What Is Inheritance Tax?
Inheritance Tax (IHT) is a tax on the transfer of assets from one person to another. It is usually encountered when someone dies, and they leave their Estate to either one individual or a range of beneficiaries. However, lifetime gifts also have IHT consequences. The rate of IHT is generally 40%.
Not everyone has to pay Inheritance Tax. The principal deciding factors are:
- What is the value of your Estate at the time of your death?
- Did you make any lifetime gifts within 7 years of death and if so what was the value of the gift and who received it?
- Do any of your assets have relief from, or are they exempt from, IHT at the time of your death?
- Who are you leaving your Estate to? Are any of the beneficiaries exempt from IHT?
- How much “nil rate band” and “residence nil rate band” do you have available at the time of your death?
The Nil Rate Band
The first £325,000 of every Estate is entirely exempt from Inheritance Tax. This is referred to as the nil rate band and it applies to everyone in the UK. It’s called a nil rate band because assets up to that value are taxed at 0%. If one spouse doesn’t use or only partially uses their nil rate band at the time of their death (for example if the value of their estate is less than the nil rate band or all their assets are passing to the surviving spouse who is an exempt beneficiary) then the unused proportion can be transferred to the surviving spouse and is available at the time of death. This is known as the transferable nil rate band.
Generally speaking if you have made no substantial gifts in the last 7 years and your estate is worth less that £325,000 (for an individual) or £650,000 (for married couples) it is unlikely that there will be an IHT charge at the time of your death. If the value of your estate is worth less than £500,000 (for individuals) and £1,000,000 (for married couples combined) again it is unlikely that there will be an IHT charge at the time of your death (after 2021) if you qualify for the residence nil rate band.
The Residence Nil Rate Band
This is an extension of the nil rate band and is available to homeowners who leave their house to their direct descendants, typically children and grandchildren. It is being phased in over time and by 2021 will provide an additional £125,000 of nil rate band. However, the extension starts to be withdrawn if your estate exceeds £2,000,000 at the time of death.
Any transfer of wealth during lifetime or on death from a person to their spouse is exempt from Inheritance Tax. There is an exception to this where the recipient spouse is not domiciled in the UK, in which case the spouse exemption is capped at £325,000.
Any transfer of wealth during lifetime or on death to a UK charity is exempt from IHT. If you decide to leave at least 10% of your estate to a UK charity on your death any IHT is payable on the remainder of your estate it is paid at 36% (instead of the usual 40%).
Are Some Assets Exempt from IHT?
There are 2 main classes of assets that are exempt or partially exempt from (or technically have relief from) IHT.
- Interests in businesses that have been owned by you for more than 2 years and qualify for “business property relief”. This may include interests in sole-trader businesses, interests in trading partnerships and unlisted shares in trading companies. Investment businesses do not qualify.
- Interests in agricultural property that have been owned and occupied for the purposes of agriculture by you for more than 2 years or have been owned by you but occupied by someone else for the purposes of agriculture for more than 7 years. This relief only extends to the agriculture value so if the market value exceeds the agricultural value, APR doesn’t provide relief for the excess value.
Some assets are not technically part of an Estate and although they may provide valuable payments on death, they are not usually subject to IHT. These may include life assurance payouts on your death, pension death benefits and death in service payments through your employment.
Can you Use Financial Planning to Avoid IHT
Yes, IHT planning is lawful but care must be taken to engage a professional and experienced Independent Financial Advisor to assist with this. The legislation sets out a number of reliefs and exemptions that can help to mitigate the liability. There are a variety of ways and the traditional ones are:
- Lifetime giving to reduce the Estate on your eventual death. Many gifts can be made without incurring any IHT consequences providing that you survive the gift by 7 years.
- For married couples making use of the spouse exemption, to prevent any IHT being payable on death of the first member of married couple to die.
- Taking out life assurance to provide funds on death to pay or help towards paying the IHT liability.
- Investing in various financial products that provide a form of investment but also seek to secure an IHT benefit. These include Discounted Gift Trusts, Loan Trusts and flexible Reversionary Trusts Lifetime giving to reduce the Estate on your eventual death. Many gifts can be made without incurring any IHT consequences providing that you survive the gift by 7 years.
- Considering the use of Deeds of Variation and other methods to reduce and IHT bill even after a person has died.
It’s worth remembering that individuals who are domiciled in the UK are subject to UK IHT on their worldwide assets. It is UK domicile rather than residence that triggers UK IHT. Domicile is more a concept of the country your regard as your home and is not necessarily the country you live in. There are also rules that deem you to be domiciled in the UK based on your pattern of residence.
For the peace of mind that efficient estate planning brings you need to ensure you engage an experienced, professional and impartial expert. Contact us now and take the first step in ensuring you leave your loved ones the legacy you worked hard for.
Tough New Tactics from HRMC
Getting people to pay HMRC the money they owe has always proved to be tricky. In 2016 it spent £24m on private sector debt collectors but in 2017 the figure soared to £39m. HMRC now has a new, more aggressive tool at its disposal, known as an Attachment of Earnings Order. These are being used alongside the feared Accelerated Payment Notices (APNs).
APNs are issued to people that HMRC believe owe them money. They are an upfront demand for immediate payment without the need to actually prove through the courts that the money is owed. Reliable data sources illustrate that use of APNs has more than quadrupled since January 2017.
It’s clear that the tax office isn’t troubled by making individuals bankrupt or forcing companies to cease trading in order to get hold of disputed funds. APNs have given HMRC the power to create an environment best described as tax now, ask questions later. Taxpayers are routinely remortgaging their homes or selling all their assets to pay these tax bills that often HMRC has not proved in court.
An Attachment of Earnings is a new method that HMRC will be using to retrieve money. It is designed to retrieve unpaid maintenance payments, county court judgements, or benefit overpayments. Both the individual concerned and their employer will receive a document from the courts, detailing what is owed and how much the employer will need to deduct from the salary each month in order to repay that money.
The Court will assess the individuals financial situation to deduce what they need to live on (this is referred to as the protected earnings rate) and then deduct the owed money from whatever is left. Data obtained by a national accountancy firm reveals that 428 people had money ‘recovered’ directly from their earnings by the taxman in 2017/18.
This new ploy ensures that HMRC gets the money it is owed conveniently and without the hassle of repossessing the debtors goods and selling them through auctions. This is always a lengthy process and sees those goods sold for far less than they are really worth. The Attachment of Earnings has the additional advantage of being completely non confrontational as there is no interaction with the debtors. It’s a tried and tested method that the Student Loan Company has been using for some time, collecting about 9% of graduates earnings every month, provided their earnings remain above a specific threshold.
Despite the ongoing disputes about unpaid tax whether from reluctant individuals or expert evaders that are giant multinational companies, HMRC have published an analysis of income tax paid in the UK by salary band, region and gender. In total 2016-17 saw £174 billion paid in income tax, which is the latest year for which figures are available. Of that amount, almost a third of it (£52.6bn) was paid by the 381,000 taxpayers who earn more than £150,000 per year. The tax paid by those overwhelming male individuals was more than all the income tax paid by the first 20 million taxpayers.
Unsurprisingly, London has 4.2m income tax payers but just the 87,000 earning over £200,000 paid nearly half of the £43.8billion that was raised. It is awkward to admit it, but if we really do lose all these high earners to Brexit, the hit to the Treasury will be significant. After all, these bankers, lawyers and accountants paid more income tax in 2016-17 that the entire sum raised from every taxpayer in Scotland and Wales combined.
Thinking about your next tax bill? Tax planning advice should only be taken from a professional experienced and impartial advisor. Call us now for the peace of mind that efficient and lawful tax planning brings.
Why Are Death Bed Marriages Fashionable?
As drastic as it sounds, statistics show that more cohabiting couples are deciding to marry when one partner is literally on their deathbed. Evidence from the Home Office and the Passport Office shows a significant rise in the number of urgent marriages, often from people in heath service providers. In fact there was an 11% increase in the number of urgent applications for a Registrar General’s Licence to get married or enter a civil partnership. The marriage can then take place in any location, 24 hours a day.
This is of course generally motivated by the curse of Inheritance Tax. To ensure the surviving partner avoids a potentially life altering inheritance tax bill, a last minute marriage albeit on a partners deathbed, ensures they have a greater level of future financial support.
A very high profile example of this was comedian Ken Dodd, who died 2 days after marrying his partner of 40 years on his deathbed. The estate of Mr Dodd was apparently around £7.2 million and the reported potential tax bill if he had not married before his death would have been £2.6m. This hastily arranged marriage meant the estate was exempt from the tax and everything passed to his surviving spouse.
The other advantage that is largely overlooked, is that the surviving spouse inherits at the probate value. This means when a major asset is sold the Capital Gains Tax (CGT) will only apply on the increase of value from when the person actually died.
It is interesting that death bed marriages can bring about a new set of disputes. Typically this scenario involves adult children (perhaps from a different marriage) who are dissatisfied with their own lack of inheritance from their parent. An example was a case wherein the husband was diagnosed with cancer, and made a Will leaving everything to his partner of 32 years. He also married his partner a few days before he died. After his death his three daughters brought a legal challenge to the Will claiming that he was unable to understand the meaning of the Will and that he had been unduly influenced by his partner. The daughters argued about their fathers’ lack of mental capacity at the time the Will was written, but eventually a solicitor provided evidence that the deceased had fully understood what was happening. The Court accepted the evidence and the sisters had to withdraw their challenge.
Of course if there is no Will written and there are surviving children of the deceased, then the spouse or civil partner will inherit the first £250,000 and all the personal possessions, but the remainder is shared 50% to the spouse/civil partner and the remaining 50% shared between the children. A death bed marriage can certainly clarify a situation and ensure a partner is duly protected after someone dies. However, a watertight Will is essential, in order to ensure all parties about clear about the deceased intentions.
It is really important that all couples should consider taking tax advice. Many unmarried couples are under the misapprehension that the ‘common law wife or husband’ concept will provide them with the same benefits as a married couple. Unfortunately many only discover on the passing on of their long term partner that there is no automatic right to inherit. The tax advantages suddenly become apparent but sadly it is then too late.
Getting the right kind of advice is crucial. To obtain impartial, professional advice from an experienced professional contact us now, for the peace of mind that sound financial planning brings.
HMRC Investigations into Inheritance Tax up by 5%
In 2015-16 24% of all taxable estates were investigated by HMRC. With rapidly increasing prices in the property market, the amount of IHT potential is very significant. Figures just released show that HMRC made 5,400 estate investigations last year. This is a year on year increase of 5%. Challenging the value of estates and investigating IHT figures in tax returns is a lucrative method for HMRC of reaping extra tax.
Interestingly the House of Lord’s Sub Committee for the Finance Bill 2018 has recently revealed that they want to investigate the amount of power HMRC currently possesses, so statistics such as these are being increasing scrutinised.
The Report detailed that the area HMRC is querying in greatest detail is the valuation of residential property that is passed onto heirs. HMRC may argue that much higher value be attributed to land which has the potential for development or to properties that have potential for refurbishment.
If an HMRC investigation concludes that IHT has been underpaid, the estate may have to pay all the tax that is owed plus a hefty penalty. This could even be 100% of the tax at stake in the estate.
Areas of particular interest to HMRC in relation to IHT include the validity of claims for business or agricultural reliefs, omitted assets and whether submitted figures accurately reflect the current market value.
Currently, when assets of an estate are in excess of £325,000 IHT is payable. As of June 2018, 24,500 estates are now liable, compared with 23,200 June 2017. This chiefly reflects the increase in average house prices in the UK.
Property prices have soared particularly in the South East. The average property in London five years ago cost £324,518 whilst elsewhere in the country the average was £172,655. This year however the London average is £476,000 and the rest of the UK £245,076. Unfortunately HMRC have chosen to leave IHT frozen at £325,000. This goes some way to explaining why there has been an increase in investigations.
Of course there is a huge temptation to undervalue residential property to save IHT as it is likely that property is the biggest figure on a tax return. The increased scrutiny and rise in investigations means that HMRC could fine more beneficiaries and estates who may not necessarily be cash rich. These fines are life changing amounts of money in some cases.
The crux of the investigation is that HMRC may deem that there has been a lack of care in carrying out property valuations. Given the power they have to impose fines, taking professional advice around IHT is absolutely critical.
By choosing a professional, experienced and impartial expert to guide you through the minefield of IHT you and your loved ones are guaranteed the peace of mind that financial planning brings. Don’t put it off. Contact us now,
A Sea Change for Landlords?
The Government is determined to build a housing market fit for the future. It aims to make the private rental market fairer and more transparent for tenants. In doing so, it will reduce the number of private landlords in the UK by making it less lucrative. Landlords across the country are now resigned to the fact that due to more new legislation their profits will be reduced. A stamp duty surcharge was introduced 2 years ago, and the 10% wear and tear allowance has been discontinued. Landlords can now claim only actual costs spent on repairs, rather than a blanket 10% reduction for wear and tear.
The latest attempt by the government has been to phase out tax relief on mortgage interest. Higher taxation is forcing many landlords to rethink their strategy, and in some cases to sell up. The gradual loss of tax relief from now until 2020 will hit higher rate and additional rate taxpayers. Indeed the loss in tax relief is also likely to push around 450,000 lower rate tax payers into a high band, according to the National Landlords Association.
Until April 2017, Landlords could deduct all their mortgage interest payments before calculating their tax bill, meaning they would be taxed purely on their profits rather than their overall turnover. With the majority of landlords utilising interest only mortgages, this meant the savings on offer were potentially significant.
However mortgage interest tax relief changes will be phased in soon and Landlords 2017-18 tax returns will be the first to fall under new government regulations. Originally announced in the 2015 Budget, this means the amount of mortgage interest landlords can offset against their tax bill will be reduced.
This figure is set to drop each tax year until it is fully replaced by a tax credit for mortgage interest in 2020-21. Investors could see thousands of pounds of potential profit wiped out. When tax returns are filed for the 2017/18 tax year (due January 2019) they will only be able to claim tax relief on 75% of their mortgage interest. They will get a tax credit on the rest of their mortgage interest payments. The following year, the relief will only be available on half of their interest and they will get 20% credit on the rest.
Some are calling this latest move from the government the end of Buy to Let for all but the richest. The number of new Buy to Let borrowers plummeted from 29,100 in March 2016 to around 4,000 the following month when the stamp duty surcharge was introduced. According to the Council of Mortgage Lenders it has struggled to pick up substantially since.
New rules are also on the way to stop landlords and property owners pocketing tax-free cash on holiday let income. Rent-a-room relief was aimed at helping home owners let their space rooms in a bid to reduce the housing crisis. Instead, many are using this as an opportunity to rent out their homes to tourists while they moved out and claimed up to £7,500 a year in tax free income. In an attempt to stop home owners from profiting from websites like Air BnB, the Government has stepped in with new legislation.
It will be introducing a new “shared occupancy clause” for rent a room relief, which will require the individual to be resident in the property and physically present for at least some part of the letting period. Doing so will return the relief to its original purpose of incentivising the letting of spare rooms.
For example a home owner letting their main residence during the Wimbledon tennis tournament to a visiting player whilst they go on holiday for the whole rental period is not eligible for rent a room relief. This is because there is no shared occupancy so it is taxable rental income and must be declared. However a landlord renting a room to a student for an entire term who goes on holiday for a week during that period is qualified for rent a room relief as occupancy is shared for part of the rental.
A final concern for landlords is the new Government bill to ban letting fees across England. Unexpected letting fees and high deposits can cause a substantial affordability problem for tenants and are often not clearly explained. This leaves many residents unaware of the true costs of renting a property.
A recently introduced bill will bring an end to costly letting fees and save tenants around £240m annually, according to government figures. The Bill will also give tenants greater assurances that the deposit that they pay at the start of the tenancy cannot exceed 6 weeks’ rent.
The Tenant Fees Bill will stop letting agents from exploiting their position as intermediaries between landlords and tenants and prevent unfair practices such as double charging for the same service. It will also help to increase competition between agents and landlords, which could drive lower costs overall and a higher quality of service for tenants.
The Tenant Fees Bill builds on the government’s work this year to protect tenants and landlords through the introduction of new rogue landlord database, banning orders for rogue landlords and property agents as well as new code of practice to regulate the letting and managing agents sector.
For all landlords who already abide by the current legislation and who treat their tenants fairly the changes will unfortunately only be visible in their year end profits.
For all landlords, tax and financial planning and the peace of mind that it brings is paramount. Contact us now for professional impartial expert advice.
What are the Tax Implications of a Civil Partnership?
Rebecca Steinfeld and Charles Keidan are celebrating their recent win in the Supreme Court. By a unanimous vote, the 5 judges ruled that the Government’s refusal to allow opposite sex couple couples to have civil partners was ‘incompatible’ with human rights law.
Everyone agrees that this is discrimination, but the Government says it’s acceptable to treat different groups of people in different ways while they make up their minds, over a number of years. If this case can establish that a “wait and see” policy is a breach of rights, it could help lots of other people facing discrimination to challenge unfair delays by the Government.
So what’s all the fuss about? A civil partnership ceremony does not require vows to be exchanged and civil partnership certificates include the names of both parents of the parties, not only the fathers of the parties. There is no mention of consummation of a civil partnership. The dissolution of a civil partnership is also not the same as a divorce in that civil partners cannot rely on adultery as a factor for the irretrievable breakdown of the relationship.
In this remarkable case, Rebecca and Charles wanted to cement their commitment to each other and wanted to strengthen the security of their family unit. They wanted to do it in a way which reflected who they are, how they see their relationship and also their roles as parents. They wanted, in their words, a partnership of equals, without the negative connotations of marriage.
Since the landmark legal victory, the idea that a civil partnership could be available to heterosexual clients, as well as same sex couples is looking likely. The case has proved to be of real significance to family and human rights law practitioners.
Currently there are over 3 million cohabitees in the UK with virtually no legal protection. The opportunity that they could possibly be able to formalise their relationship with a civil partnership will automatically provide the same protections that marriage does. Family law specialists will be keen to see people being removed from a legally problematic area. Providing a way for couples to commit in a formal and legal way has a drastic impact on their long term financial situation. Significant tax savings can be made which cohabiting couples simply don’t qualify for.
People who live together are taxed separately and each person has their own personal allowance entitlement. However married couples can qualify for the Married Couples Allowance which entitles them to an unused Personal Allowance of up to £1,190 to be transferred to their spouse or civil partner if they earn more.
Transfers of assets between cohabitees are subject to Capital Gains Tax. However, a spouse or civil partner doesn’t have to pay CGT on the transfer of assets between them because they are able to claim spouse exemption, provided that they are living together.
The most significant tax saving is likely to be Inheritance Tax. Assets left by one spouse or civil partner to their surviving partner or spouse are not subject to Inheritance Tax, because spousal exemption can be claimed. There is no limit to this exemption where both spouses are domiciled in the UK, although there are limits if one member of the couple is not domiciled in the UK. Cohabiting unmarried couples or those not in a civil partnership on the other hand, have to pay Inheritance Tax on everything over the Nil Rate Band (£325,000) passing to their cohabitee. Married couples and civil partners can transfer their unused allowance to be used on the second death, as well as transferring the new Residence Nil Rate Band.
In a situation of Intestacy, a married couple or civil partner will automatically inherit from their spouse or partners estate, although this will be limited if the deceased has children. A cohabitee will not automatically inherit, unless the property is jointly owned.
Surprisingly there are some negative considerations to marrying or entering into a civil partnership. For example a married couple or civil partner can only nominate one main residence for principal private residence tax exemption if sold. Cohabitees each owning a property would not have to do this.
Charles and Rebecca have achieved their aim of receiving a declaration that the Civil Partnership Act is not compatible with sections of the European Convention on Human Rights. It is now up to Parliament to act upon this declaration and take action to rectify the situation.
If you are a cohabitee unsure of your personal financial situation now is the time to obtain professional impartial advice from an experienced financial planner. Contact us now https://www.bluebond.co.uk/directions/.
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.