For more on inheritance tax, read the beginner's guide to IHT in this Saturday's Times Money section

Are we too young to start thinking about reducing our Inheritance Tax liability? I am 57, married with 4 children and 2 grandchildren. Our property is worth around £350,000 and we have savings of around £50,000. Is there anything we should be doing now to reduce the IHT liability without affecting our lifestyle, or should we wait a few more years? Anon, Leicestershire

Mike Warburton: At the age of 57, you are probably too young to consider giving away assets. You will hopefully live for many more years and your first priority must be to have sufficient assets for your old age. Having said that, it would be worth taking the trouble to draw up a well structured will. With total assets of around £400,000, you could be forced to pay inheritance tax on your joint estates if your estate passes to your spouse on the first death, but this can be easily avoided. For example, you might arrange for your property to be owned equally as tenants-In-common, and then structure your wills to create a nil-rate band discretionary trust on the first death. Under this arrangement, an amount up to your nil rate band, or the value of your half share of the house, would go into trust on the first death and would not then pass to the survivor. Better still, you could write a clause into the will whereby the amount passing into the trust would be an i.o.u. rather than half of the property so that the whole of the property passes to the survivor. On their eventual death the amount due to the trust will then come out of the estate before they use their own inheritance tax nil rate band. This can be an effective way of utilising both IHT nil rate bands. With assets of about £400,000 involved, this alone would clear you of IHT (as you would then be utilising both nil rate bands - currently £285,000 per person) and I do not believe you would need to carry out any more planning for the time being.

My mother has a house valued about £350,000 and one rented out valued at £130,000. Her other assets are fairly nominal, say £30,000.To avoid inheritance tax she needs to give it away to her children or grandchildren seven years before her death, but she needs the income of the rental property to live on and the private house to live in. Can she somehow live in the property as caretaker without paying rent and give it to the grandchildren now? Or could she give them the rental property – letting them give her the income as expenses for looking after it? Or, as the rental income is only £550 month, will this fall under her tax-free threshold? Anon, London

Carolyn Steppler: If she gives away the house she lives in but continues to reside in it until her death, the value of the house would continue to be included in her estate, because she has ‘reserved a benefit’ in the house. Any increase in value of the house between the date of the gift and its eventual sale by the children would not benefit from the capital gains tax main residence exemption if they do not use it as their residence. There are complicated ways of avoiding the ‘reservation of benefit’ rules, but such schemes are now countered by an annual income tax charge on the market rental value of the property.

She could give the rental property away to her family and receive a fee for managing it on their behalf. The management fee would typically be about 15 per cent of the rental. Capital gains tax ill be charged on the gift, based on the difference between the cost of purchase and the market value at the date of the gift. This could be deferred by gifting the rental property to a discretionary trust for the benefit of the family, i.e. excluding your mother from any benefit. The value of the rental property is sufficiently low that the inheritance tax charge on the gift to a discretionary trust would be covered by the nil rate band. The nil rate band should also ensure that no ten year charges or exit charges are incurred by the trustees. However, the expenses of setting up and running the trust would have to be taken into consideration.

Can inheritance tax be reduced by including property investments (i.e. additional properties) in a company or business? What are the tax implications of children inheriting a company or business after the death of their parents? Jacqui Shaw

John Whiting: Relief (BPR) for IHT, which can in many cases provide 100% relief by effectively eliminating the value of the business from the deceased’s estate. There are two important stages to go through. Have you got a valid business? Essentially the business mustn’t be one wholly or mainly ‘dealing in securities, stocks or shares, land or buildings or making or holding investments’. There have been a number of cases on what this all means and it comes down to ‘standing back and looking at the business in the round’. Thus a farming business that had some income from letting a spare cottage would be OK; stuffing a trading business with all your investments so the trade was swamped wouldn’t be. Also – does the business contain ‘excepted assets’ – ones that aren’t held for the purposes of the trade? If so, the value of those assets is left out of what qualifies for BPR.Putting a property investment into an existing company probably wouldn’t help and could even damage the chances of getting BPR on the original business. If you pass a business to children on death, they’ll get it at market value for capital gains tax purposes and potentially free of IHT if BPR is fully working. They then take it on and pay tax in the normal way – there are no particular tax issues for them to be aware of. There is a tripwire if the business is given during life as a PET – if the donor dies within the seven years after making the gift, the transfer become chargeable and BPR is only still due if the donee is still operating the business (or a replacement one) in a way that would qualify for BPR.

My wife does not fully use her Personal Allowances and my income is below the threshold for 40 per cent tax. We are both pensioners. There used to be a way whereby we could combine our income for tax purposes so that our Personal Allowances could be fully utilised. Is this still possible? John Wales, Cheshire

Carolyn Steppler : I’m afraid not. Husbands’ and wives’ income are charged to income tax independently. There is no possibility of one spouse’s pension being taxed on the other. If you have savings however, you might consider giving these to your wife so that the income from the savings can go against your wife’s personal allowance.

My father recently died and the provisions he made for a nil rate band discretionary trust in his will to minimise IHT are being enacted. Our solicitor has indicated that there will be stamp duty charge of 3 per cent of the value of the trust (£285,000) to be paid now. I have been sent some information from HM Revenue and Customs that seems to indicate that, depending on how the trust is used, this need not be the case or it could be levied only on my father's share of the house (£160,000). My mother and I are utterly confused. We want a second opinion from someone who knows this stuff inside out but have no idea who to approach. Robert Storey, Berkshire

Carolyn StepplerThere are a number of ways in which the nil rate band discretionary trust can be satisfied when the matrimonial home forms a large part of the deceased’s estate without incurring a stamp duty land charge. I suspect that the information that HM Revenue and Customs (HMRC) has sent you is the same helpful (but complicated) information as that found on their website; http://www.hmrc.gov.uk/so/nilband.htm.If there is to be no stamp duty land charge, it is vital that the transaction is structured correctly. From your question, I assume that you are already some way through the process and it is impossible for me to advise on your exact circumstances without more information. It may be though that you can unravel some of the existing arrangements to be able to structure the transaction such that you will not incur a stamp duty land tax charge. In terms of whom you should approach for a second opinion, I would recommend that you contact the Society of Trust and Estate Practitioners at 020 7838 4890 or use the ‘Find a Practitioner Service’ on the STEP website at www.step.org.

I am due to make a capital gain above the £8,800 capital gains tax limit. I would like to offset some losses by selling some tech shares for £12 that I bought for £1,000 in 1999. I am assuming that this will allow me to make an extra £988 profit but do I have to fill out any forms? Also, can I offset losses by transferring the shares rather than selling them? Paul Abbott, Birmingham

John Whiting: You will have to fill in a self assessment form, and claim the loss there. You crystallise the loss by selling the shares or giving them away (but not to a charity or member of your family). It does sound as if your tech shares are not worth much, so it may be possible to make a ‘negligible value’ claim which in effect deems them sold without the need to actually dispose of them. The Revenue’s view is that ‘negligible’ means ‘next to nothing’. Assuming the shares are not quoted, the Revenue’s criteria are that the company is registered in the UK, not registered as a PLC and was In liquidation or had ceased trading at the time of the claim, which can be for no more than £100,000. The claim must be less than £100,000. If you think that your shares fit these criteria, then write to your tax office. You will be treated as having disposed of them (for the negligible value – presumably £12) at the date of the claim. A final point – do get your tax years right. Losses area available to offset gains made in the same or subsequent tax year. You can not carry capital losses back to an earlier year.

I have three rental properties which I am planning to sell once I am living abroad. Will I still need to pay Capital Gains Tax? I have had the properties between 15 years and 21 years. The latter was my main residence for 14 years. Vernella Fuller-Armah, Kent

Mike Warburton: If you are moving abroad permanently, or for at least five complete tax years to April 5th, you will be classed as not resident (and not ordinarily resident) for capital gains tax purposes. Provided you complete the full five year period and delay selling your properties until at least April 6th following your departure, you should be free of UK CGT. If you return within the five-year period, the capital gains will be calculated and assessed on you for the year of your return.
Please keep in mind that it is not just UK CGT that may be relevant because a number of other countries charge CGT on properties, even if they are owned outside that country. If that is the case, it would probably be wise to take professional advice in the country you are moving to.
If you are not able to spend five years overseas, you will be liable to tax, but this is likely to be relatively small for the main residence. In this case, you will have a principal private residence exemption for the 14 years you lived there together with the final three years whether you lived there or not. This may give you an exemption for over 80 per cent of the total gain. On top of that, if you let the property out for the other years, you can claim letting relief of up to £40,000. If you own the property jointly with somebody else, you can each claim letting relief up to this amount.

I have been renting out a flat for 4 years & propose to keep it for many more years. When I eventually sell it, is it true that I will be entitled to claim the capital gains tax allowance for all intervening years to minimise my total CGT liability? Alan Norris, London

John Whiting: No. The CGT annual allowance is a ‘use it or lose it’ allowance. So when you sell, you’ll only have one year’s CGT exemption available. You will pay tax as CGT exemption is linked to your main residence. So, in most cases, when you sell your own home, there is no CGT to pay. However, if you have a property that you rent out, and never lived in, CGT will arise on the full gain. There will be the usual costs to set against this and some tapering relief which may get the rate of tax down to 24 per cent (assuming you keep it for 10 years or more and you are a higher rate taxpayer).

If you live in the flat at some stage as your main residence, then there are various reliefs available to cover periods when you weren’t living there. Letting relief can exempt gains of up to £40,000, depending on the circumstances.

Is it still feasible for one to become a fiscal nomad for a year before living permanently overseas in order to realise capital assets free of capital gains tax prior to investing them in an offshore trust, or later to avoid IHT? Anon, Somerset

Mike Warburton: The guidance on matters like this are contained in the publication from HM Revenue and Customs (HMRC), IR20. It is possible to become a fiscal nomad without having a residence in any particular country. You may travel to various countries and, in any event, countries have different rules that they apply to determine residence.
If you are moving abroad permanently, but do not want to be trapped for CGT in the country you are moving to, it can be attractive to become a fiscal nomad for a period after the 5th April following your departure from the UK, but before the start of the tax year in the new country. Unfortunately, HMRC are likely to need some persuading in circumstances such as this that you have genuinely ceased to be UK residents if you are not able to show that there is a particular country that you have moved to. It may be advisable to spend a sufficient period in a suitable third country with a favourable tax regime, such as a tax haven in which you become resident for a limited period before moving to your permanent country of residence. Ultimately, it is a matter of fact and evidence and the onus will be on you to prove to HMRC that you have ceased to be UK resident. If you return to the UK within five tax years of the year of departure, the capital gains will be payable in the UK on your return.
Whilst this may help your CGT position, it does not necessarily improve your inheritance tax position. Inheritance tax is determined by your domicile, rather than your residence, and if you have started life with a domicile in the UK, it is very difficult to change it. You would need to show that you have ceased to have any ties with the UK and that you have left the UK for at least three years before you could argue that you have changed your domicile Even if you are able to change your domicile, any assets located in the UK will remain subject to UK inheritance tax (which is normally charged on your worldwide assets).

I bought a flat with a garage (one in a row of garages) in 1986 as my main residence. In 1994 I sold the flat and bought another in the same street (a new main residence) but kept, and continued to use, the garage. In 2005 I sold the garage but still live in the second flat. Will I be liable for capital gains tax on the profit on the garage or is it exempt as part of my main residence? Alex Traynor, Edinburgh

John Whiting: It may be that the garage will bring a CGT liability. If so, there would be a need to ascertain cost (a proportion of the original cost of your first flat plus garage), then include the cost of any capital improvements. There will be some relief for indexation prior to 1998, and then tapering, and you may have your CGT annual exemption left to use this year.

The reason for this is that whilst your main residence is CGT-free, it only covers that property. So you can sell bits of it off while living there, but once you have moved out, it loses its status as CGT-free in full. This issue usually arises with houses and gardens – sell part of your garden off while living in the house means no CGT; sell the house and retail part of the garden as a building plot means CGT when you sell the latter off.

However, there is an interesting argument as to what is your property. I think there is a good argument that you transferred the garage to your new residence and have (I assume from what you say) continued to use it as part of your main residence (as opposed to renting it out). That’s rather different from the ‘retained plot’ situation where you don’t occupy that in any real way as part of your residence. It has to be a question of fact (if the flat and garage were on one set of deeds that would be conclusive but I suspect that may not be the case) as to what really has happened but I’d start from the basis that the garage has been part of your main residence and thus no CGT arises.

I have been given a plot of land by my father; if I sell the land immediately am I liable to tax? Lewis Hefin, Berkshire

Mike Warburton: When your father gave you the plot of land it would have been treated for capital gains tax as if he had sold it to you for market value. He should have declared this disposal on his tax return and paid CGT accordingly. As far as your tax position is concerned, you will be treated as having acquired the land at that same market value and you would only be liable to CGT on any increase in value. If the property has been used by your father as part of a business there are some capital gains exemptions that could apply which would allow you and your father to elect that no tax was payable by him, but you would then acquire the property at his original base cost for capital gains purposes. You would then be liable for any capital gains tax on a disposal.

I am just starting a new small one-man-band business. What taxes or expenses/costs can I claim back e.g. petrol, computers, clothing, flights/hotel/food bills when in the EU? Robert Howarth, Gloucestershire

Peter Harrup : You do not mention what line of business you are in, but you would expect to obtain a tax deduction for most of the items listed, providing they are incurred in connection with the business itself. I am assuming that you operate from home and therefore travel costs should be available for set off against your taxable profits. If it is necessary for you to stay away from home in connection with the business then you should also be able to obtain the relevant subsistence costs.
It is unlikely you will be able to obtain a tax deduction for your clothing, unless it is in the form of protective clothing.
You will be able to obtain a tax deduction for your computer, but it will be in the form of capital allowances, typically you would expect to be able to claim 50per cent of the cost in year 1, and then 25 per cent of the remaining balance thereafter, until the computer is sold. As with all capital equipment, you will need to make an adjustment if there is any private usage. For example, if the computer were used 10 per cent for private use and 90 per cent for business use, then you would only be able to claim 90 per cent of the allowance.
You need to notify the Revenue that you have started to trade, otherwise there is a risk of £100 penalty. The Revenue provide a special form for this purpose, which is included in their booklet "Starting up in Business", you can also download the form in PDF format, from the Revenue's website. The Revenue must be receive the form within 3 months of you starting to trade, to prevent a penalty charge.
I would also suggest that you consider putting away some money to pay your tax liability. It can be a nasty shock when the first tax bill comes around as the rules mean you pay a tax liability for your first period's profits on 31 January following the end of the tax year (5 April), and also a payment on account of the following years tax liability at the same time. Therefore you can have an extra 50 per cent liability that you were not expecting.

For a small business starting up as a private limited company, what are the most tax effective ways for owners to extract an income? Peter Meldrum, Manchester

Peter Harrup : In a start up situation, you would normally expect the proprietor to take out a salary equivalent to his personal allowance for the year, currently £5,035, with the balance being taken out as dividends.

The salary is tax efficient because it is tax-free in the recipient's hand and the amount paid is allowable as a deduction from the taxable profits. Thereafter, money is normally extracted in the form of a dividend as this is the most tax efficient way of extracting funds from a company which suffers tax on its profits at the small companies rate, typically companies with taxable profits up to £300,000.

Another tax efficient way of extracting profits is to have the company make pension contributions on behalf of the individual. These are tax-free, and providing a combination of the salary and the pension payment equivalent to the market rate for somebody doing the equivalent job, the company should be able to obtain a tax deduction for the whole amount paid.

I have five properties and I am now wondering if it is better to become a limited company to gain 25 per cent capital gains charge after two years, or to be self-employed and live in the properties for six months each before selling each one. There doesn't seem any way around this without having a large capital gains bill. I have owned the properties for seven years. Anon, London

Peter Harrup: It is not clear from your email how you acquired these properties, but I will assume that you purchased them in their current state, and in particular have not built the properties or undertaken substantial development, and any gain on the properties will be treated as a capital gain and not income.
There is some good news as you will be able to claim non-business asset taper relief which will reduce the gain by 25 per cent. Non-business asset taper relief starts at 5 per cent once you have held the properties for three complete years and increases by 5 per cent per annum for each complete year held thereafter until you receive the maximum non-business asset taper relief of 40 per cent. You also have an annual exemption which is currently £8,800, and as a higher rate taxpayer, you would have an effective rate of tax of 30 per cent on any excess. The effective rate will reduce by 2 per cent for each complete year that you hold the properties, up until the point where you have held them for ten years, when the effective rate of tax will be 24 per cent.
You mention transferring the properties into a company so that the gains are taxed at 25 per cent after two years. I believe that you are assuming that the company will qualify for business taper relief, which reduces a gain by 75 per cent in a situation where individuals hold shares in a trading company. Unfortunately, for these purposes the company will hold investment properties and will not qualify for business taper relief.

Having said this, there is the possibility of transferring your rental business into a company and not giving rise to a capital gains tax charge. The effect is that the company acquires the properties at the market value and the company will only pay tax on the excess above this market value on any future sale. This is the good news. There is some bad news, as there will be stamp duty land tax to pay on a transfer into the company on the properties, and there is the gain which has been held over into the value of the shares. Therefore you need to consider carefully whether this is the right thing to do. Certainly it could be advantageous, if you are intending to re-invest the money into further properties in the future. It is less likely to be advantageous if you are intending to take the money out of the company for other ventures. Certainly the incorporation of your business should not be taken lightly.
You also mention the possibility of becoming self employed, but this is not really relevant in this case, as you will be treated as renting the properties.
You do mention the possibility of moving into the properties for 6 months. Obviously you have in mind that you will be able to claim that the properties are your main residence. This is not as straightforward as you may think, and certainly the Revenue would look to resist a claim for the exemption in the circumstances you set out in your email. Having said this, there may be some scope for claiming the exemption if you arrange your affairs appropriately.

All advice offered here is of a general nature and is intended for guidance only. It is offered without any legal responsibility. You should always consult your own professional advisers on your specific requirements.