You’re already familiar with income tax and council tax, but do you know about the other taxes you may have to pay later in life as you grow your personal wealth?
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Taxes you need to be aware of:
1. Capital Gains Tax
This is the tax paid on the profit made from selling an asset that has increased in value since you acquired it. Assets can include shares in a company, real estate property or personal possessions like a valuable painting or an antique piece of furniture.
Gillian Campbell, partner at Shepherd and Wedderburn and head of the firm’s private wealth and tax team in Aberdeen, explains when Capital Gains Tax applies: “Say, somebody owns their own home. They bought it for £200,000 and then, years later, they sell it for £300,000. Although there is an increase in value, they don’t have to pay Capital Gains Tax as the property is their main home and so benefits from private residence relief from tax. It’s other people who have to pay this tax, those who have second properties such as a holiday home or a property that was bought as an investment to rent out.”
2. ‘Dementia Tax’
Although sometimes known as ‘dementia tax’, this cost is not a tax; the term pertains to care home fees. Such fees are often referred to as ‘dementia tax’ by campaigners owing to reports from organisations such as the Alzheimer’s Society, which has stated that “people with dementia face the highest cost of care of any group”.
People living in Scotland can potentially receive £308.65 per week for nursing care and personal care. This is not means tested. However, if a person has capital of more than £29,750 at the current rate, they would need to fund their own care costs if they were to move into a residential care home.
Gillian shares the sad reality of ‘dementia tax’ for those who are unprepared:
“Many people feel very disgruntled that they’ve paid a lot of tax during their life. They’ve paid income tax, national insurance and perhaps also Capital Gains Tax but, if they have to move into a care home in later life, their house may need to be sold to fund their care. Some people may have other more liquid assets that could be used to fund care costs. However, if their main asset is their house, then their family may have no other option but to sell the house to raise the cash to pay the care home fees.”
3. Inheritance Tax
This duty is payable in most circumstances on estates valued above the £325,000 threshold (the Nil Rate Band). Rising house prices in recent years mean more people are affected by this tax, including those who would not necessarily be regarded as particularly wealthy. As a result, in 2021, HMRC raised £5.9 billion from this tax.
Similarly to ‘dementia tax’, many people see inheritance tax as a form of double taxation. After dutifully paying income tax throughout their life, they may feel aggrieved at having their net wealth taxed again at 40% inheritance tax following their death.
Benefits of tax planning
These examples illustrate the importance of a robust tax planning strategy. It is important to take stock early on and structure your financial affairs in a way that avoids, or at least mitigates, various taxes. For example, anything you pass to your spouse or civil partner on death is exempt from inheritance tax, as is anything that is gifted to charity. Gillian says:
“A lot of people don’t realise the extent of the value of their estate. They may not appreciate the market value of their home; they may never think about it if they have no plans to move. They may have bought their property decades ago and don’t realise they’re living in a house that could be worth a value which exceeds the inheritance tax Nil Rate Band.”
Tax planning can help you take stock of your assets and put in place a plan to protect them, whether you are looking to leave money to loved ones, fund your own care in later life or support a charity close your heart.
Start by consulting a trusted professional adviser who can advise on practical solutions to suit your specific needs. A solicitor can assist you by ensuring that a tax efficient Will is in place and that you are making full use of available tax allowances and reliefs.
Consult Shepherd and Wedderburn to address your tax planning needs now.