Q. I was always under the impression that gifts made more than 7 years before you died were ignored for Inheritance tax purposes, but a friend of mine has told me it has changed and it now 14 years, is that correct?
A. No, the rules have not changed, but there is a particular situation which may affect your friend. There are three types of “Gift” or transfer for inheritance tax purposes. Gifts within allowances, or between spouses, are generally “Exempt transfers”. Gifts into trust are called “Chargeable Lifetime Transfers”. Chargeable Lifetime Transfers are charged at half the rate on death, with further tax due on death within 7 years. The tax paid on a Chargeable Lifetime Transfer also takes account of previous Chargeable Lifetime Transfers in the previous 7 years, to stop people wanting to make a large gift simply dividing it up into smaller ones. Gifts to individuals are usually “Potentially Exempt Transfers” or “PETs”. These become exempt if the donor survives for 7 years after the gift, but if they die within that period, the PET becomes Chargeable. This brings into the calculation of tax on the now Chargeable Lifetime Transfer, any previous Chargeable Lifetime Transfers in the 7 years prior to that, hence a total of potentially up to 14 years. So while your friend is correct that gifts up to 14 years before death can be caught, it is only in certain very specific circumstances that this is the case.
Q. I own my own company, and want to put a large amount into my pension as an employer contribution. I understand there are changes to the amount I can contribute. Could you explain?
A. The Annual Allowance is a limit on the amount which can be contributed to pensions each year, before extra tax is payable. This is measured differently according to whether the pension is a defined contribution plan (like a personal pension) or defined benefit plan (like a final salary plan, or similar). Yours is likely to be the defined contribution type. The annual allowance is measured over a “pension input period” or “PIP”, which was an additional complication introduced in 2006, and thankfully being effectively abolished after 6th April 2016. The default for new personal plans after 2012 was for the PIP to be aligned with the tax year, with an option to elect a different date. Before that the default was the anniversary of the first contribution after 6th April 2006, again with the option for this to be changed by either the provider or plan-holder. In his budget, George Osborne proposed that all future PIPs run in line with the tax year.
In the current year, two mini tax years have been created, to ensure no-one is disadvantaged in the transitional period. The reality is that some people will be able to contribute more as a result of these interim rules. That is the good news. The bad news, for high earners (over £150,000, including employer pension contribution), is that the Annual Allowance is to be tapered from 2016-17, reducing it from £40,000 per year to a minimum of £10,000 for really high earners.
Finally, your company can claim the contribution as a business expense for tax purposes if it is “wholly and exclusively for the purpose of the trade”. Your accountant will be able to guide you on this, but a simplistic way to look at it is to ask “Would you pay this contribution as part of an employee’s remuneration package, if that employee was not a shareholder but was doing your job?”
To find out the scope for you to make contributions, and use any unused allowances for up to 3 previous years, I recommend you consult a chartered financial planner who can guide you through these complications.
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.
