Cash Clinic: There is an art to ensuring your inheritance tax liability is kept to a minimum

I AM in my mid-60s, I have two children and have recently divorced. My assets now consist of a flat worth approximately £450,000, some savings and a fairly extensive art collection. I am worried about inheritance tax and was wondering if you could provide me with some advice on how to reduce the amount I might have to pay.

IM, Jedburgh

THERE are a number of ways to limit your potential inheritance tax (IHT) liability. My first recommendation would be that as you have recently divorced, you should have a new will prepared, if you have not already done so. This will ensure that your estate is made over to your chosen individuals and ensure that your wishes are implemented on death.

Turning to your potential IHT liability, you may be aware that you currently have a nil rate band of £325,000. This means that no IHT is payable on your estate up to this value. The remainder of your estate is subject to tax at 40 per cent.

There is substantial scope for reducing any potential liability through gifting assets to your children, and indeed any other chosen beneficiaries, during life. Any gifts you make will be exempt from IHT, provided that you survive for seven years from the date the gift is made. In the event that you were to die between three and seven years of making any gift, the tax charged may be reduced on a sliding scale. These gifts are referred to as potentially exempt transfers (PETs).

You also have a £3,000 exemption within any tax year for gifting, and if all or part of an exemption is not used in one year, it may be carried forward to the next. This exemption can be very useful for making systematic yearly gifts.

On top of this, you are entitled to make regular payments out of your income (after tax), as long as you are left with enough income to maintain your normal lifestyle. In addition, if either of your children were to be married, as a parent you are entitled to pass either gifts or cash of up to £5,000 as a wedding gift.

You are also entitled to make gifts up to the value of £250 in every tax year to as many individuals as you wish, so long as they do not coincide with another exemption to the same person.

In respect of your art collection, depending on the value of individual items, there are a number of options available. You could also consider gifting items from your collection up to the value of the £3,000 a year to make full use of the annual exemption allowance.

Alternatively, you could consider leaving some of your collection to charity or indeed to a public gallery, which can be exempt from IHT.

Finally, it is important to be aware of the interaction between avoiding IHT liabilities through making large lifetime gifts and capital gains tax (CGT). Currently the annual exemption for CGT is £10,600 and this should always be considered when a transfer of an asset is being made.

• Glen Gilson is a partner and head of private client & financial services at HBJ Gateley.

If you have a question you need answered, write to Jeff Salway ℅ The Scotsman, 108 Holyrood Road, Edinburgh EH8 8AS or e-mail: [email protected]. The above is for general purposes only and is not tailored for individual use. It does not constitute legal, financial or investment advice on any particular matter and must not be treated as a substitute for specific advice. No action should be taken in reliance of the information given. The Scotsman Publications Ltd and HBJ Gateley accept no liability on the basis of this article