Could Inheritance Tax be abolished?
Rumours are swirling that Inheritance Tax may perhaps be abolished. It is tricky to navigate the current IHT regulations and many adults admit they find it baffling. Despite the ability for a couple to pass on £850,000 free of IHT, receipts this year increased by 8% to £5.2 billion.
In January, Philip Hammond, Chancellor of the Exchequer, took the unprecedented step of contacting the Office of Tax Simplification asking them to completely overhaul Inheritance Tax.
In April the OTS published a call for evidence, and analysing the questions that it asked it is obvious they are considering a radical review. Responses had to be returned to the OTS by 8 June and we are led to believe the report will be published before the 2018 Autumn Budget.
In May the Resolution Foundation, a leading economic thinktank, published their Intergeneration Commission Report. It strongly recommended radical reforms of our IHT system. The report stressed how inefficient the tax was. Indeed it cited examples such as inheritances and other gifts totalled £127bn in 2015/16 but the only tax raised was £5bn. This effectively equates to a rate of just 4%. Between 2006/7 and 2022/23 IHT receipts are forecast to grow at less than a quarter as fast a rate as inheritances.
The Resolution Foundation has recommended the current IHT regime is scrapped. The feasible alternative is to move to a lifetime receipts-based tax rather like the schemes currently in place in both France and Ireland. The concept appears tried and tested and would deliver both practical and perceptual benefits. Crucially, it would also increase tax receipts.
It would be a significant move away from our current system. The receipts based system involves individuals having to keep track of cumulative receipts. However gifts of £3,000 or less per donor per year and gifts between spouses, civil partners and charity gifts are excluded. There would be a cumulative gift allowance of initially £125,000 tax free, with the allowance being indexed in line with inflation.
Gifts between £125,000 and £500,000 would have a basic rate of 20%, and a top rate of 30% would apply thereafter. The estimate is that such a change would generate £11bn annually compared to the forecast of £6bn under the current system.
Some of the tax planning opportunities currently available would no longer be an option, namely the seven year cumulative gifting rule and the normal expenditure out of income exemption.
Agricultural relief and business relief which currently cost the Treasury £1.22bn, would also be better targeted to remove any predominantly tax-driven motivation for owning the assets. It is likely that the relief is to be capped, the minimum ownership period will be increased and the relief would ideally be limited to genuine farmers and business owners rather than the financially astute planners.
The trust tax regime, arguably the most complex, is likely to be redesigned to reflect the lifetime receipt rules and the thinktank also has some suggests for pension inheritance. These suggestions have caused concern as it recommends the removal of the tax free treatment of pension funds inherited on death of the member (under age 75). Their suggestion is to make it liable to inheritance and income tax.
Their final suggestion is that capital gains tax apply on death, although restricted to additional residential properties and assets qualifying for business property relief and agricultural relief.
Of course these are only suggestions from the Resolution Foundation and it is entirely possible that the Office for Tax Simplification may have a completely separate set of regulations that they will introduce. If these suggestions are implemented however, most hit would be small families, as there is a tax on the individual rather than two allowances from a couple gifting the money.
However, one thing that is very clear is that referring to IHT as a voluntary tax will be a thing of the past. This phrase was coined on the basis that careful planning can significantly reduce or even negate an individuals liability.
Anyone who has held off making gifts for IHT planning purposes or for anyone who has deferred having that initial IHT discussion, now is the time to act. It is vital to discuss this with an experienced, professional and impartial advisor. Call us now before the autumn report is published and significant opportunities are lost.
Entrepreneurs Protect Your Wealth!
Entrepreneurs seeking to build and develop their businesses are understandably focussed entirely on their commercial objectives and too often forget about financial planning. It’s entirely understandable as cash is often tight in the initial stages. Spending money on lawyers to protect assets that may not be worth much at that stage could seem unnecessary.
Obviously no one wants to think about marriage breakdown or death particularly if you are a dynamic young business owner on the path to success. However, it is important to do this at the earliest opportunity.
Protecting your personal assets through your commercial documents should be done when actually setting up your company. That way the initial wording to protect your personal position can be woven into your commercial documents.
There is usually provision in the articles of association for what will happen to shares in certain circumstances including on death. However, despite the UK having a divorce rate of about 40% it is rare for these agreements to state what will happen if the founder suffers a relationship breakdown.
Entrepreneurs are often advised by their accountants to gift shares to their spouse for tax reasons. However there is often no consideration given to what happens to these shares should the couple split up. If the shares carry voting rights this can be problematic so the ideal situation is that any such shares automatically revert back if you get divorced at any stage.
Governing documents can also contain pre-emption rights, so that any shares are offered to other shareholders, members or partners in the business. This can be done in conjunction with a ‘keyman’ insurance policy which pays out to the other parties allowing them to purchase the shares from your estate.
Safeguarding assets for children should be a consideration too. There are steps you can take to protect any property or money you have intended for the children in the event of a relationship breakdown.
Gifts in your Will could be left to a Trust managed by the family so they do not actually own the assets, or they could be made contingent upon the children reaching a certain age. Gifts such as cash to buy a property or to use as a deposit for a property purchase can also be made as a method of reducing your inheritance tax liability. This gift could be made on the proviso that the child enters a pre-nuptial or cohabitation agreement. Another option would be to use a trust to protect the cash.
Of course having a Will is a vital part of financial planning. A basic Will together with a joined up approach in the corporate governance documents will usually be adequate. However once assets are worth £500,000 and above it is likely that a more detailed version will required to ensure that your are wholly protected.
The key to efficient planning is to review your Will every 5-7 years, to make sure it is inheritance tax efficient and still meets your particular needs. If your personal circumstances change then an annual review would be a wiser option.
A pre-nuptial agreement is a very practical tool but allow plenty of time for this to be prepared as they are tailored specifically to your needs now and in the future. Such an important document should be completed at least 6 months before the wedding.
If buying assets abroad is your intention ensure you understand how these would be affected by death or divorce. Find a UK lawyer specialising in international cases as they will have a good network of specialists in other jurisdictions and will work with you to ensure your wishes are carried out both abroad and back in the UK.
A significant part of being a successful entrepreneur is making informed decisions about your personal wealth and being prepared for any event in the future. Taking professional advice from an experienced impartial estate planner is crucial. Contact us now for the piece of mind that efficient estate planning brings.
Where there’s a Will there’s a way …
The whole estate planning process is difficult for many clients. People often have a lot at stake financially and emotionally when they engage an estate planner. The fact that others often have an intense interest in the outcome of any estate planning doesn’t make it any easier either. This leads to inevitable postponement of estate planning which explains why some people still die intestate. This means the deceased has no control over who will inherit the assets in the estate and intestacy rules step in to determine which family member should benefit from the estate and in what portion. The applicable intestacy rules will turn on the nature of the assets, where the assets are located and the domicile of the deceased. Depending on the jurisdiction in point, the intestacy rules can offer rather different outcomes.
It is not unusual for individuals to invest in cross-border investments to gain exposure to international markets in property, shares, currencies and other investments. This is often done in a bid to achieve diversification and to spread risk. However, these cross border assets should be carefully considered when it comes to estate planning as they will fall under local regulations. International estate planning can involve a range of tools and an individual with an international profile should at least have an effective Will in place.
Without proper legal advice many people make elementary mistakes when writing their Wills, which may mean a challenge can be brought by other potential beneficiaries down the line.
In the UK people are largely free to leave their assets to whoever they choose. You may be surprised to learn that this is in sharp contrast to much of continental Europe where laws of succession mean its virtually impossible for French parents, for example to disinherit a wayward son or daughter. There are restrictions though, and there are several grounds for a Will to be contested.
A Will is a formal legal document and while you can write it yourself, it needs to be done properly, signed and verified by 2 witnesses. In order for a Will to be valid in the eyes of the law, the person making the Will needs to be of sound mind. They must understand that they are making a Will and the effects of its contents. They have to be clear of the nature of their Estate and its value, and understand the consequences of excluding certain people from their Will.
Crucially, they must not be suffering from any disorders of the mind such as dementia, which may have an undue influence on their decision making. This is to prevent them making bequests, gifts and exclusions that they would otherwise not have made.
It is possible to contest a Will if there is genuine evidence that it has not been correctly produced. You can also make a claim if you believe someone wouldn’t have approved an aspect of the Will or was unaware of the contents of a Will. Inevitably suspicions arise when there is a substantial gift made to the person who was involved in the writing of the Will. This alone is a good reason to engage a professional.
Fraud can sometimes be suspected in a Will, for example a faked signature or a faked document. However, the law can also define fraud as lying. A could make up that B stole from C. If C then excludes B from her Will based on that lie, the Will could ultimately be invalidated due to A’s fraud.
Estate planning can be very complex and mistakes do get made. You can contest a Will if a genuine clerical error is made which results in the wishes of the deceased becoming unclear. It is possible too, to claim where there is evidence of negligence in the drafting of the document, or where specific wishes are unclear. A court may ultimately decide what the exact meaning of the Will may be.
If you think you have any grounds for complaint then it is important to move quickly, preferably before probate, and seek specialist legal advice as soon as possible. The longer you take to lodge an action the weaker your case will be when it comes to court. Initially the costs are relatively low; you can pay a small administration fee to lodge a caveat at the Probate Registry. If the beneficiaries do not agree that there are grounds for complaint they can issue a short document known as a warning. This sets out their reasoning for objecting to any claim. Then the person contesting the Will, having received legal advice, can determine whether to proceed further.
At this point they lodge another short document known as an Appearance. If no agreement is reached then the probate process – the gathering up and distribution of the estate in line with the Will – will begin. Obtaining professional impartial estate planning advice is crucial. Over the years we have tried to help people with badly written Wills often to little effect once the settlor of the estate has died. The larger your estate the greater the need for both estate planning and inheritance tax planning as an integrated strategy.
Contact us now for the peace of mind that efficient estate planning brings.
What is the Tax Gap?
The Tax Gap (which applies to Inheritance Tax as well as other taxes) measures the difference between the amount of tax the Treasury think it should be getting and what it has actually received.
HMRC is aware that it is virtually impossible to collect absolutely all of the tax that is owed to them. Legal interpretation, avoidance, evasion and criminal attacks on the tax system along with simple errors and careless mistakes made in self assessment calculations all contribute to create this tax gap.
The amount of Inheritance Tax (IHT) the Government received in 2016/17 reached a record high of £4.84 billion. This was an increase of 4% compared with the 2015/16 tax year which raised £4.7 billion. Interestingly, the gap between tax received and tax owed has grown from £575 million in 2016/16 to £600 million in 2016/17, a 4.3% increase which is roughly in line with the increase in tax taken.
It is fair to say that Inheritance Tax is one of the most complex taxes in the system, and there is considerable scope for individuals to organise their affairs in a way which reduces the amount of tax which they pay. In its current form, IHTs complexity actually encourages behaviours which are detrimental to sensible financial planning and the distribution of wealth through generations. Because the rules are sometimes so irrational there is definitely an element of accidental evasion by those who don’t take professional advice. The new main residence nil rate band was intended to take normal people out of IHT but it is so complex that people are missing out on its benefits.
The Government has ordered a review of the IHT system which the office of Tax Simplification is currently working on, but the results of the review and any consequent amendments thereafter are unlikely to be rapidly implemented. Once the new system is in place however it should be simpler for taxpayers and theoretically a higher proportion of the tax due can actually be collected.
Part of the reason that IHT receipts have grown is the increase in property prices, which in turn causes the absolute amount of tax gap to increase. The effective simplification of all IHT tax rules is the vital component in closing the tax gap for HMRC. Currently as a population we have asset rich baby boomers, asset poor millennials and a ticking tax bomb. In order to maximise the efficiency of your Inheritance Tax planning you need to speak to an impartial experienced professional. Don’t keep postponing it. Contact us now for effective advice.