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Advanced taxation Case Study

Category: Finance & Accounting Pages: 10 Type: Case Study Level: College
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