The Final Discrimination

As someone who saves and invests for your future you've probably worked very hard to build your overall wealth. By investing into tax efficient savings plans such as pensions and ISAs you have done the utmost to keep the tax man's hands off you're money. We tend to be fairly well trained in keeping tax to a minimum while we are acquiring cash but what about the hidden dangers in later life.

The last line of tax discrimination in this country is represented by the duties that your beneficiaries may have to pay once you've passed on. Inheritance is taxed at 40% and must be paid within six months of your death. As gay men are classed as unmarried couples the common exemptions don't apply. This means that if you don't plan your estate well in advance, then your partner could fall foul of a huge tax bill.

Your Estate

You're now probably wondering which of your assets are taxable on transfer. The list below is not exhaustive. Basically, everything you own is taken into account

• Your home
• Any further property i.e. holiday homes, investment properties,
• Bank and building society balances
• Tax-free lump sum cash taken from your pension at retirement
• Investments such as Tessas, Peps, Unit Trusts
• Stocks and Shares
• Antiques or Art collections
• Contents of your home
• Your Car
• Any Life Assurance policies which are not already in trust or assigned to someone else.

Inheritance tax planning is a complex subject and independent financial advice is crucial before making planning decisions. If planning is made early enough most or even all inheritance tax can be avoided. Some of the common strategies are listed below. 

Transfer of Assets and Gifting of Money

The most common way of avoiding tax is to gift some of your assets to your chosen beneficiary. Common assets transferred are property or investments and has to be unconditional. The transfer only becomes fully effective if you manage to outlive the transfer by seven years.

Transferring assets is all well and good if you don't need them yourself. Not everyone can predict the future and may not be prepared to give their wealth away so easily. Some gay clients give a look of horror when it is suggested. A great deal depends on how strong your relationship is with your partner.

Exemptions

There are a number of exemptions and annual allowances that you should be aware of. Those listed below include the main considerations. 

Most Common

• The first £250,000 of any estate is exempt (Tax Year 02/03)
• An individual may give up to £3,000 every year during his or her lifetime. Any unused balance can be carried forward for one year only. The current year's exemption has to be used prior to the previous.
• Outright gifts of up to £250 to any one person in a tax year are exempt.
• Transfers of any property between spouses, either during lifetime, or on death, are exempt provided the recipient is resident in the UK. This is one of the few advantages I can think of to being straight and married!!!
• Gifts are permitted in respect of marriage, £5000 by a parent, £2500 by a grandparent, £1000 for others.
• Gifts to charity which are solely for the charity's purposes
• Transfers conferring pension benefits

Less Common

• Transfers which are deductible for income tax purposes, e.g. charitable covenants and gift aid payments
• Gifts to qualifying political parties
• Transfers of National Heritage property subject to certain conditions

Alternative Planning

Using Insurance to Pay the Tax

Once you've worked out the liability your beneficiaries will have to face, alternative planning can be considered.

Many people insure against the tax bill by writing a life policy in trust. This plan is designed to pay their partner following death the expected sum required. This route has a monthly cost of an insurance premium, but normally is cost effective. This planning is especially effective if initiated early enough. 

The plan would be written on a whole of life basis and is guaranteed to pay out if maintained through to the end. Experience shows that people maintaining whole of life assurance for a specified period get a very good deal. This is due to the fact that not everyone who takes this type of policy continues it through to the end.

If the sums assured are kept to a sensible level there are life assurance companies that will write this type of insurance without personal questions and a lifestyle questionnaire. Need I say that you should obtain gay advice on this subject? 

Investing into Trusts

With careful investing you can also avoid IHT. There are a number of specialist 'Tax Plans' designed specifically for this purpose.

They invite investments to be held in a special kind of trust. Although they require the investor to gift their money, this type of trust will allow withdrawals by you at set points of time in the future. This type of scheme will allow assets to be transferred free of IHT to your beneficiaries after seven years. If the investor were to die during the seven years, tax would be saved on a sliding scale. The earlier this type of strategy is adopted the better.

The withdrawals are permitted, as they are encashments of the original policies at set dates. A strategy would be agreed (with your financial adviser) coinciding these withdrawals with future events. These events could be the purchase of a holiday home; extra cash during your intended retirement year or a world cruise. Normally such plans can be split up to 100 times, allowing serious planning and strategy to be built. 

You must be aware that the full use of the capital is sacrificed by yourself at the time you make the investment. This type of plan would be unsuitable for all of your assets but could fit within a wider overall strategy.

As you can see, by acting early enough you can save literally thousands of pounds in tax. A combination of the above plans can provide a diversified and flexible approach to your future planning. Please seek advice on this subject before making decisions. 

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