Latest news with #inheritancetax
Telegraph
3 hours ago
- Business
- Telegraph
Inheritance tax is heinous, but avoiding it could be a bigger disaster
They say nothing in life is certain but death and taxes, but I propose to add a third to the list: investors doing everything imaginable to avoid taxes. The bigger the bite HMRC wants, the heavier the hustle to shield hard-earned assets. Thanks to Labour dragging pensions into the inheritance tax net, it is now a stampede. Yet the avoidance path conceals huge pits I've watched investors fall into throughout my 50 years managing money. Estate planning is wonderful, but too often, sensible planning leads to tax considerations dictating investment decisions. This raises risk, reduces returns and can hit your planned inheritance much harder than any tax rise. Consider popular ways people now seek to shield pensions from inheritance tax: investing in Aim shares is one, with the double benefit of stamp duty exemption and business property relief. Enterprise Investing Schemes (EIS) are another, and business property relief schemes letting you access unlisted companies is a third. All these sprang from past governments' investment incentives, hoping to spur entrepreneurship and startups. A fine aim. But pursuing a strategy aimed at these incentives solely for tax benefits aren't the sunlit uplands some promise. You don't need me to tell you Aim has a long history of scandals and failures alongside those select success stories that graduated to the main market. Or that its stocks are Britain's tiniest, with a median market capitalisation of £15m. Or that FTSE's Aim All Share is down nearly -30pc since 2000, while the FTSE All Share has soared over 275pc. Astronomical missed returns are a dear price to pay for tax relief, particularly one whose relief is rapidly diminishing – Aim stocks' BPR relief drops from 100pc to 50pc next year. EIS and BPR schemes carry another risk: overloading on unlisted companies. These sport the veneer of stability and, in EIS's case, supposedly high growth potential. They are billed as a way for normal folks to invest in venture capital and reap big rewards when a startup hits it big, but the reality is those are needles in a haystack of hard-to-value, illiquid investments. Winners aren't guaranteed – untraded doesn't mean stable. It just means fewer pricing points, hiding the inherent behind-the-scenes volatility. That is illiquidity – a bug, not a feature. You risk being unable to sell when you really need to without suffering a steep discount. Aim companies aren't categorically horrid. Some are fine, even great. EIS and BPR can also be fine tools, in certain situations. But it all depends on your broader goals and time horizon, which gets us to the root of the problem. Your fixation on tax steers you away from why you invested in the first place. Done right, long-term investing is about picking the correct asset allocation – the blend of stocks, bonds and other securities – for reaching your goals over your investment time horizon. Your goals are the primary purpose for your money, usually growth, cash flow or some combination of the two. Your time horizon is how long your money must last, usually your lifetime – clearly longer if inheritance tax is a concern. Throughout history, stocks and bonds have done a marvellous job of delivering the growth and cash flow people need, given a sufficiently long-term horizon and reasonable withdrawals. Stocks deliver abundant long-term growth, despite bear markets and volatility along the way, while bonds cushion expected short-term volatility and support cash flow with interest. British and global listed stocks and bonds are liquid – easy to sell in a pinch to cover expenses both expected and sudden. When tax avoidance takes supremacy, will you let it steer you from whichever liquid asset allocation aligned with your goals and needs? If your pension is loaded with Aim shares, EIS or BPR schemes to reduce inheritance tax, it risks not delivering the returns needed to support your cash flow later on. Aged poverty is a real pain. Or maybe your pension ends up worth vastly less for your heirs, after tax, than if you had opted for a simple blend of stocks and bonds. If you have a sudden expense, your pension may not be liquid enough to cover it. Then what do you do? Borrow? Don't forget, tax policy is a whack-a-mole game. Pensions were exempt from inheritance tax until they weren't. After halving Aim relief in 2024's Budget, Labour capped BPR last year. Some ministers floated scrapping Aim relief altogether. What then? If you focus on tax optimisation, you may find yourself needing to make big changes again. And again. And again. Changes cost money. Taxes are certain in general, but the specifics are shape-shifting. When your goals and time horizon determine your strategy, there are fewer moving parts. You can build a diversified strategy with a long history of delivering what you need, while taking sensible steps to reduce tax exposure where available. Tax avoidance is nice. Liquidity, predictability and reaching your goals? Nicer.
Yahoo
17 hours ago
- Business
- Yahoo
Treasurer's huge call on tax changes
Treasurer Jim Chalmers has announced his ambition for economic and tax reform, and while he remains tight lipped about what's on the table, he has ruled out two key changes. Speaking to the National Press Club on Wednesday, the Treasurer announced the government will hold a productivity roundtable from August 19 to 21 for the purpose of seeking ideas for reform from business, unions, civil society and experts. The gathering will be capped at 25 people and held in Parliament House's Cabinet room. 'Obviously there are some things that governments, sensible, middle of the road, centrist governments like ours don't consider,' Mr Chalmers told The Conversation's Michelle Grattan. 'We don't consider inheritance taxes, we don't consider changing the arrangements for the family home, those sorts of things.' Mr Chalmers said he believes limiting the narrative to 'ruling things in or ruling things out' has a 'corrosive impact' on policy debate, but conceded to ruling out the historically controversial taxes. Inheritance tax is a tax you pay on assets inherited when you are the beneficiary of a will. While inheritance taxes used to be common in most states, by 1981 all Australian states had abolished them. The GST was another key tax eyed for the roundtable. Mr Chalmers has historically opposed lifting the GST but is facing increasing pressure from the states to do just that. The GST has remained at 10 per cent for 23 years. 'You know that historically I've had a view about the GST,' Mr Chalmers told the Press Club. 'I think it's hard to adequately compensate people. I think often an increase in the GST is spent 3 or 4 times over by the time people are finished with all of the things that they want to do with it.' Mr Chalmers said he hadn't changed his view on GST and he won't walk away from it but stressed he's open to hearing ideas on the issue at the roundtable. 'I've, for a decade or more, had a view about the GST,' he told The Conversation. 'I repeated that view at the Press Club because I thought that was the honest thing to do, but what I'm going to genuinely try and do, whether it's in this policy area or in other policy areas, is to not limit what people might bring to the table.' Two years ago, Mr Chalmers warned that raising the GST would likely not fix federal budget issues since even though the tax was collected by the federal government before it was distributed back to the states. 'From my point of view, there are distributional issues with the GST in particular. Every cent goes to the state and territory governments, so it wouldn't be an opportunity necessarily, at least not directly, to repair the Commonwealth budget,' he said. One thing that will remain in play though is the government's pledged superannuation changes, that would increase tax on investment returns, including interest, dividends or capital gains, on balances above $3 million. 'What we're looking for here is not an opportunity at the roundtable to cancel policies that we've got a mandate for; we're looking for the next round of ideas,' he said. 'I suspect people will come either to the roundtable itself or to the big discussion that surrounds it with very strong views, and not unanimous views about superannuation. 'But our priority is to pass the changes that we announced, really some time ago, that we've taken to an election now, and that's how we intend to proceed.' Mr Chalmers said the idea of extending the capital gains tax on superannuation balances to other areas had not been considered 'even for a second'. Sign in to access your portfolio
News.com.au
17 hours ago
- Business
- News.com.au
Treasurer Jim Chalmers rules out two key tax reforms
Treasurer Jim Chalmers has announced his ambition for economic and tax reform, and while he remains tight lipped about what's on the table, he has ruled out two key changes. Speaking to the National Press Club on Wednesday, the Treasurer announced the government will hold a productivity roundtable from August 19 to 21 for the purpose of seeking ideas for reform from business, unions, civil society and experts. The gathering will be capped at 25 people and held in Parliament House's Cabinet room. 'Obviously there are some things that governments, sensible, middle of the road, centrist governments like ours don't consider,' Mr Chalmers told The Conversation's Michelle Grattan. 'We don't consider inheritance taxes, we don't consider changing the arrangements for the family home, those sorts of things.' Mr Chalmers said he believes limiting the narrative to 'ruling things in or ruling things out' has a 'corrosive impact' on policy debate, but conceded to ruling out the historically controversial taxes. Inheritance tax is a tax you pay on assets inherited when you are the beneficiary of a will. While inheritance taxes used to be common in most states, by 1981 all Australian states had abolished them. The GST was another key tax eyed for the roundtable. Mr Chalmers has historically opposed lifting the GST but is facing increasing pressure from the states to do just that. The GST has remained at 10 per cent for 23 years. 'You know that historically I've had a view about the GST,' Mr Chalmers told the Press Club. 'I think it's hard to adequately compensate people. I think often an increase in the GST is spent 3 or 4 times over by the time people are finished with all of the things that they want to do with it.' Mr Chalmers said he hadn't changed his view on GST and he won't walk away from it but stressed he's open to hearing ideas on the issue at the roundtable. 'I've, for a decade or more, had a view about the GST,' he told The Conversation. 'I repeated that view at the Press Club because I thought that was the honest thing to do, but what I'm going to genuinely try and do, whether it's in this policy area or in other policy areas, is to not limit what people might bring to the table.' Two years ago, Mr Chalmers warned that raising the GST would likely not fix federal budget issues since even though the tax was collected by the federal government before it was distributed back to the states. 'From my point of view, there are distributional issues with the GST in particular. Every cent goes to the state and territory governments, so it wouldn't be an opportunity necessarily, at least not directly, to repair the Commonwealth budget,' he said. One thing that will remain in play though is the government's pledged superannuation changes, that would increase tax on investment returns, including interest, dividends or capital gains, on balances above $3 million. 'What we're looking for here is not an opportunity at the roundtable to cancel policies that we've got a mandate for; we're looking for the next round of ideas,' he said. 'I suspect people will come either to the roundtable itself or to the big discussion that surrounds it with very strong views, and not unanimous views about superannuation. 'But our priority is to pass the changes that we announced, really some time ago, that we've taken to an election now, and that's how we intend to proceed.' Mr Chalmers said the idea of extending the capital gains tax on superannuation balances to other areas had not been considered 'even for a second'.
Daily Mail
5 days ago
- Business
- Daily Mail
The looming economic disaster that means inheritance tax is inevitable in Australia - even after multiple governments said it would never happen: STEPHEN JOHNSON
It was once the most loathed tax in Australia - a final hit to the hip pocket as families mourned a loved one. Death duties were officially abolished in 1979, after Queensland Premier Joh Bjelke-Petersen led a successful revolt against inheritance taxes. Since then, governments of all stripes have vowed never to bring them back.
Daily Mail
07-06-2025
- Business
- Daily Mail
Can we gift our daughter three of the bedrooms in our house to lower inheritance tax bill?
Inheritance tax is a minefield for us. We do not want to leave our daughter with a big tax bill after we die, but our house may be worth £1million in 20 years. We have been advised to make a trust under Section 102. We've also been told to give our daughter three of our bedrooms, then if the last person survives seven years the house will not be included in IHT. This is because it will already be registered with the Government, and she will only have to deal with probate on the remaining funds. The cost would be north of £5,000. I'm not clued up about this, so can this be set up so that the last person to die be after seven years? For example, I could die tomorrow but my wife could live over seven years. Any advice welcome. Angharad Carrick of This Is Money says: Inheritance tax (IHT) is a thorny issue and I understand why you and your wife do not want to leave your daughter with a huge tax bill. Frozen thresholds combined with rising asset prices, including the value of homes, investments and savings, are already dragging more people into the IHT net. IHT is levied at 40 per cent on estates above a certain size. As an individual, your estate needs to be worth more than £325,000 for your loved ones to have to pay IHT. This can be doubled to £650,000, jointly, for married couples or civil partners, who have not already used up any of their individual allowances. A further crucial allowance, the residence nil rate band, increases the threshold by £175,000 each for those who leave their home to direct descendants. This gives a total potential extra boost of £350,000 and creates a potential maximum joint inheritance tax-free total of £1million. Changes to the rules in 2027 will also bring pension pots into people's estates, which will only add to the numbers due to pay death duties. This Is Money recently revealed how this change will add thousands to some families' tax bill. There are several ways to mitigate the tax's impact, but the rules are complex. We asked some tax experts for some general thoughts on using a trust for IHT and whether it's possible to gift your daughter part of your property. What is a trust for IHT purposes? Natalie Butt, Director, Private Clients at Crowe, says: A trust is a mechanism whereby an individual can move assets out of their estate. To get relief from IHT, an individual would need to a) give the asset away and retain no benefit, and b) survive 7 years from the gift. When an individual gifts any asset into a Trust, this is a lifetime chargeable transfer and is subject to an immediate charge to IHT – on the basis that the individual has not settled Trusts in the preceding 7 years, they would have the first £325,000 at 0 per cent and the balance above at 20 per cent. Generally, if the settlor survives for 7 years after making a gift to a Trust and has no benefit, it will fall outside of their estate. Trusts come with both legal and taxation reporting requirements, including registration on the Trust registration service, which is managed by HMRC. Trusts are often irrevocable and should not be entered into without due care and attention. For IHT purposes, when a married couple, or couple in a civil partnership, put assets jointly into a Trust, they are deemed to have both made the gift on the percentage of what they bring to the table. For example, if a rental property was owned tenants in common with a 60/40 split, then the total value would be apportioned. If one of the couple were to die within the 7 years, then their gift will fall back into their estate. Can I gift bedrooms to lower the tax bill? Rachael Griffin, tax and financial planning expert at Quilter says: At the heart of this is a concept known as the 'seven-year rule'. If you give something away like a share in your property, and survive for seven years, then that gift is generally outside your estate for IHT purposes. But there's a key catch you can't still benefit from what you've given away. This is known as a 'gift with reservation of benefit' (GWR), and it means if you keep living in the house rent-free after giving it away, HMRC will treat it as still being part of your estate, and tax it accordingly. That's where Section 102 of the Finance Act 1986 comes in. It outlines the GWR rules and is designed to stop people dodging IHT while continuing to enjoy the benefit of the gifted asset. Simply giving your daughter three bedrooms, while you and your wife carry on living in the house, would fall foul of these rules even if one of you survives another seven years. Some people try to mitigate this by paying market rent to the person they've gifted the house to but that's often impractical, especially when the beneficiary is a close family member like a child. HMRC expects it to be properly documented and paid consistently. Butt says: It is very difficult to give away your family home and continue to live there. One option an individual may consider to help ease the impact of IHT is to take out a life assurance insure the tax. This policy could be written into Trust and be accessible straight away on death. It should be outside the scope of IHT and enable the beneficiaries to pay the tax. If that is not an option due to age, some individuals are considering lifetime mortgages and using the cash borrowed against the property to gift to children. The alternative is for the parents to pay market rate rent to their children for the gift to be IHT effective. This technique though depletes cash savings and means the children have a reporting obligation to HMRC for the rent received and creates an income tax charge for them, so this is probably seen as a last resort. It would be advisable for individuals considering their options to seek professional advice. Please note, we cannot give tax advice in isolation – we need to know the full picture of any clients' needs. However, we can provide general pointers that should not be relied on. Is there anything I can do to lower the IHT bill? Griffin says: The good news is that if your daughter is your direct descendant and the house is your main residence, then each of you currently has a £175,000 residence nil-rate band in addition to your £325,000 standard nil-rate band. That means, as a couple, you could potentially pass on £1million tax-free — as long as your estate meets the criteria and doesn't breach the £2million taper threshold. If those allowances remain in place and your only significant asset is your home, your daughter might not face an IHT bill at all. But of course, tax rules can and do change. It's also important to consider your own financial needs. Gifting away your home or locking it into a trust could limit your options later in life, particularly if you need to fund care or downsize. Probate may still be required, even if IHT isn't due, and it can come with administrative and legal costs. Getting clear advice from a financial planner or solicitor with estate planning expertise is a wise next step. In short, be cautious about complex gifting arrangements, especially if you're still living in the property.
