What Is Inheritance Tax?
Inheritance Tax (IHT) is a tax on the transfer of assets from one person to another. It is usually encountered when someone dies, and they leave their Estate to either one individual or a range of beneficiaries. However, lifetime gifts also have IHT consequences. The rate of IHT is generally 40%.
Not everyone has to pay Inheritance Tax. The principal deciding factors are:
- What is the value of your Estate at the time of your death?
- Did you make any lifetime gifts within 7 years of death and if so what was the value of the gift and who received it?
- Do any of your assets have relief from, or are they exempt from, IHT at the time of your death?
- Who are you leaving your Estate to? Are any of the beneficiaries exempt from IHT?
- How much “nil rate band” and “residence nil rate band” do you have available at the time of your death?
The Nil Rate Band
The first £325,000 of every Estate is entirely exempt from Inheritance Tax. This is referred to as the nil rate band and it applies to everyone in the UK. It’s called a nil rate band because assets up to that value are taxed at 0%. If one spouse doesn’t use or only partially uses their nil rate band at the time of their death (for example if the value of their estate is less than the nil rate band or all their assets are passing to the surviving spouse who is an exempt beneficiary) then the unused proportion can be transferred to the surviving spouse and is available at the time of death. This is known as the transferable nil rate band.
Generally speaking if you have made no substantial gifts in the last 7 years and your estate is worth less that £325,000 (for an individual) or £650,000 (for married couples) it is unlikely that there will be an IHT charge at the time of your death. If the value of your estate is worth less than £500,000 (for individuals) and £1,000,000 (for married couples combined) again it is unlikely that there will be an IHT charge at the time of your death (after 2021) if you qualify for the residence nil rate band.
The Residence Nil Rate Band
This is an extension of the nil rate band and is available to homeowners who leave their house to their direct descendants, typically children and grandchildren. It is being phased in over time and by 2021 will provide an additional £125,000 of nil rate band. However, the extension starts to be withdrawn if your estate exceeds £2,000,000 at the time of death.
Any transfer of wealth during lifetime or on death from a person to their spouse is exempt from Inheritance Tax. There is an exception to this where the recipient spouse is not domiciled in the UK, in which case the spouse exemption is capped at £325,000.
Any transfer of wealth during lifetime or on death to a UK charity is exempt from IHT. If you decide to leave at least 10% of your estate to a UK charity on your death any IHT is payable on the remainder of your estate it is paid at 36% (instead of the usual 40%).
Are Some Assets Exempt from IHT?
There are 2 main classes of assets that are exempt or partially exempt from (or technically have relief from) IHT.
- Interests in businesses that have been owned by you for more than 2 years and qualify for “business property relief”. This may include interests in sole-trader businesses, interests in trading partnerships and unlisted shares in trading companies. Investment businesses do not qualify.
- Interests in agricultural property that have been owned and occupied for the purposes of agriculture by you for more than 2 years or have been owned by you but occupied by someone else for the purposes of agriculture for more than 7 years. This relief only extends to the agriculture value so if the market value exceeds the agricultural value, APR doesn’t provide relief for the excess value.
Some assets are not technically part of an Estate and although they may provide valuable payments on death, they are not usually subject to IHT. These may include life assurance payouts on your death, pension death benefits and death in service payments through your employment.
Can you Use Financial Planning to Avoid IHT
Yes, IHT planning is lawful but care must be taken to engage a professional and experienced Independent Financial Advisor to assist with this. The legislation sets out a number of reliefs and exemptions that can help to mitigate the liability. There are a variety of ways and the traditional ones are:
- Lifetime giving to reduce the Estate on your eventual death. Many gifts can be made without incurring any IHT consequences providing that you survive the gift by 7 years.
- For married couples making use of the spouse exemption, to prevent any IHT being payable on death of the first member of married couple to die.
- Taking out life assurance to provide funds on death to pay or help towards paying the IHT liability.
- Investing in various financial products that provide a form of investment but also seek to secure an IHT benefit. These include Discounted Gift Trusts, Loan Trusts and flexible Reversionary Trusts Lifetime giving to reduce the Estate on your eventual death. Many gifts can be made without incurring any IHT consequences providing that you survive the gift by 7 years.
- Considering the use of Deeds of Variation and other methods to reduce and IHT bill even after a person has died.
It’s worth remembering that individuals who are domiciled in the UK are subject to UK IHT on their worldwide assets. It is UK domicile rather than residence that triggers UK IHT. Domicile is more a concept of the country your regard as your home and is not necessarily the country you live in. There are also rules that deem you to be domiciled in the UK based on your pattern of residence.
For the peace of mind that efficient estate planning brings you need to ensure you engage an experienced, professional and impartial expert. Contact us now and take the first step in ensuring you leave your loved ones the legacy you worked hard for.
Tough New Tactics from HRMC
Getting people to pay HMRC the money they owe has always proved to be tricky. In 2016 it spent £24m on private sector debt collectors but in 2017 the figure soared to £39m. HMRC now has a new, more aggressive tool at its disposal, known as an Attachment of Earnings Order. These are being used alongside the feared Accelerated Payment Notices (APNs).
APNs are issued to people that HMRC believe owe them money. They are an upfront demand for immediate payment without the need to actually prove through the courts that the money is owed. Reliable data sources illustrate that use of APNs has more than quadrupled since January 2017.
It’s clear that the tax office isn’t troubled by making individuals bankrupt or forcing companies to cease trading in order to get hold of disputed funds. APNs have given HMRC the power to create an environment best described as tax now, ask questions later. Taxpayers are routinely remortgaging their homes or selling all their assets to pay these tax bills that often HMRC has not proved in court.
An Attachment of Earnings is a new method that HMRC will be using to retrieve money. It is designed to retrieve unpaid maintenance payments, county court judgements, or benefit overpayments. Both the individual concerned and their employer will receive a document from the courts, detailing what is owed and how much the employer will need to deduct from the salary each month in order to repay that money.
The Court will assess the individuals financial situation to deduce what they need to live on (this is referred to as the protected earnings rate) and then deduct the owed money from whatever is left. Data obtained by a national accountancy firm reveals that 428 people had money ‘recovered’ directly from their earnings by the taxman in 2017/18.
This new ploy ensures that HMRC gets the money it is owed conveniently and without the hassle of repossessing the debtors goods and selling them through auctions. This is always a lengthy process and sees those goods sold for far less than they are really worth. The Attachment of Earnings has the additional advantage of being completely non confrontational as there is no interaction with the debtors. It’s a tried and tested method that the Student Loan Company has been using for some time, collecting about 9% of graduates earnings every month, provided their earnings remain above a specific threshold.
Despite the ongoing disputes about unpaid tax whether from reluctant individuals or expert evaders that are giant multinational companies, HMRC have published an analysis of income tax paid in the UK by salary band, region and gender. In total 2016-17 saw £174 billion paid in income tax, which is the latest year for which figures are available. Of that amount, almost a third of it (£52.6bn) was paid by the 381,000 taxpayers who earn more than £150,000 per year. The tax paid by those overwhelming male individuals was more than all the income tax paid by the first 20 million taxpayers.
Unsurprisingly, London has 4.2m income tax payers but just the 87,000 earning over £200,000 paid nearly half of the £43.8billion that was raised. It is awkward to admit it, but if we really do lose all these high earners to Brexit, the hit to the Treasury will be significant. After all, these bankers, lawyers and accountants paid more income tax in 2016-17 that the entire sum raised from every taxpayer in Scotland and Wales combined.
Thinking about your next tax bill? Tax planning advice should only be taken from a professional experienced and impartial advisor. Call us now for the peace of mind that efficient and lawful tax planning brings.