You will need to review your will
The use of nil rate band discretionary trusts in wills were very common for those who exceeded the nil rate band limit in 2007. This means that if you left your estate in a discretionary trust on the second death, you need to review your will as soon as possible. The discretionary trust would have been used to protect your assets for your children against divorce or bankruptcy. But now, if your estate is all passed to a discretionary trust, the new residential nil rate band (RNRB) cannot be used. This potentially means a couple not using two allowances of £125,000 each which could mean an additional IHT bill of £100,000.
There are complex and confusing rules around using the RNRB. If you have sold your main home after the 8th July 2015, downsized or moved to a nursing home, you may be caught by these rules. Therefore, you will need to review your will as soon as possible. Hundreds of thousands of wills will be affected by these rules, and so it is best if you review your will as soon as possible.
The new IHT RNRB allowances means that any IHT planning measures which you may have previously done, which includes discretionary trust planning, will need to be reviewed and possibly changed.
While these new allowances will benefit a lot of people, you will still need to be advised as to the best way to protect your assets. The best and most efficient way to do so is by contacting us so we can help you protect your beneficiaries’ money on IHT.
In summary, if you have an IHT problem now or are likely to have one due to the growth in the value of your house before you die, please call us to see how we can help you.
New inheritance tax allowance for homes: six things you didn’t know
The new Residential Nil Rate Band (RNRB) which was introduced in April 2017 means that over the next 3 years, couples with a home worth up to £1million will be able to pass it on to their direct descendants IHT free. However, a recent survey found that 70% of people had no idea about the new inheritance tax allowance for homes.
At the moment, the first £325,000 of a person’s estate is free of IHT which is known as the nil rate band (NRB), the introduction of the RNRB means you get an extra chunk free of IHT if you own a home. For estates worth over £2million, the new RNRB will be progressively tapered away by £1 for every £2 that the total estate exceeds the taper threshold.
There have been lots of misunderstandings about the new RNRB which could lead people to structure their finances in the wrong way, which is where an experienced financial adviser would be recommended.
The five areas with the highest misunderstanding are:
- You can select which property the allowance is set against
The new RNRB can be used against any property within or outside of the UK which was used as your own home and lived in by you. However, the value of the property must be included within the person’s estate for IHT reasons.
- The allowance can still apply even if the property has already been sold
This means that if you have downsized you will not be penalised because the allowance can then be used within your estate against the value which the property was sold for.
- Any outstanding mortgage is deducted before the allowance is added
The value of the home is calculated by subtracting the liabilities secured on the home from the market value of the property, all for RNRB reasons.
- The allowance can only be used when the property is left to direct descendants
The home/value of the home must be inherited by your child or grandchild for the RNRB to be eligible; this does not include siblings, any other members of the family, other people or trusts.
- This allowance will rise by £25,000 every year for the next 4 years
The current RNRB is at £100,000 and by 2020/2021 the RNRB will have reached £175,000 per person.
- The allowance of a previously deceased spouse is available on the second death of the surviving spouse irrelevant of when the first spouse died
This is only available provided all of the previous five points are adhered to.
Given these confusions and misunderstandings of the new inheritance tax allowance for homes , it is more important than ever to seek expert financial advice. Do not hesitate to call us, we would be more than happy to help you reduce your IHT bill as much as possible by taking advantage of the new RNRB correctly.
Who should you leave your home to on death?
LV Legal Services says that over 1.7 million people who are 55 plus have the potential to miss out on the newly increased nil-rate band as they have left the family home to a sibling rather than a direct descendant. One in 10 over 55s have decided to leave their estate to a sibling, meaning the new residential nil-rate band will not apply and will disqualify them from being able to use it.
The new residential nil-rate band came into effect on the 6th April 2017 and it means that an initial allowance of £100,000 per person per family home will be inheritance tax free, increasing the total maximum individual allowance for IHT to £425,000 or £850,000 for married couples. Anything above £850,000 or £425,000 will be taxable at 40%.
The allowance for tax free inheritance on the family home will then increase by £25,000 per person per tax year until 2020, when the tax free allowance combined with a spouse or a civil partner is at £1million. Meaning you could leave your property to either your children or direct descendants of a value of up to £1million IHT free.
However, if you were to leave the family home to a sibling then the IHT bill will be 40% of the difference between £1million and £650,000, leaving a potential IHT bill of up to £140,000.
This means getting the correct advice on reducing the risk of IHT is worthwhile and could save your children or direct descendants up to £140,000. Do not hesitate to contact us, we’d be happy to help.
When is a gift not a gift?
A gift of property made by a person on or after the 18th March 1986 is called a gift of reservation (GWR) as long as the person is still benefitting from the property, ie they are still living in it. If this benefit is reserved, then it will be included as a part of the gift givers estate for inheritance tax purposes, even if they no longer own the property, they are still using it for their own benefit.
When talking about a GWR, a gift can mean a sale which was made deliberately below the market value of the property. For example, if a property was worth £1million and a person sells it for £750,000. The transfer is part sale and part gift meaning the £250,000 loss to the estate would be treated as a potentially exempt transfer and would be included in the deceased’s estate if they pass within 7 years of the sale, even if they didn’t receive any benefit from the transfer.
The GWR rules have only been around for 30 years meaning if someone placed an investment in a trust before the 18th March 1986, they will not get caught unless further gifts are made on or after that date.
The use of these GWR rules by HMRC means it is very important to ensure that any gifts or loans made to adult children or anyone else are properly recorded as failure to do so could have them fail for IHT purposes.
As always, experienced advice is essential, please call us for help.
The tax advantages of getting married
Marriage or civil partnerships, in the eyes of the law makes a large difference to a couple’s financial status. If you just live together, you could lose out on inheritance tax mitigation strategies, even if you have been partners for a long period of time. The only advantage that you could get if you are not married or in a civil partnership is you can claim one property each as your main residence. This means that on the sale of a second property there would be no capital gains tax applied as the second property could be classified as a main residence. Some of the tax advantages of getting married are as follows.
Marriage or civil partnerships become important in the probable event that one of you passes first. If all of the assets pass on to your spouse or civil partner it will be free of IHT. In addition, they will take any unused portion of the nil rate band for future use. This wouldn’t apply if you aren’t married or in a civil partnership. In an example, radio one presenter Steve Hewlett married his partner Rachael as he was terminally ill so that all of his assets would pass on to her free of any inheritance tax charges.
If you do not have a will and are married or in a civil partnership, then your partner would automatically receive some of your estate, but if you aren’t then they would not automatically receive any assets. It will skip your unmarried partner and will follow the rules of intestacy, which will pass the assets to your family according to certain rules.
Other benefits of being married or being in a civil partnership include being able to make lifetime gifts to your partner without IHT or capital gains tax, making it the easiest way for assets to be arranged in the most tax effective way. On the occasion of a wedding cash gifts can be given up to £1,000 per person as well as being able to give gifts of up to £5,000 to your children and £2,500 to your grandchildren without the worry of IHT.
You also have the ability to easily claim against your married partners will if they haven’t made reasonable financial provision for you in the will, as you won’t have to prove your relationship has lasted for more than 2 years or financial dependence from your partner. If you aren’t married then you will be struck by the disadvantages of inheritance taxation.
Although there are many ways around getting around inheritance tax if you are not married, it is easier and more cost efficient if you are and your family would benefit more after death from it. These are just some of the tax advantages of getting married.
For any advice regarding this matter, do not hesitate to contact our experienced financial advisers.
Why do you need both a will and a trust?
The reason you would make a will is so you have clear knowledge and clarity of whom and where your money and assets are going to go after your death with minimum delay and charges. Although these are good intentions, you may not have considered all of the ‘what ifs’ which would affect those receiving the inheritance by a will. Not addressing any inheritance tax charges or delays places a big burden on the beneficiaries prior to receiving the inheritance.
Potential questions or ‘what ifs’ of the question ‘why do you need both a will and a trust? that you should consider are:
- What if your spouse remarries after being widowed?
Legally, the new spouse is likely to benefit from their death, which could lead onto your grandchildren’s inheritance to be taken away/disinherited.
- What if your beneficiaries were to become divorced or separated?
Then your estate could end up being left to people who you may have never met before.
- What if your beneficiaries were to suffer financial hardship?
Creditors have the right to seize the inheritance that they could have benefited from.
- What if a beneficiary is reliant on state benefits?
If you leave them money through a trust, then that money wouldn’t fall under your estate and then wouldn’t be considered for IHT reasons.
- What if a beneficiary isn’t sensible enough with money to receive their inheritance?
It is possible for them to receive the inheritance in stages as long as the money is being supervised by someone who is trusted. You may choose to do this if the beneficiary struggles to handle money or has gambling or drug addictions, to reduce the likelihood of more addictions.
- What if your will is challenged?
Under the ‘Provision for family and dependants act 1975’ the only people which would be able to challenge your will are those who have been disinherited fully or left only ‘unreasonable provision’. However, if you form a trust then it makes it much more difficult for anyone to be able to make a challenge. The trust would only be given to those named before your death and there is no need to change ownership as all of the assets would go to the beneficiaries named.
- What if the beneficiaries cannot pay inheritance tax straight away?
Even if your assets are given to a trust before death, it doesn’t necessarily mean you will avoid inheritance tax but it does mean you can avoid probate and the trusts beneficiaries can access the assets immediately.
- What if, after receiving a large estate minus death duties the beneficiary dies prematurely?
Leaving assets to someone by a trust means those assets will never be accounted in the beneficiaries personal assets, meaning you can pass it on through generations for as long as the trust goes on for (usually 120 years), reducing IHT for them in the future.
Those are some answers to the questions regarding ‘why do you need both a will and a trust?’.
If you have any more questions regarding ‘why do you need both a will and a trust?’, do not hesitate to contact us and we will be more than happy to give you the best experienced advice.
Making gifts from your income to avoid inheritance tax
One question which always gets asked: How can I reduce inheritance tax on my estate when all my capital is tied up?
One answer to that question is that if you can afford it then you can make lifetime gifts of capital. This is one of the most effective IHT planning strategies. But what can be done when a chargeable estate cannot be transferred because of other taxation or practical reasons?
If you are in this situation and have already made use of the annual and small gift exemptions then you might be limited to only being able to make a gift of capital, which is gifts from your income and then hope to survive the dates of making the gifts by at least 7 years so that the gifts will fall out of the estate at death for IHT reasons. This gift can be made directly and so is classified as a potentially exempt transfer (PET) or a gift into trust which is classified as a chargeable lifetime transfer. The two types of gifts are taxed in different ways so experienced advice is required.
To be able to improve this position, you can arrange affairs so that the exemption for ‘normal expenditure out of income’ can be claimed on death. This is done by making gifts from your income that you consider you do not need to maintain your standard of living.
For you to be able to qualify then your expenditure must be normal or habitual, it must be made out of income and after all outgoing costs, including the transfers, you must be able to demonstrate that there is no change in your standard of living.
Should you decide to use these gifts out of income method, it is essential the intention to make the gift regular and habitual is recorded. This could mean using standing order arrangements or a letter of intention for gifts that are made annually. In addition, the gifts should be of the same value as the regular payments that are made and should there be any changes to the amount gifted the reason for the change must be recorded.
To determine whether the second and third conditions have been met, HMRC expect your trustees or executors to give a lot of detail of your income and expenditure in the years before your death which would be entered on the IHT form 403. Income includes all forms of income whether it is taxable or not.
The expenses will include amounts which can be easily determined for example, mortgage or utility bills but will also include items which cannot be easily determined such as holidays or travel. The surplus of income over expenditure is then compared to the value of gifts which the exemption is being claimed to determine whether the gifts were made out of income rather than capital.
If you hope for the estate to benefit from the exemption then you must keep everything well documented to ensure the personal representatives have the best chance of success and don’t submit an incorrect claim.
Like all IHT planning it is essential to get experienced advice before starting any inheritance tax mitigation planning. Please call us for help and advice in this area.
Gifts to grandchildren
It is rare for most people to make direct gifts to grandchildren in their wills as they would normally just pass it down to their children with the option of them passing it on to their children; however this is not the most tax effective way of doing it. Forward thinking can reduce the eventual overall tax.
You may worry about leaving large sums of money to your grandchildren due to the fear of it affecting their motivation to work as well as the appreciation for the value of money.
14 million grandparents spend an average of £74 on each grandchild for Christmas. But those grandparents that are generous can give up to £250 to each grandchild without the worry of inheritance tax on that money.
Help with education fees
Those grandparents who are helping their grandchildren pay for school fees will be making gifts which could potentially be liable to Inheritance tax. As long as the amount given is under £3,000 per year per person making the gift then the recipient will be exempt from having to pay inheritance tax. However, it will diminish the taxable value of their grandparent’s estate a little bit at a time.
Education of the child over the course of their education can result in significant fees which if deducted from the value from your estate will generate significant IHT savings.
If you have an annual income which is a lot more than your normal annual expenditure then you will be able to use some of that excess money to pay for school fees as long as you have enough money left over to keep your standard of living. These gifts will be tax free. It is important that any gifts made are well documented as they utilise a less well known “gifts out of normal income” rule.
Helping to buy property
A solution to the housing crisis is to encourage wealthy people to leave their properties or cash to buy one to their grandchildren. If you do make gifts when you are still alive then the value of the contribution will remain in your estate and then drop out of the potential IHT liability after 7 years from the date of the gift.
A way of avoiding this if that if you have younger grandchildren as well as a surplus income then it may be better for you to put the surplus income into a trust so you can build up a fund which can be used for deposits later on when required. This way provided the money gifted is from surplus income ( as opposed to from capital) there will not be a seven year run off when the funds are needed for housing purchases.
Help with getting married
Up to £2,500 can be given as a wedding gift to grandchildren either before or after the wedding which will be free from IHT, although it must be conditional on the marriage taking place.
Help with pensions
The changes to the tax system for pensions presented the chances to use these as tax-planning vehicles. You could pay into a child’s pension up to £3600 a year while they are young. This early start will have a massive impact on the final value in later years.
If you are under 75 then you are able to take 25% of your pension before you turn 75 totally tax free to make gifts to grandchildren.
If you die before the age of 75 then you can pass the pension onto the nominated beneficiary free of inheritance tax as well as being free of income tax when the money is withdrawn. But if you die after the age of 75 then it can be passed on inheritance tax free but there will be tax if money is withdrawn at your highest marginal rate.
If a grandchild is nominated as a beneficiary they can withdraw significant funds tax free while they are in education up to the value of their personal allowance.
An option regarding wills is to leave your property to your grandchildren as it skips a generation. This probably won’t save tax upon your death but it will be beneficial to your grandchildren as it could eliminate another 40% tax charge on your estate as if they have already accumulated wealth which puts them into the inheritance tax charging zone.
To benefit the entire family, you could leave your estate to one or more discretionary trusts.
If you have any questions on how best to make gifts to grandchildren please, call us for advice from an experienced financial planner.
Tax planning for HNW people
A third of the high net worth individuals (worth at least £20 million) of the UK are being looked at regarding tax affairs by HMRC. There is considered to be around 6,500 HNWs, which is 0.02% of all taxpayers.
However, the tax year of 2016/17, more and more taxpayers are being scrutinised by HMRC due to the HNW considerations for in depth scrutiny being halved to £10million.
In previous years HNWs have paid over £3.5billion in income tax and national insurance which added with all other taxes totals to over £4.3billion worth of tax in one year. This number totals 1.3% of total revenue for those specific taxes. Inheritance tax paid by HNWs between 2014 and 2016 totalled to £183million.
As so much tax is already being paid, it is likely that in depth scrutiny of these peoples tax affairs is worth investigating by HMRC. Therefore, tax planning for HNW people is essential.
It is estimated that the formal enquiries of tax is valued at £1.9billion and £1.1billion is related to marketed avoidance schemes, with it also being estimated that 15% of the wealthiest have used at least one scheme. Tax avoidance schemes are being used by more and more famous and wealthy every year. Such as, over 100 BBC staff are being investigated over potential tax avoidance.
HMRC are making moves to try and understand and engage with the behaviour of HNWs. Because of these behaviours, it is becoming more difficult for HMRC to ensure that the correct amount of tax is being paid; the specialist team of HMRC is fast gaining a better understanding of HNW people tax affairs and will ensure the correct amount of tax is being paid each year.
Everyone has got to pay the amount of tax that they owe, and HMRC is keen to ensure there is no way around that. An additional £416million was taken in tax from the wealthy last year, which would have gone unpaid if not investigated.
HMRC are clearly focusing on the wealthy taxpayers of the UK. This makes it clear that you need an experienced financial advisor to make sure that this doesn’t happen to you and so questions from them can be answered with no need to worry.
Tax planning for HNW people is an increasing area of our business so please call us if you need help in the area.
Making gifts to avoid inheritance tax
The making of lifetime outright gifts of assets is a straightforward tax planning device, if you can afford it. The value of the gift won’t be included in the IHT calculations if the transferor survives the date of the gift by at least 7 years.
If you still use or enjoy the benefit of a particular asset but plan to give it away, then the value will be included in the IHT, as it is probably a ‘gift with reservation’ (GWR). For instance, if you give away a second home and continued to use it as and when you want the HMRC would state that you hadn’t truly given it away as you were still enjoying the full benefits of ownership. However if you had paid rent to the beneficiaries of the gift for the weeks that you used the property that would not be a GWR and would fall outside of your estate after the normal 7 year period.
I said probably as tax planners have come up with many different methods to try and work their way around the GWR rules. This means it’s not restricted to schemes for giving away your family home but still living in it. However we are always very doubtful about schemes that fly in the face of the intention of the tax rules. Basically, if it sounds too good to be true it probably won’t work.
In the tax year of 2005-2006 ‘pre owned assets’ rules were introduced. These rules are intended to impose the income tax charge on the benefit of using an asset where it previously owned by the individual and was disposed of by means that are not considered to be an arm’s length transaction.
There are many complicated rules and regulations which you have to obey when dealing with making gifts to avoid inheritance tax and pre owned assets. HMRC can look back to previous owners as far back as March 1986. This means income charges can still take place, even on transactions which took place over 30 years ag.
Once the pre-owned asset rules come into the equation, it leaves you with a very short amount of time to dis apply those rules in return for agreeing to treat the asset as a part of the estate, all for IHT purposes.
All pre-owned transaction need to be included when tax planning as even ‘innocent’ transactions can be affected.
As experienced IHT advisers we can help you by guiding you though the processes to ensure that if you are making gifts to avoid inheritance tax you do not have to pay these taxes and charges.
Call us if you need any help on your IHT issues.