The long arm of HMRC?
The implications of the outcome following the Brexit referendum are still being finalised. However global financial institutions such as Goldman Sachs, Morgan Stanley, Deutsche Bank and others have said they will relocate workers to rival financial centres in Europe after March 2019. A survey by Reuters indicated up to 5,000 financial jobs could be moved, depending on the final terms agreed by the Brexit negotiators.
It is worth pointing out that for the individuals thinking about relocating, the long arm of HMRC will make their finances more complicated than they had anticipated. Moving country is a huge decision. Quality of life, employment opportunities, climate and a good education system, could all be factors in this decision, but tax implications may also be significant.
There is widespread confusion about UK tax obligations among Britons thinking of moving abroad. It is also fair to say it may not be the ideal choice of the individual involved to relocate and for many, it will be their first stint of working outside of the UK.
A survey was recently taken of 150 British expats across the world to gain insight into the most common misunderstandings about the UK tax laws. Nearly three-quarters of those surveyed said they wrongly assumed they would no longer be UK domiciled after moving, which would free them from taxes levied by the HMRC such as UK inheritance tax, which at 40% is the 4th highest in the world, according to policy adviser the Tax Foundation
Many people believe leaving the UK will break the domicile position and therefore negate UK tax. Unfortunately, those who move abroad for work along with those who move by choice need to remember that just because they have crossed the border it is not a clean break from the UK tax system. For those domiciled, the tax code can also catch out those who seek to claim non-residency while on secondment to an overseas office, for example. Non-residents have to pay tax on any UK income, such as rental income from a British property while residency could trigger HMRC taxes on worldwide earnings and capital gains.
A managing director at a US Investment Bank who moved to Milan from London in Spring 2018 said many of his peers believe they can keep their families in London and return on the weekend. Overstaying the permitted tax year allowance of 90 days or working from the UK on more than 30 of these days could trigger residency and a hefty bill. Travel between the UK and the new country of residence has to be carefully managed and logged in case HMRC request evidence to support the individuals new non-resident status.
Losing domiciled status (which has roots back to 1799) is very difficult to achieve. It involves individuals to sever all links and to pledge never to return to live in Britain among other strict criteria. People who were born in the United Kingdom are generally deemed domiciled and as of April 2017 so are people resident in the UK for at least 15 of the last 20 tax years.
In April this year, new non domicile rules came into force which has pared back tax perks offered to people whose domicile is outside the UK imposing new limits on their ability to keep offshore income out of Britain’s tax net.
Permanent non-dom status will be abolished for anyone living in Britain for a least 15 of the past 20 years. Non-dom status for Britons who return to the UK but claim to have a permanent home abroad will also be removed.
These measures are the biggest tax changes to the tax rules since their introduction in 1914. They have been introduced to tackle what the government has described as fundamental unfairness in the non-dom regime. HMRC estimates the measures will generate an additional £995m in extra revenue.
A prominent example of a returning non-dom is Stuart Gulliver, Chief Executive of HSBC banking group. Mr Gulliver was born and educated in the UK and acquired a tax domicile of Hong Kong after he moved there with HSBC in 1980. This allowed him to keep his offshore income, including from a confidential Panama company, out of the British tax net. However, he recently lost a High Court battle to stop HMRC investigating how he has kept a tax domicile in Hong Kong despite working in Britain for 13 years.
The survey of expats also highlighted confusion in other areas of financial planning. Half the respondents admitted they had no idea whether their Wills would be legally recognised outside Britain. In fact, people may require a UK Will and Power of Attorney for their UK assets and then a separate one covering their assets in the country they live in. The Wills need to acknowledge each other to avoid potentially superseding each other.
Additionally, certain life insurance policies may not be effective in other countries. The terms may not be altered easily so portability can be an issue.
Finally, bringing money back to the UK either for expenses or when someone returns home for good will have also have tax implications. Efficient financial planning will make a significant difference to your financial situation. Ensure you speak to an experienced and impartial professional for peace of mind. Don’t put it off. Contact us now for advice.
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.
IHT Gifts to Charity
What would it mean for charities if Inheritance Tax was abolished and therefore no tax incentive to leave a bequest?
Chancellor Philip Hammond has requested a complete overhaul of the UKs inheritance tax framework, and the Resolution Foundation (a leading group of experts), has proposed that the tax be scrapped entirely. The government may not have such a radical change in mind for the IHT system but the public consultation period has now expired and charities have had a chance to say how they believe the future system will work.
The Resolution Foundation has proposed an interesting concept; a tax on your estate after you pass away is replaced with a ‘lifetime receipts tax’ which beneficiaries would pay as they go. The scenario encourages people to pass on cash or assets to younger generations and potentially enable them to get on the housing ladder earlier on in their lifetimes. This would be a lifeline to millions of young people who are currently priced out of the property market and are paying exorbitant rents to opportunist landlords.
However, what seems to have gone almost entirely under the radar is what such extensive changes would mean for legacies and charitable donations. Tax relief plays a key role in motivating the public to do social good, and is a saving to the consumer, although effectively comes at a cost to the Government.
Legacy income is the largest single source of voluntary income for the sector and generates more than £3bn each year. Thanks to the current generous system of tax relief, bequests to charity are currently exempt from IHT (otherwise charged at 40%) and a lower rate of tax (36%) is granted to any estate where 10 per cent or more is donated.
The impact of this framework has had a significant effect on legacies, but in an unexpected manner. Research proves that tax relief can be a strong incentive for people to donate, particularly for those whose Estate encroaches the IHT threshold. The real issue here though is that this potential tax relief gives solicitors and financial advisors the incentive to discuss legacy giving with clients who are they are writing Wills for.
Solicitors and financial advisors are not expected to be canvassing for charitable donations. But they are expected to raise all issues that should be considered when people are writing their Wills. Donating to charity isn’t always an obvious consideration but because of the tax relief aspect these professionals have a natural entry point for discussions with clients. And this has been an important factor in behavioural change. Trials conducted by the Behavioural Insights Team show that when the option of leaving a gift to charity is referenced the number of gifts can be trebled. Currently 7 out of 10 advisers regularly mention the tax benefits of legacy giving with their clients and without a similar tax incentive in place, such discussions are unlikely to occur.
The Government has always supported the concept of legacies and we are confident that future tax policies will continue to encourage and to inspire giving.
The IHT consultation led by the Office of Tax Simplification, closed last week. Charities’ response to this consultation was to highlight the importance of legacy income and IHT relief. The Government is already in discussion with the Institute of Fundraising and the National Council for Voluntary Organisations. From a charity perspective their focus is not to determine whether IHT is the best tax model, but to ensure that charities are carefully considered within this debate. Another proposal is to introduce VAT exemption on Will writing costs for those that include charitable bequests.
As a sector, it is vital to convey the societal impact of gifts in wills, as well as the importance of tax incentives to creating an environment where conversations about charitable giving are becoming more routine.
IHT may well be in dire need of reform, but the potential impact on legacy giving must not be overlooked in its new incarnation. It is crucial that you take professional impartial advice when considering the potential IHT implications of bequests. Speak to us now to discuss your IHT concerns.
What’s the Point of Marriage?
Latest figures from the Office of National Statistics indicate that the marriage rate has been on a downward trajectory since the early 1970’s, hitting its lowest level on record in 2015.
For many young couples there is a significant quandary between buying a house together and getting married. The cost of the average UK wedding is now an eye watering £27,161, according to the Skipton Building Society. So does it make sense to sacrifice all your savings for a wedding in order to prosper from the financial perks of marriage later down the line?
Over a 50 year marriage, a couple could be as much as £190,964 better off, even taking the potentially extraordinary cost of wedding into account (although unfortunately most of the benefit is a saving in inheritance tax).
It’s a common misconception that couples who are living together have the same rights as married couples. In fact, cohabiting couples have very little rights. Should the couple decide to separate there is no legal entitlement to shared assets either. At the risk of sounding unromantic, the best tax strategy you can have is to get married.
Unlike couples who are simply living together, married or civil partnership couples can share their assets between them to make the most of both of their tax free allowances, and ultimately avoid a hefty tax penalty. This is significant benefit.
Each individual currently has an annual Capital Gains Tax (CGT) allowance of £11,700. Where an individual might incur capital gains of more than this, they can transfer some of the assets to their spouse and effectively benefit from double the allowance (so a married couple holding the assets jointly could make a gain of £23,400 before paying any tax).
If this is still going to leave you with a CGT bill, it is prudent to split the assets in such a way that you use both allowances and the lowest rate taxpayer foots the bill for the additional capital gains to minimise the amount of tax due. Married couples can also transfer assets to make the most of the annual dividend allowance and personal savings allowance.
Married couples can also enjoy £238 tax saving this financial year by using the marriage allowance. If one spouse has less than £11,850 in taxable income during the tax year, they can transfer £1,190 of their personal tax-free allowance to their other half – provided the higher earning spouse is a basic rate taxpayer earning up to £46,350 (£43,430 in Scotland) a year.
Unfortunately most of the benefits of marriage occur at the most difficult times. As morbid as it seems, this is biggest upside to being married from a tax perspective. This is the reason why many long term cohabiting couples marry in older age, or if one partner is terminally ill. Assets passing between married couples on death are generally exempt from inheritance tax. This can amount to a saving of 40% which can potentially save the surviving spouse hundreds of thousands of pounds.
Every individual has an inheritance tax threshold which is currently set at £325,000 while homeowners have a property threshold, which will be £175,00 by 2021. When married partners leave assets to one another, their tax free bands are added together so that the surviving spouse has a threshold of £650,00 and (assuming they are passing it to children or grandchildren) £350,000 worth of property free of tax.
However there are also advantages arising on death. Assets that have made significant gains, if passed to a spouse on death, are generally given a new base value for tax purposes at the date of your death, all the while still avoiding inheritance tax.
In 2015 a rule change meant that ISAs inherited from a spouse or a civil partner were now free from tax liabilities. Previously the tax efficient status of those products ceased on owners death. The surviving spouse can now apply for an additional ISA allowance, known as an Additional Permitted Subscription allowance, which is equal to whatever their partner held in the ISA at the time of their death.
Although increasingly rare, there are still millions of people with generous defined benefit pensions which often include, surprisingly, a spouses pension if their partner passes away. The average rate a spouse can get is around half of their partners pension, payable for the rest of the spouses life, so potentially a huge benefit. If you’re not married the pension trustees may still pay the pension, however it is completely at their discretion. Generally married couples find it easier to inherit their partners pension on death, regardless of what kind of scheme it is. It is important to read the small print however, as policies vary enormously.
While cohabiting couples can draw up agreements and wills to help determine how assets are split or inherited, there’s very little they can do to avoid paying taxes altogether. Of course there is the argument that the government needs to keep up with the times and give cohabiting couples some of the tax benefits their married peers enjoy; regrettably it’s unlikely to change for the foreseeable future. Cont
Can An Executor be liable for Inheritance Tax?
Before you agree to taking on the role of an Executor it’s important to be aware of all the potential responsibilities that it entails. Being asked to become an Executor for a friend or a relative can seem flattering, indeed quite an honour, but not everyone understands exactly what they are taking on.
When the person dies, as Executor you are obliged to deal with their Estate ensuring that their Will, assuming they had one, is adhered to. It will be your responsibility to make sure the deceased’s Estate is correctly valued for inheritance tax purposes and that any outstanding tax bill is paid. While that may seem obvious, what is not obvious is that the Executor can be personally liable for the IHT bill even if they are not a beneficiary (it’s worth pointing out that it is possible to be both a beneficiary and an Executor of the same Will).
In England and Wales, an Executor can be held personally financially liable for any loss that a breach of their duty incurs, regardless of whether the error was inadvertent or intentional. Executors are obliged to disclose all known information about the Estate of the deceased, typically income from bank accounts, liabilities from credit cards, utility bills and other outstanding debts.
Interestingly, beneficiaries may start legal proceedings against the Executor in certain circumstances, often to recover losses incurred due to errors made in the Estate administration process. Verifying that all the Estate information is accurate is a crucial part of the Executors role and it may be appropriate to complete financial asset searches and gather further information by other means to ensure all assets and liabilities have been located and accounted for.
When dealing with Estate funds, all liabilities must be paid before funds are released to any beneficiaries. If there are insufficient funds within the Estate to pay all debts, the Executor will need to prioritise the funeral costs and associated expenses before following the procedure for an illiquid Estate (one in which the assets are not easily converted into cash).
In 2013 a Mr Harris was made Executor of a £1.2m estate. He filed an IHT return with HMRC and paid the initial taxes due. However, as the Estate included land the remaining balance owed to HMRC didn’t need to be paid immediately. Mr Harris arranged for the Estate to be passed onto the beneficiaries; in this particular case the majority of the Estate went to one individual. There was an agreement that this beneficiary would settle the remaining IHT bill. Unfortunately this beneficiary immediately headed to Barbados and didn’t pay the bill.
This left the Executor liable to pay the remainder of the £340,000 bill. As he no longer had the funds from the Estate to cover this cost he appealed, denying personal responsibility for it. A judge ruled that Harris is in fact personally liable for this, and HMRC could potentially seize Harris own assets, including his house. Of course this is an extreme example but a good illustration of fact.
A more frequent issue is the question of how to pay an IHT bill when assets need to be sold to cover the cost. HMRC expects IHT bills to be settled within 6 months of an individuals death, after which it will start charging interest on unpaid tax. However, an Executor cannot sell assets until probate has been granted. Fortunately there are some options available to circumvent Executors personally funding IHT bills.
If the deceased has enough cash or investments to pay the bill then you can approach their bank or investment manager and ask them to release the money. Most are willing to assist. Additionally, if the Estate contains certain assets that need to be sold in order to pay the bill HMRC will allow you to pay in instalments. This includes property and shares that gave the deceased more than 50% control of a company. The first instalment is due 6 months after the death date and the rest is paid in annual instalments until the assets is sold.
In case of property, you can pay the IHT in annual instalments of 10% of the bill, plus interest, if a beneficiary chooses to live in the property, meaning it won’t be sold. Be aware though that interest is charged at 3% for instalments. The final option is to take out an Executors loan to cover the IHT bill until probate is granted. Assets from the deceased’s Estate can then be sold to cover the loan repayment.
Finally, if all this is too much responsibility, you can always refuse the request to become an Executor. Whether you are appointed under a Will as an Executor or you become an administrator of an estate because of intestacy, you can officially renounce the nomination.
Always ensure you take impartial professional advice for all your Inheritance Tax and Estate Planning issues. Contact us now
The Dangers of Poor Tax Advice
We were contacted recently by potential clients with an interesting situation. They wanted to review their likely inheritance tax position.
In 2003 they had asked a solicitor to put their home into a trust in order to avoid possible care home fees. As there was no capital gains tax incurred on their home and the value of the property was below the nil rate band allowance there was no tax to pay. Unfortunately by doing this they had unwittingly created a significant problem which we were unable to help them with.
The reason Trusts are so effective for Inheritance Tax Planning is because they work on the basis that the Trust is recognised as a separate legal entity under English Law.
In this particular case the property has virtually doubled in value in the last 15 years. The Trust now fully owns the property and any disposal of it in the future either by gifting it back to the client or to their children will generate a capital gains tax bill of around £80,000.
The situation is compounded by the fact that the house is entirely owned by the Trust, meaning the clients lose their allowance for the Residential Nil Rate Band (RNRB). This will be £175,000 each by 2021. The RNRB allowance is only available to individuals gifting their main residence to direct descendants or adopted children and therefore not available to a Trust.
To further exacerbate the problem the clients have not been paying any rent to live in this property they gifted to a Trust. As such, HMRC will regard this as a “gift with reservation of benefit”. Therefore the value of the property (but not the legal ownership) which is around £650,000 will fall back into the estate. Consequently the £650,000 is now liable to Inheritance Tax even though the actual legal ownership of the property no longer resides with the potential clients.
The clients have other assets of around £400,000. This gives them a potential IHT liability of £160,000. If they do nothing about this it will increase depending on the value of the property (which is a failed gift) and the value of their other assets.
So to recap, the intention behind the initial planning was the potential avoidance of care home fees. However, it is likely that the local authority will stipulate that the right to utilise and remain in the property still resides with the client. They are likely to insist that the property is rented out and that income utilised for care home fees. So even the original idea will not work.
These potential clients didn’t take advice from an Independent Financial Advisor before they embarked upon moving their house into a Trust. They merely instructed a solicitor to act on their behalf for the conveyancing. They will end up at the very least paying a large CGT in the Trust, and if they do nothing they will end up with a much larger IHT bill on their Estate.
Ironically if they had done absolutely nothing they would not have paid anything in tax provided one of them survives until 2021 which is highly likely.
We couldn’t help these potential clients because the Trust was already in place, so we referred then back to their original solicitors.
The moral of the story is that lack of good advice has cost the inheritors of these potential clients over £80,000 in unnecessary tax.
To avoid situations like this it is vital to take experienced advice before progressing with any plans that you believe will have a direct impact on your taxation and IHT. Contact us now for reliable and expert inheritance tax advice.
Wealth inequality is by no means exclusive to the UK, however we do have a very high level compared to other developed countries. Typically, households in the bottom 10% of the population have on average a disposable income of £9,644 after direct taxes. By contrast the top 10% have net incomes almost 9 times as much (£83,875). The poorest fifth of society have only 8% of the total income whereas the top fifth have 40%. Wealth is even more unequally divided than income. The richest 10% of households hold 45% of all wealth. The poorest 50% by contrast, own just 8.7%, and the South East has almost twice (184%) the amount of wealth of an average household in Scotland.
The Organisation for Economic Cooperation and Development OECD) has released a report concluding that disparities have increased in recent decades. Wealth – for example property, savings, share portfolios and pensions – grows and becomes self reinforcing because the rich have more to invest in higher yielding assets, greater financial knowhow and better access to investment advice.
Individuals with more money to invest have more power, influence and opportunities and are able to generate income without having to work. A key aspect of wealth accumulation is that it operates in a self reinforcing way; wealth begets wealth, the report said. It may be argued that wealth begets more power, which may ultimately beget more wealth. Overall, this means that in the absence of taxation, wealth inequality will tend to increase.
The eminent economist Thomas Piketty has highlighted the importance of wealth in entrenching inequality. He has called for a global wealth tax to reduce this inequality and to increase social mobility. This report from the OECD is partly in response to his comments, and it highlighted that taxing capital income would not do enough to reduce wealth inequality. It went on to say the answer may lie in higher taxes on inherited wealth. Inherited wealth is unearned and therefore unfair, the report surmised.
Increased home ownership and rising house prices mean the wealth of younger generations now depends more on how much they inherit, increasing inequality. By accepting the argument for tougher wealth taxes and proposing inheritance tax as a key measure, the OECD is likely to instigate further dispute in the UK, where the tax is highly unpopular. There has been a surge in inequality between the generations. Most married couples can leave up to £850,000 to their direct descendants without paying inheritance tax. That figure will rise to £1m by 2020 if they own a home worth more than £350,000.
Experts have agreed that the analysis produced by the OECD is very useful as the actual essence of the argument is sensible. Wealth is much more unequal than income but it is discussed much less. Politicians across the spectrum recognise that taxing wealth will be necessary, as the so called Baby Boomer generation (born between 2946-1964) retire and need social care.
UK estates paid a record high of £5 billion in inheritance tax last year. This figure is set to rise especially for people that leave it too late to take action. For help and advice on Inheritance Tax Planning please call us now.