Introduction
With the end of the present (2006-07) tax year on the horizon – 5 April 2007; clients are reminded, if they have not utilised the annual exemption from tax year 2005-06 prior to 5 April 2007, they will lose the benefit of that year’s exemption.
Workings
The annual exemption of £3000 only applies to transfers made before death and runs in tax years -6 April to the following 5 April. The transfer is available in addition to other exemptions; viz small gifts, wedding gifts, spouse / civil partner exemption.
To the extent that the annual exemption is not used in a particular tax year the unused part can be carried forward to the next tax year but no longer. As is often the case there are practical traps for the unwary to avoid!
To ensure that the carry forward annual exemption is limited for one tax year only, the annual exemption for the current year must be used firstly and, only after that year’s exemption has been used, can any amount be brought forward from the previous tax year.
Where more than one chargeable transfer is made in a tax year, the annual exemption must be allocated to the first chargeable transfer made in that tax year. This includes transfers that would otherwise be deemed to be a Potentially Exempt Transfer.
Amount available to each spouse or civil partner
The maximum amount available to each spouse or civil partner is computed as:
Tax year to 5 April 2007: £3000.00 each spouse / civil partner
Tax year to 5 April 2006: £3000.00* each spouse / civil partner
* will be excluded if not utilised by 5 April 2007.
Where parents are gifting cheques to (adult) children, it is the date the cheque cleared through the donees bank account that is operative; those parents/ donors with (adult) children that are “slow” to pay in such cheques as gifts should be encouraged to do so with all speed if the 5 April is fast approaching!
Comment
Whilst £3000 per donor is modest (the amount is unchanged since the 1984 Inheritance Tax Act); nevertheless with a structured approach – spouses can pass £6000.00 in total per annum –over ten years this would be £60,000 gifted to a succeeding generation. If that capital had remained in the ownership of the donors it, together with ten years of potential investment growth, could attract a 40% liability on the subsequent demise of the donor.
In similar terms if parents are able to “educate” their adult offspring as to the merits (say) of a regular savings plan - £6000 -00 per annum applied into such investment or savings plans, may generate a useful sum after ten years to assist their adult children in funding a deposit towards property purchase.
If you have any questions do not hesitate to contact Andrew Murdoch at Lockharts Solicitors for further advice: am@lockharts.co.uk
12-02-07
