Q: Does death mean the end of tax planning?
A: With all the talk recently about the government’s continued attempts at cracking down on aggressive tax avoidance, it is easy to forget that sometimes a very simple tax planning device can result in significant tax savings. This might be true even after the death of the taxpayer.
Take for example John who died a couple of years ago leaving a valuable asset to his three grandchildren jointly in equal shares. They have no interest in keeping the asset; they would each rather have cash. The asset has grown in value by £50,000 since John’s death and for capital gains tax purposes the personal representatives are treated as though they acquired the asset at its value on the date of death.
If they sell the property now they will realise a capital gain after allowable expenses of £48,000. They are entitled to the same annual exempt amount as individuals (currently £11,000) in the year of death and the following two tax years and have no other capital gains in the current tax year so they will have a taxable gain of £37,000. The tax rate applicable to this particular disposal is 28 per cent so they will pay £10,360 capital gains tax.
If instead they transfer the asset to the grandchildren there is no disposal for capital gains tax purposes at that point; the grandchildren are deemed to have acquired the property on their grandfather’s death instead of the personal representatives. The grandchildren are all at university and have no other capital gains and only very small amounts of part-time employment income in the current year so they each will have a gain of £16,000 of which £5,000 will be taxable after deducting the annual exempt amounts. They will each be taxed at a rate of 10 per cent so the total tax payable is £1,500, a saving of £8,860.
Depending upon the nature of the asset and the various taxpayers’ own circumstances there may be other factors to be taken into account but this simple example serves to prove that tax planning need not always be terribly complicated.
Ben Chaplin is managing director of Taxwise
