The concept of Estate Planning can be divided into two parts. Firstly, the structuring of one’s Estate in order to effect a lifetime transfer of the assets and secondly the wording of a Will in order to allow one’s assets pass on death tax efficiently.
Unfortunately, almost every business transaction in this day and age has, not only one, but numerous tax consequences. In many cases, there is a tax cost to the Transferor and also the Transferee. This form of double tax is supposedly the government’s way of spreading the wealth through society. The purpose of tax planning is not to argue the moral correctness of the tax liability but to ensure that the minimum amount of taxes, as per the Law, is paid.
The advantage of planning, of course, is to structure the intended transaction in a way which results in the least amount of tax. Although a certain amount of tax planning can be done after the event, as discussed later, this “rearguard” action is very unsatisfactory and limits the scope for tax planning.
In even the most straightforward of cases there are a multitude of tax consequences. Take the example of an asset transfer, by way of gift, from a parent to a child. The parent is disposing of an asset and is liable to Capital Gains Tax. In most case the parent will also be liable to Value Added Tax (VAT). If the parent is ceasing to trade, the Revenue apply special Income Tax rules to ensure that the trade is not being ceased at time and in a way which is done to avoid Income Tax.
The recipient on the other hand will have to contend with Gift Tax and also have to deal with the VAT issues. If the child is commencing to trade, again the Revenue will apply special Income Tax rules.
With all of the above the Law sets out certain tax relief’s which result in a tax reduction. These reliefs attempt to encourage the business transaction without an accompanying penal tax bill. It is the job of the Tax Adviser to structure the Estate such that on a transfer, as many tax reliefs as possible can be availed of by both the Transferor and Transferee.
Transfer on death
The making of a Will is something that we all dislike doing and put off indefinitely. I’m not too sure why this is the case. Over the years I have considered there are two possible reasons as why this is. The first possibility is because we feel that once it is made, we will immediately cross the road and be hit by a bus. The second reason is because the making of a Will brings us face to face with our own mortality and this is something we all find difficult to face. The one event that seems to encourage the majority of people to effect a Will is when one has children. Suddenly the need to have ones affairs in order for the future and for one’s successors emphasises the seriousness of making a Will.
All too often we will have heard of situations where a Will was not made and the death of the testator resulted in very unfortunate circumstances. The type of scenario that springs to mind would be where a nephew would have worked on the business of an Uncle for years and to whom the Uncle had promised the farm or trade assets. Without having made a Will, the death of the Uncle would usually result in the trade assets passing to a number of persons other than the nephew.
The other scenario regularly faced is the situation of the beneficiary receiving property from the deceased but being liable to a Tax liability that necessitates the sale of the assets to pay the tax. In these events we are often faced with the problem of tax planning after the event.
Post death planning
The idea of tax planning after death is not unusual. In fact, unfortunately because dying without a Will is all too often, this area of tax planning is reasonably well developed.
To reduce tax we would normally consider, among other possibilities
With all the above we are attempting to reduce tax after the event.
Nothing is more effective than tax planning prior to the event. Similar to the popular saying, “fail to prepare, prepare to fail”, if you fail to prepare for the tax liability then be prepared to pay tax.
Pre death planning
For assets passing on death there is generally the advantage of not having to concern oneself with (a) Capital Gains Tax and (b) Stamp Duty. These taxes are not normally payable on death. In some cases, this is reason alone to delay an asset transfer until death occurs.
The tax liability that thus requires serious attention is that of Inheritance Tax. All beneficiaries are entitled to receive a specific value of property before this tax is payable. Where the asset value exceeds that amount one will have to examine the availability or not of certain reliefs. The idea of planning is to examine whether or not a beneficiary could alter his circumstances and thereby make himself eligible for any relief in the future. More often than not, an examination of the beneficiaries’ situation prior to receiving assets does allow for some manoeuvring in order to qualify for a relief and reduction in tax.
In order for any tax plan tax to be effective it is important that the solicitor dealing with the Estate is correctly advised. Where Grant of Probate or Letters of Administration are being extracted, all documents submitted will have to contain all necessary details to coincide with the tax structure.