As we find our way out of the other side of a major recession, things may look bad. Our house prices have dropped, shares rates have fallen and finding a new job remains a tall order for those of us made redundant. But as a wise person once said, every cloud has a silver lining.
And the silver lining to the credit crunch that has sent Brits screaming towards their savings? Believe it or not, this is the ideal time to efficiently pay your taxes and give to future generations. The reason for this is quite simply that your estate is probably at its very lowest value at the moment, whether you intend to pass on property, savings or shares.
In the case of exempt transfers – those gifts that are valued at less than £3000 per annum – this can mean something that you intend to pass on may have dipped below the value threshold. In terms of inheritance tax that could certainly mean a levelling out of value if not a slight profit. Keeping in mind that it is also possible to carry over a previous year’s allowance and that the allowance is doubled for married couples and you’re potentially looking at Â£12,000 tax-free.
Potentially Exempt Transfers (PETs), which come above the £3000 band but below the IHT nil rate band (currently £312,000), are likewise exempt from tax provided they are donated at least seven years before the donor’s death. Again, the recession could mean that properties that previously came in above the nil rate band are now below it – in many cases this could essentially equate to a profit.
You may be concerned that Capital Gains Tax (CGT) still applies which, on gifts above £9,600 it does, however falling prices again work in the giver’s favour. CGT is calculated by subtracting the original cost of an asset from its value at the time of gifting meaning a smaller perceived ‘gain’ in a falling market.
It is worth remembering that donations to a UK charity are tax free so there’s never a bad time to think of charities in your will. Generous tax relief is also forthcoming on pensions which means that now is a great time to put any spare cash you may have in to a good pension. Most of us can’t reach the upper limit of £235,000 but smaller donations are currently extremely efficient because the government bulks up each donation. So an upper limit taxpayer can expect to see his pension payment added to by 50%. If you’re feeling particularly savvy, buying shares via your pension fund isn’t as bad an idea as it sounds. In fact with shares at what experts call ‘an undervalue’ there couldn’t be a better time to invest. Finances can be daunting at the best of times, let alone in a recession. But use the credit crunch to your advantage and those you care about could benefit in the future.