years though a number of companies have been taken over and/or funds have merged making this calculation more difficult so you may need to take advice if you are planning to sell large amounts.
If you have not already used up your New ISA allowance (NISA) of £15,000 each in this tax year you could both reinvest this amount into a NISA. As your priority is now for income you could consider investing into fixed interest funds such as Corporate Bonds where although 20% income tax is deducted on the interest generated at source this can be reclaimed by the NISA plan manager and the full gross interest be paid out to you as income which is tax free. Whilst capital and income values can vary this is a very efficient way of generating income. Also with the annual NISA limit now being set at £15,000 you could manage out any potential CGT liability from your existing investments by only selling a proportion of your funds over a number of years. However, you should consult a suitably qualified Independent Financial Adviser to consider your personal circumstances before committing yourself to any particular course of action.
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
