Advanced taxation Case Study Example | Topics and Well Written Essays - 2500 words

Advanced taxation - Case Study Example Lord Bolsover is quite wrong in his thinking that in the event of his death,all his belongings will be divided equally between his wife and son.He is also wrong in assuming that the income and assets of the married coupe are added together for tax purposes. The fact that he has not made any will so far will make his successors liable for inheritance tax in the event of his death.Present taxation system charges Inheritance Tax on any estate worth over 300,000 (for Tax year 2007 -2008). The value of estate is arrived at by adding up the value of every thing one owns including the share in jointly owned properties. The amount of large gifts made during the last 7 years before death will also be subjected to inheritance tax.Up to the value of 300,000 the estate is covered under 'nil rate band' and no IH tax is payable. Any value over the 'nil rate band' becomes taxable at a rate of 40 percent. Inheritance tax is to be paid out before the money and belongings of the deceased can be distri buted according to his/her will.Based on the above premise unless some tax planning is not done immediately, Lord Bolsover's estate would be subjected to inheritance tax. The following are some of the ways in which the incidence of Lord Bolsover's estate to inheritance tax could be mitigated.The 'nil rate band' is an effective saving in the value of the estate which would otherwise be subjected to inheritance tax.... Annual Exemption of 3000 which can be carried forward for one tax year, Marriage gifts exemption of 5000 to each of the children, 2500 to each of the grand children and 1000 to anyone (these gifts are exempted subject to the condition that the gift is made before the wedding day) and exemption of small gifts made to anyone up to a value of 250 during the tax year. All these gift exemptions have the effect of reducing the value of the estate that may be subjected to inheritance tax. 1.2 Making Direct Gifts: This is another way of mitigating the incidence of the inheritance tax on the estate of Lord Bolsover. However for using this method of tax avoidance there are two hitches which Lord Bolsover has to consider: He should live at least for 7 years to make the gifts exempt from tax He cannot have access to the monies gifted by him on his own accord. The important point to note here is that any gift made directly or into an absolute trust over and above the exempt gift allowance will be deemed as 'Potentially Exempt Transfers (PET) for a period of 7 years and until this period of 7 years the person making the gifts should remain alive to make the gifts eligible for exemption from inheritance tax. However the law allows the charging of the inheritance tax pro-rata depending on the year of death after the gifts or transfers are made, subject to the nil rate band of 300,000. This method of taxing pro-rata is known as Taper Relief which reduces the tax incidence by 20 percent every year after an initial period of 3 years. That means the reduction of tax rate will start from the fourth year before death onwards. But there are several other considerations like the time at which Lord Bolsover wants the beneficiaries to get the gifts, change in the circumstances of the