New Record High For Inheritance Tax Payments
New figures from HMRC show an alarming 13% year on year rise in Inheritance Tax receipts, raking in a staggering £5.3 billion to the end of February. These record sums forced Chancellor Phillip Hammond to instigate reforms in the notoriously complex IHT system.
The review of the system was ordered at the end of January but the timescale is unclear and the threshold of IHT (which has remained at £325,000 since 2009) has not been cited thus far.
Interestingly, the combination of the unchanged IHT threshold and soaring property prices are the main reasons that more people are eligible for death duties. Substantial portions of peoples’ estates are now being taken, often quite unexpectedly, by HMRC through IHT. The value of these is rising at a startling rate and no one wants their descendants to be landed with hefty and avoidable IHT bills.
The Government have introduced the residence nil rate band (RNRB) which was gradually bought in from April 2017. Under the RNRB married couples or those in civil partnerships will eventually have an extra £350,000 worth of IHT free allowance per couple. Unfortunately it is not fully phased in until the 2020/21 tax year and the rules are extremely complex.
Another quirk in IHT which needs resolving is extending civil partnerships to couples of different genders and the next step in this change would be full legal rights for unmarried and non civil partner cohabiting couples. Since 2006 the law in Scotland gives some cohabitees some rights but not to tax exemptions and the Law Commission in England and Wales did not suggest that in its’ report at the time. The President of the Supreme Court has said several times that cohabiting couples should have more rights when their relationship ends but she has not suggested tax rights on death. At the moment, a bereaved partner without legal status may not just be landed with a large and perhaps unexpected IHT bill, they can also lose their home.
Lord Willetts said recently that IHT was “poorly designed, widely abused and a classic bad tax with a very high rate and very high exemptions”. He went on to say “we could lower the rate but with a broader tax base which would be fairer for all”.
If you wish to avoid or reduce this punitive tax, careful planning from an IHT specialist is invaluable. Call us now.
Inheritance Tax is often described as incomprehensible. Executors often complain to Probate lawyers that the deceased could have done more to save inheritance tax. Of course by that stage it is too late to do anything about it. One solution is to take full advantage of the rules on gifts, which is something older generations seem perhaps reluctant to do.
Anyone who can afford to give away sums of money should consider doing so. Provided the benefactor lives 7 years after the gift is given the Assets gifted are not included in the estate so there is no inheritance tax liability. The 7 year condition does not apply to the annual exemption. Anyone can give away £3,000 per year with a carry over for any allowance not used in the previous year, therefore allowing a couple to give away £6,000 every year. It is also possible to give gifts of up to £5,000 for a wedding, smaller sums of £250 can be given to as many people as you want and gifts from surplus income are also considered to be outside an estate for inheritance tax purposes.
According to recent research however, the average amount people believe they can gift each year without incurring inheritance tax is £1,575. This is almost half the allowance. Interestingly, only one in 10 (12%) of survey respondents actually answered with the correct figure. The confusing nature of tax rules appears to be stopping either generation from benefitting from significant pools of wealth built up over years.
Nearly half of parents surveyed (44%) said they would give more money to their children if they were allowed to do so without tax implications, while more than one in three (35%) grandparents would do the same. Two in 5 (40%) just don’t feel confident enough to make financial gifts.
Perhaps the recent Government directed inheritance Tax review will make a difference, as the review will be carried out by the Office of Tax Simplification.
It is worth mentioning that the current annual gifting allowance has remained at £3,000 since the early 1980s. Industry professionals believe that if this was increased we would see more families pass wealth down through the generations. This will give younger people the financial leg up in life that they may need, particularly with soaring property prices and home ownership merely a dream for some. The additional benefit of course would be to help older generations from an inheritance tax perspective.
Contact us now to discuss the significant benefits of Inheritance Tax Planning for your family.
The Chancellor of the Exchequer, Philip Hammond, has recently written to the Office of Tax Simplification (OTS) requesting a review of the regime surrounding UK Inheritance Tax (IHT). He asked the review to focus on the technical and administrative issues with IHT as well as practical issues around routine estate planning and disclosure.
The instruction for a review appears to reflect Mr Hammonds’ preferred considered and researched approach to policy decisions and his letter stated that he would be most interested in any proposals the OTS may have to make the experience of those who have Inheritance Tax issues as smooth as possible.
Inheritance Tax was instigated well over 30 years ago and since then has evolved into a fragmented, complex and poorly targeted legislation. There have been calls for a reform of the system for most of its existence. In the last year alone HMRC received £4.84 billion in inheritance tax. Rising property prices and a static IHT threshold (which has remained at £325,000 since 2009) are the biggest drivers of this. The introduction of the Residence Nil Rate Band has caused a significant increase in legislation, increased complexity and caused more uncertainly to those looking to plan the distribution of their estate during their lifetime or on their death.
Over the next couple of week the latitude of the review will be agreed. There are inextricable links between Inheritance Tax and Trusts, which themselves were referred to in the Autumn Budge last year. It is likely that there will be a review of the taxation of trusts at some stage in the near future. It seems probable that there won’t be any decision made before this years’ Autumn Budget. Experts suggest that substantial changes to the basis of the tax are likely to be forwarded looking and that existing structures may be offered some form of protection.
Once the details of the review are available, industry professionals will be able gauge if this is merely an administrative review or whether it will extend to consider the valuable reliefs from tax, including Charitable exemptions, Agricultural and Business property reliefs and the treatment of Lifetime Gifts.
If you’d like some professional advice regarding our own circumstances, please don’t hesitate to get in touch.
How To Arrange The Passing Of Business Shares On Death
The passing of business shares on the death of a business partner who is not a spouse requires careful planning. If you are considering selling business shares to a non spousal partner this area requires experienced advice.
To avoid business shares falling into a person’s estate and the surviving owners losing control of a business, many business owners set up share purchase agreements. The usual objective of agreements for the sale and purchase of a share in business between the owners in the event of the death one of them is that the beneficiaries of the deceased sell their share to the surviving partner. Unfortunately, using the wrong type of share purchase agreement can result in the surviving business partner being denied business property relief. However, the terms of this should not be obligatory.
Historically HRMC has regarded this kind of agreement as binding, as and such made the transfer of shares on death ineligible for business relief, for IHT purposes. Equally, for IHT purposes, the transfer of the share could be passed into a trust.
It is worth noting that HMRC will accept that in the passing of business shares a double option agreement is not a binding contract for sale (Statement of Practice SP12/80) and this will not prejudice business property relief.
Interestingly, this is despite the fact that the double option agreement states that if one party decides to exercise their right to buy or sell, the other party is bound to comply. If both parties decide not to exercise their options, the practical effect of the agreement is the same as a buy and sell agreement. In this instance, eligibility for business relief is retained.
The wording of these agreements is obviously crucial. HMRC gives specific reference to a double option agreement entered into under which the surviving partners have an option to buy (call option) and the beneficiary has an option to sell (a put option), such options to be exercised within a stated period after a partners death.
If the option periods for the purchase and the sale are not identical (e.g. the option to buy for three months and the option to sell for six months from the date of death) this does not affect how HMRC views the agreement.
In Spiro v Glencrown (1991) the decision provided authority for an option to be a contract for sale, which resulted in no business relief being available. Early in 1996 HRMC (then the Capital Taxes Office) confirmed there had been no change in its opinion regarding Statement of Practice SP12/80 and the case wouldn’t be cited as authority for an option constituting a binding contract for sale.
More recently the 2000 case Griffin v Citibank Investments provides a much stronger argument that an identical terms buy and sell option together do not constitute a single bilateral contract. This did not concern an arrangement for a share purchase between partners but it did involve 2 identical options and is of particular relevance for this reason.
In December 1994 Citibank Investments Ltd sought an investment that would generate funds in the form of capital gains rather than as income liable to corporation tax. It purchased 2 FTSE linked options on terms that all transactions entered into on reliance of the purchase agreement formed a single transaction. Corporation tax was then assessed for 1994, 1995 and 1996 on the gains arising from the two option contracts.
On appeal to the Special Commissioners, Citibank Investments Ltd contended successfully that the gains arising from the options fell to be treated as capital gains rather than as profits or gains chargeable to tax under Schedule D. HRMC appealed the decision but conceded that each of the two options, if taken separately would be a qualifying option within the meaning of section 128 ICTA 1988 and accordingly any gains would have been exempted from a charge to tax.
However, if the two options fell to be treated as one composite transaction by the operation of the Ramsay principle (in essence the court should not confine itself to the method of assessing the tax consequences of each individual transaction in a composite transaction but instead should look at the composite result and consequences) as was the Revenues contention, that would fail to satisfy the statutory definition of a qualifying option within the meaning of section 128.
As all the above indicates, setting up these agreements is best done using advice from an experienced IHT and business adviser.
Please call us if you own a business with a person who is not your spouse for help in the passing of business shares.
Inheritance Tax Planning for Cohabiting Couples
In a recent YouGov survey about cohabitees legal rights, 35% of cohabitees either did not know what legal rights they had or believed that once they had lived together for a year they automatically had the same rights as married couple. In fact, if a relationship breaks down, the court cannot reallocate resources between them on the grounds of fairness and neither party is able to claim maintenance from the other for their own benefit.
In the survey, only 33% of the couples said that they had taken advice about their different options. Consequently 40% of the couples had bought their home in the name of one partner, 13% were tenants in common and 41% bought as joint tenants. It may be a surprise to learn that joint tenants are presumed to be equal owners regardless of the actual contribution they made to the purchase. Only around 50% of the cohabitees in our survey contributed equally to the deposit and a mere 42% paid equally towards the monthly mortgage repayments. It would be wise for the remaining couples to buy as tenants in common and make a declaration of trust stating clearly each party’s share.
If a property is purchased in one name a court is unlikely to recognise another individuals claim upon it. Likewise, if the ‘Bank of Mum and Dad’ are involved in the purchase of a property it should be made absolutely clear whether they are buying a share of the property, offering a loan or making a gift. A formal loan agreement is a practical option; the purchase should be in joint names, as tenants in common supported by a declaration of trust. It is recommended that parents involved take advice on the tax and practical implications of purchasing a property.
Property owned by joint tenants passes automatically to the survivor regardless of any of the deceased’s bequests. If either party wishes to leave their share in the property to a third party, the property should be held as tenants in common and a specific will made.
The survey highlighted that a surprising 44% of the cohabiting couples had not made a will, so their assets will pass under intestacy rules which do not benefit unmarried partners at all. Challenging this in a court is expensive and the outcome uncertain for a surviving partner, and making a Will is the only way to provide clarity and peace of mind.
Where surveyed cohabiting couples had children, 73% of them couldn’t determine what support their partner should give them on separation. In fact, both parents are expected to pay to maintain their children until they complete their education. The Child Maintenance Service assesses how much should be paid to the parent with the greatest caring responsibility and will enforce payment.
The court cannot make a child maintenance order unless the paying parents’ gross weekly income exceeds £3,000. If necessary, applications can be made for a lump sum, eg for a car, and as a one-off for the transfer or purchase of a property. The property will be reverted to the paying parent once the child has finished full time education.
In the survey 76% of those cohabiting couples surveyed had never heard of cohabitation agreements, and only 10% had one in place. These contracts cover the ownership of the finances and property and make financial provision for the children.
Despite many calls for a statutory framework for the fair distribution of cohabitees’ property in a relationship breakdown, in the short term law reform is unlikely. Evidently numerous cohabitees are simply unaware of the potential circumstances that will arise if their relationship breaks down or one partner dies. Anyone already cohabiting or contemplating it is strongly advised to take as much advice as possible in order to circumvent stressful disputes and avoid potentially distressing situations. Let us help you. Call now for a free 30 minute consultation 01582 447069.
3 things to consider when thinking of selling your business
One of the main issues for business owners when planning to sell their business/retiring is the lack of planning of the possible tax liabilities. In order to achieve the best outcome, you should plan well ahead of that time. You are never too young to consider financial planning, either you or your business. Planning at an early stage can be structured to help with current tax liabilities as well as any liabilities on retirement or sale of the business.
Capital gains tax
During the planning of finances, capital gains tax (CGT) as well as inheritance tax (IHT) needs to be considered very carefully as if they aren’t, you may have to hand over a hefty cheque to the tax man.
CGT would be payable when selling any assets (EG – a property or business) where there has been an increase in the value of the asset. The CGT rates are currently 10% for basic rate tax payers and 20% for higher rate tax payers (of April 2016). Although there are exemptions, the gains from a sale of a property that would not qualify for full principal private residence will continue to be taxed at 18% for lower tax payers and 28% for higher tax payers (as of before April 2016). The sale of a private business which qualified for entrepreneur’s relief allows the owners who own more than 5% to enjoy a tax rate of 10% in capital gains tax up to a lifetime amount of £10 million. You need to ensure you qualify for this relief.
Do not leave it too late to start planning and considering your CGT liabilities as investments made many years go can have quite shocking CGT liabilities which you would not want to face.
You can reduce your CGT liabilities by using the tax allowances which you are entitled to by very carefully planning of your CGT positions throughout your life.
You can ensure that you offset capital gains on successful investments with losses from investments that haven’t worked out as well. Loses can be carried forward to offset gains in future tax years. As it stands, if your capital gains is less that £11,300 in a financial year then you will be exempt from CGT.
The biggest priority of any business owner should be having a well written and planned out will, not only to ensure that your assets go where you want them to go but also to reduce the likelihood of any taxation it may have. If you do not have a will then effectively the law will decide what happens to all of your assets, which will cause extensive financial anxiety for your family due to the potential of a large IHT bill.
If you don’t want to directly give a gift, you could put the assets in a trust. With planning, you can transfer your assets into a trust with little capital gains tax or inheritance tax consequences and it could then reduce your taxable estate after death. However, there are additional tax charges and costs relating to trusts which could be applicable. Experienced advice is essential.
The current nil rate band is £325,000 which will not change until the year 2020/21. In April 2017 the residential nil rate band was introduced, which is currently at £100,000 rising by £25,000 every year until 2020/21. This will give a total inheritance tax exemption of £1million, if married or in a civil partnership or £500,000 per person.
Business property relief
Business property relief can, with very careful planning, remove the total value of your business from being subject to an inheritance tax bill either by a lifetime gift or on death. You are able to gift as much money as you like throughout your lifetime and this is referred to as a potentially exempt transfer.
Gifting income producing assets to your children, such as shares, is a good way of reducing the total family income bill as well as, at the same time, conducting succession planning. However, you have to be careful that there are no capital gains taxes or inheritance tax liabilities which can arise from the gift. Your children could also get divorced so a trust would potentially be suitable – experienced advice is essential.
If you gift a part of your estate to a charity, it can reduce the amount of inheritance tax payable on your estate due to the act of benevolence. It can reduce the inheritance tax rate payable from 40% to 36% if you leave at least 10% of your net estate to charity.
These areas of taxation can be very daunting, but with careful planning it is possible to reduce your CGT and IHT liabilities. Contact us with any queries or estate planning you may need and we will be happy to help with a free 30 minute consultation. Call us now on 01582 447069.
Unsuspecting consumers being hit by IHT bills
In the tax year of 2016/17, IHT drew £4.7 billion from UK consumers and is estimated to be a third higher (£6.2 billion) in the upcoming 5 years – the inheritance tax amount being at 40% on anything over £325,000. The unwarranted reluctance of people to use financial advice plays a big part in the rise. As the inheritance tax rules are so complicated, it is definitely worth getting financial advice as it may cost some money in fees at the time, but will save significant money in the long run.
A lot of people put financial planning to the back of their mind when they may be 20 years off the retirement age, as they think that they will live 20 or 30 years past retirement. But you may die earlier than the retirement age all together, which is why you need to consider it much earlier. You don’t want your family to have the burden of IHT after your death.
HMRC think that the rise in the bill of IHT is because of the continuous rise of asset values, property being the main one. Because of the rise in estates and assets, it means that your assets would then be over the residential nil rate band of £325,000.
You cannot underestimate how tough IHT rules are. HMRC are taking a large percentage of your estate which could be avoided if the correct and legal measures are put in place before it becomes an issue. You could pay an adviser £2,000 to implement financial advice but if you do not take action, then you could be paying HMRC more than 100 times that price.
Since April 2017, there has been a £100,000 nil-rate band allowance when a residence is passed on to a direct descendant after death. This will increase by £25,000 per year until it reaches £175,000 in the financial year of 2020/21.
With the inheritance tax nil-rate band and the ability to transfer unused RNRB to a surviving spouse or civil partner, it means that there is a total tax threshold of £1 million in 2020/21. The full use of this is complex and once again advice is essential.
Don’t be the person who buries their head in the sand, make sure that you face potential IHT bills as early as possible, to save your direct descendants from huge IHT bills. Contact us for any help making your first steps to having a pain free financial future.
Call to change tax rules
If you are acting as an executor for your friends and family then you may face having inheritance tax bills yourself which you’ll have to pay with your own money if settling the estate takes more than a few months. You may have taken on being an executor without knowing about the financial burden you may have brought upon yourself if selling the home owned by the deceased takes too long. It is said by the law that you as the executor would liquidate the estate and settle any debts or bills and then distribute what is left to the beneficiaries within the will itself. Any inheritance tax must be paid within 6 months after the death to HMRC.
Most estates include a mixture of property, cash, shares and other possessions, which could potentially take months or years to sell. If these assets haven’t been sold by the time the IHT bills are due, then IHT will have to be paid on those assets, which could potentially mean that the executor will have to pay that bill with their own money. Families can also plan to pay the bill by either saving money or borrowing money from the bank. Firms are calling to the government to change these tax rules so that the executor is not stuck with the potentially massive IHT bill which they are unable to pay in the short term.
It is said by a financial specialist that many executors have no idea that they may be faced with a massive IHT bill and although the money can be reclaimed after the assets have actually been sold it is an issue that many people may not be able to handle and causes unnecessary financial stress. HMRC need to re think these tax rules to give executors more time to settle the estate before they start demanding tax as they are only acting in good faith of friends and/or family.
Do not hesitate to contact us for any help planning your future finances and minimising IHT before this issue may arise. We will be happy to answer any queries or questions you may have.
Five good reasons to use a trust
Trusts take an important role when estate planning. Trusts ensure assets can be easily managed by trustees and that the assets can be ring-fenced.
Five good reasons to use a trust are as follows:
- Managing assets
Trusts are very flexible meaning you can tailor the trust to your needs and situations.
Do you have a beneficiary who isn’t capable for any reason (EG-a minor or disabled) to personally manage the assets?
Do you have a level of mistrust with another beneficiary to own the assets themselves? (EG-Gambling addiction)
Could there be potential conflict between beneficiaries when the estate is settled? (EG-between children from different marriages?)
If a trust were in place, the trustees can distribute the assets to the beneficiaries over time.
- Protecting assets
There are different types of trusts which can protect you from creditors, marriage breakdown or from anyone who may influence beneficiaries.
An example would be a discretionary trust. A discretionary trust would offer protection as the beneficiary cannot access any of the assets until the trustee appoints it to them.
When considering a bare trust, the beneficiary can access the assets at any time meaning there is no protection.
Some particular trusts allow you to make a gift of money into a trust, for specific beneficiaries as long as you still continue to receive a benefit from it. Discounted gift trusts and flexible reversion trusts allow you this kind of flexibility.
Some trusts give the trustees full control of the trust in case there is a worry by the settlor about the beneficiary not being mature enough. This way the trustee can be in control of the trust beyond the age of 18, without the worry of it becoming a discretionary trust.
These types of trust are offered from many different providers allowing the funds to either be kept back until a certain age or distributed in smaller regular amounts instead of all in one lump sum.
- Minimising tax
A lot of people believe that the main reason for using trusts is to reduce the inheritance tax on the estate after the settlor’s death. In other words, assets which are put into trusts are given to beneficiaries and will fall outside of the settlor’s estate, but only if the settlor lives longer than 7 years after the trust was set up.
If the settlor dies within the 7 years, then any growth of the trust will not be included within the IHT bill, only the amount originally put into trust.
- Avoid probate
Assets within a trust no longer belong to the settlor, but to the beneficiary meaning on the death of the settlor, the value of the asset is not included within the estate for probate reasons. This saves you time, legal fees and a lot of paperwork.
When dealing with life policies, the insurance provider will be able to pay the death benefit quicker as they can simply just pay the legal owners and doesn’t require the grant of representation, meaning it could be paid in a matter of weeks.
Trusts are a very useful estate planning tool, but choosing the right one for you is crucial which is where you will need to seek professional advice. If you are interested in starting a trust or have any other questions, please call us and we will be happy to help.
Deed of variation
If your estate is worth more than £325,000 then your beneficiaries will be faced with an inheritance tax bill of up to 40% of any amount over that sum on your death. For married couples, you can add together your £325,000 threshold and have a £650,000 threshold for IHT reasons, reducing IHT for your beneficiaries.
There is a loophole which is being used more and more called a deed of variation to reduce IHT bills. It involves a law which involves changing wills to redirect a deceased person’s estate and assets. A deed of variation can be used where a descendant can give some of what they received from the will to someone else – often a discretionary trust or a charity. For the deed of variation to work, they just need everyone who was included within the will to agree with the changes within 2 years of the death of the person whose will is being varied.
A deed of variation is generally used by those who may not need all of the inheritance that they received from the will, so they redirect their inheritance to their children to use later on in life. Either this or if a will wasn’t kept up to date and there were children or grandchildren who were not included within the will. You can use a deed of variation to change the distribution of the deceased assets to make most of the IHT rules which exempt particular assets and beneficiaries.
When a person’s assets are passed onto their spouse/civil partner, their assets are exempt from any IHT.
So if someone is receiving assets which would be exempt from IHT, you can re arrange things so that these exempt assets can be passed to someone who would otherwise be liable for IHT. An example of this is that if the estate includes a business, it could get 50% or 100% IHT relief, so a deed of variation could be used to pass that onto children rather than a spouse/civil partner.
You need to remember that the deed of variation must be in writing, created within 2 years of the deceased death and signed by all beneficiaries of the estate. To do this properly and easily, contact us and we will be happy to help and save you money from IHT.