AS IT'S Christmas, I decided to share two ideas which could help you and your family take advantage of the economic downturn.
1Make lifetime gifts If you are looking to give to future generations, now might be the perfect time to give tax efficiently.
Plummeting share and property values mean that the value of your assets could be at its lowest point for some time, and therefore the tax cost of lifetime gifting maybe minimal, or even nil.
There are two key ways to minimise inheritance tax (IHT) on your gifts: exempt transfers, which are gifts with a value of less than 3,000 per annum, and potentially exempt transfers (PETs).
So, if the value of an investment has dipped below 3,000, you could give this away now with no IHT due, assuming no other gifts have been made in the current tax year. In addition, if you didn't use your 3,000 last year this is carried forward for a maximum of 12 months, so 6,000 could be gifted now, free from IHT. This figure is doubled for married couples.
PETs are gifts made during a tax year that are above 3,000 but still fall within the IHT nil rate band, currently 312,000. A PET is exempt from IHT provided it is made more than seven years prior to the death of the donor. With prices falling, a second home or a share portfolio that would not have satisfied the conditions to be a PET previously, may do so now.
The recipient will not be liable to tax on receipt of any of these gifts.
While transfers can be IHT free, capital gains tax (CGT) will be levied in the tax year that you make the gift. Here again, falling asset values work in your favour. This is because CGT is calculated by subtracting the acquisition cost of the asset from its value at the time that it is gifted. There is also a 9,600 annual CGT exemption. Because many asset values have fallen, there may be no CGT to pay upon gifting.
You could also make use of the "small gifts exemption", under which you can make an unlimited number of gifts of up to 250 each to family and friends without incurring any tax liability yourself, or in the hands of the recipient.
2Put more into your pension The adverse effects of falling share prices on pensions is well known. Strangely, however, if you have cash in the bank, now may be a good time to think about putting it into your pension scheme. This is because of the generous tax reliefs available on pension contributions. The maximum contribution which can be made in the current tax year is 235,000, a figure to which most people cannot aspire. However, much smaller contributions can be very tax efficient because the government grosses up personal contributions, meaning higher rate tax payers and their pension funds can get a 50 per cent boost on contributions. In practical terms, for every 1,000 contributed by a higher rate tax payer, the government grosses this up to 1,250. The pension fund reclaims 20 per cent of this grossed up figure by the way of a tax relief, and you claim a further 20 per cent, giving a total overall tax relief of 500 on a 1,000 cash contribution.
Many experts say shares are now undervalued so it may be a good time to buy them with your pension fund. Even if the market falls further, you will have enjoyed a huge tax relief on your contributions, meaning the market would have to fall a very long way before you make a loss in real terms.
You should always take professional advice before implementing any of the above suggestions.
• Ronnie Ludwig is partner in Saffery Champness Chartered Accountants.