Increasing property prices has had the effect of increasing the amount of Inheritance Tax many people are paying. There are ways of reducing the amount due if you plan in advance.

The IHT threshold

IHT is payable at the rate of 40% of the value of an estate above £325,000, for example on a £400,000 estate, IHT is 40% of £75,000, ie. £30,000. The person who is appointed as executor or administrator of a Will is responsible for valuing the deceased’s estate and calculating the amount of IHT due, then making payment within six months of the date of death to HM Revenue & Customs.

IHT is not payable on money left to a spouse or civil partner or to charity. When the remaining spouse or civil partner dies, the unused IHT allowance of £325,000 is added to their allowance. If some of the allowance has been used, then only the remaining balance is passed on.

Leaving property to a family member

If you leave your primary residence to your children or grandchildren, to include step-children, then a ‘main residence nil-rate band’ is applied. This is £150,000 per person for the tax year 2019/20, rising to £175,000 as from April 2020.

This means that where your main home is gifted to your children or step-children, the total IHT allowance rises to £475,000. Any unused portion of this allowance can be passed on to a spouse or civil partner, meaning they could potentially pass on assets valued at £950,000 free of IHT, rising to £1m in April 2020.

Giving gifts

Some gifts given during your lifetime may also have the effect of reducing the amount of IHT payable. The sum of £3,000 can be given in any tax year and any unused portion of this can be carried forward to the following tax year, although not beyond a single year.

In addition, gifts of up to £250 can be given to anyone and wedding gifts can be given to children in the sum of £5,000, grandchildren of £2,500 or others of £1,000.

Larger gifts are known as potentially exempt transfers and when someone dies within seven years of making them, IHT is payable on a sliding scale.

Setting up a trust

It is possible to leave assets to your loved ones via a trust to reduce IHT payable. Professional advice should be sought to ensure your beneficiaries receive what you want them to have and that your assets are adequately protected by the trust.

If you would like to talk to one of our expert tax, wills and probate specialists, ring us on 01276 415835/6/7.

In 2018, £3 billion was left to over 10,000 different charities in Wills. Smaller charities are increasingly popular, possibly following some high profile failures by bigger organisations.

An estimated 6 percent of charity income in the UK is derived from gifts in Wills, with public generosity growing over the past few years.

Inheritance Tax benefit of gift giving

Inheritance Tax can be payable at the rate of 40 percent on the value of an estate over £325,000. The exact calculations can be complicated, so it is recommended to seek professional advice if your estate is likely to exceed this amount.

If you leave 10 percent or more of the part of your estate on which Inheritance Tax is payable to a registered charity, then the Inheritance Tax rate can be reduced to 36 percent. If you wish to try and mitigate the amount of Inheritance Tax your estate will need to pay, you should speak to an expert, as it is not always a straightforward calculation.

Popular charitable areas and charities

According to Legacy Market Outlook, the most popular charitable area for giving is health, at 38 percent of the total, according to their 2018 report. Animal charities followed at 15 percent, then conservation and disability at 8 percent each. International development received 7 percent.

Charities receiving the most by way of bequeaths include Cancer Research UK, the Royal National Lifeboat Institute, Macmillan Cancer Support, the British Heart Foundation, the Royal Society for the Prevention of Cruelty to Animals, the Salvation Army Trust, The National Trust, the People’s Dispensary for Sick Animals, and the Guide Dogs for the Blind Association.

Choosing a charity to leave a bequest to

To benefit from the Inheritance Tax exemption, the charity you choose should be based in the UK or EU and have a registered charity number.

A charity may have helped you or your family at a difficult time or be a cause close to your heart.

Quite often, medical charities are chosen when a relative has suffered from the particular disease they are set up to try and help with.

Local charities are also popular, with smaller organisations increasingly benefiting in Wills.

You can either leave the charity a specified lump sum, or alternatively a percentage of your net estate.

If you would like Inheritance Tax advice or help writing your Will, talk to one of our specialist lawyers on 01276 415835/6/7.

A person’s domicile is usually their home or permanent place of residence.

However some people may claim the place that their father was born as their domicile, or if their parents were unmarried, then the place of their mother’s birth.

Even if someone was born, educated and works in the UK, it is still possible for them to be a so-called ‘non-dom’, ie. not domiciled in the UK. There are rules requiring an annual remittance to be paid to HMRC each year from the seventh year of residency onwards, but by way of benefit non-doms can avoid paying tax on foreign income or gains, provided the money is not brought to the UK.

Inheritance Tax benefits for non-doms

This benefit also extends to UK Inheritance Tax liability. Property outside of the UK can be excluded when calculating Inheritance Tax liability if the deceased was classed as a non-dom at the time of their death. For those classed as domiciled in the UK, Inheritance Tax is payable on all assets, wherever in the world they may be situated.

Property excluded from Inheritance Tax payments

• Property situated overseas
• Property situated overseas and held in trust where the settlor was not domiciled in the UK
• Foreign currency bank accounts
• British government securities, national savings and War savings certificates

How to benefit from non-dom status

If you have non-dom status, then by setting up an excluded property trust such as a discretionary off-shore trust can protect your assets from UK Inheritance Tax.

By setting up an excluded property trust, assets will not attract Inheritance Tax even if the settlor then acquires UK domicile.

To talk to one of our experts about tax planning, call us on 01276 415835/6/7.

When an executor or administrator is dealing with the administration of an estate, part of their job is to account to HM Revenue & Customs for any tax which may be due. This includes Inheritance Tax, Income Tax and Capital Gains Tax.

Capital gains or losses during the tax year leading up to death will be taken into account when making the tax calculation, as well as any capital gains made on assets from the date of death until their sale.

This means that if for example the deceased leaves a property that is subject to Capital Gains Tax, ie. a second property and not their main residence, then if the value of that property increases between death and sale, tax will be payable on the increase if the amount exceeds the Capital Gains Tax allowance.

Expenses can be deducted from the gain, for example estate agents’ or solicitors’ fees, or in the case of shares or valuables, stock broking or auction house fees.

Capital Gains Tax allowance 2018/19

An executor is given a Capital Gains Tax allowance of £11,700 per annum for the three tax years following death.

Once this allowance has been used up, Capital Gains Tax is payable at the rate of 28% in respect of residential property and 20% for other assets.

Beneficiaries’ liability for Capital Gains Tax

Where a beneficiary inherits a valuable asset and then proceeds to sell it, they may become personally liable for Capital Gains Tax.

They can use their Capital Gains Tax allowance and may only be liable to pay the tax at a lower rate if they are a lower rate tax payer. This means they would pay 18% on gains from a property sale rather than 28%, and 10% on gains from other assets rather than 20%.

Where a beneficiary occupied the property as their principal private residence and is entitled to at least 75% of the net proceeds of sale, the executor may use principal private residence relief to avoid the need to pay Capital Gains Tax on any increase in value.

Valuing inherited property

The value of an asset to be passed on to a beneficiary is the full market value as at the date of death.

Where the asset in question is a property, it is preferable for the executor to obtain a proper ‘red book’ valuation from a member of the Royal Institute of Chartered Surveyors, rather than simply an estate agent’s quote.

For advice on Capital Gains Tax and the most effective way of passing on assets, speak to one of our tax experts on 01276 415835/6/7.

Inheritance Tax rules are complex, particularly when it comes to working out what might be due on gifts given before death. Research by Brewin Dolphin found that only 12% of those questioned knew what the annual tax-free gift threshold is.

If money or a valuable item (a lifetime gift) is given within the seven years before someone dies, then there is a possibility that Inheritance Tax will be due if the donor has given away more than the tax threshold amount of £325,000. In that event it would be the recipient of the gift who would be asked to pay the tax.

How much can you give tax-free?

An individual is permitted to give £3,000 per year, with no tax implications. This allowance can be carried over to the following year if it isn’t used, but it cannot be carried over for more than one year.

Amounts above £3,000 are added to the value of the estate if they were given within seven years of the donor’s death. If the total value of the estate exceeds £325,000, Inheritance Tax may be payable.

What is a lifetime gift?

As well as cash, any valuable item constitutes a gift and the value is added to the estate total for the purposes of calculating Inheritance Tax. This includes selling a property at below market value, for example to your children. In that event, the amount of the reduction is added to the value of the estate.

Exemptions

As well as the tax-free £3,000 per year, there are a number of other exemptions allowing you to gift money without needing to consider Inheritance Tax:

• Any money given to a spouse or civil partner;
• Single gifts of up to £250;
• Donations made to registered charities or political parties;
• £1,000 given as a wedding gift, rising to £2,500 for a grandchild or £5,000 for a child;
• Money given to an elderly or infirm relative or a child who is under 18 to support them;
• Gifts from surplus income, for example for birthdays or Christmas, providing it does not affect your standard of living.

The rules can be complicated and it is always worth seeking professional advice before distributing money.

To speak to one of our tax experts, ring us on 01276 415835/6/7

Welcome to our October 2015 Newsletter.  In this newsletter we discuss new legislation relating to a new tax threshold on the home – the Residential Nil Rate Band.

If you wish to download the newsletter in PDF please click on the link below.

October 2015 Newsletter

The good and bad news of the new Residential Nil Rate Band (RNRB)

In the Summer Budget 2015, the government announced it will phase in a new residence nil-rate band (RNRB) from 6 April 2017 when a residence is passed on death to a direct descendant. It will be:

• £100,000 in 2017 to 2018
• £125,000 in 2018 to 2019
• £150,000 in 2019 to 2020
• £175,000 in 2020 to 2021

It will then rise in line with the Consumer Price Index (CPI) from 2021 to 2022.

The intention is to reduce the burden of Inheritance Tax for most families by making it easier to pass on the family home to direct descendants (including step-children) without a tax charge, so that by 2020 homes up to the value of one million could pass tax-free to children and descendants. This would utilise a couple’s current Nil Rate Bands of £325K each and the maximum RNRB of £175K each, making a total of £1million.

The existing nil-rate band (NRB) will remain at £325,000 until the end of 2020-21.

However, there is a sting in the tail with the additional benefit of the RNRB in that there will be a tapered withdrawal of the value of the RNRB for estates with a net value of more than £2million. This will be at a withdrawal rate of £1 for every £2 over the £2millon threshold. Therefore estates that have a value of £2.35 million will not benefit from the RNRB whatsoever.

For couples with larger estates effective inheritance tax planning is now even more important to ensure that the estate on 2nd death doesn’t exceed the £2.35m value so the extra benefit of the RNRB is not lost. Basic Wills which leave everything to the surviving spouse on 1st death will not necessarily achieve this. Also, tax-planning options on other assets which could bypass the spouse/civil partner on 1st death (such as insurance proceeds, death in service benefits and lump sum pension death benefits) should definitely be considered.

Note that estates that pass to beneficiaries other than direct descendants will not benefit from the RNRB and as with the existing NRB, the new RNRB cannot be transferred between couples who are not married or civil partnered for use on 2nd death. Therefore planning recommendations for cohabiting couples is to preserve the benefit of both of these allowances for use on 2nd death so the extra the allowance is not lost. (Note that a ‘direct descendant’ will be a child and their lineal descendants where ‘child’ includes, unlike all other pieces of related legislation, step-children and foster children.)

The government also announced that legislation would be included in Finance Bill 2016 to make sure that those who wish to downsize to a less valuable property or cease to own their own home are not discouraged from doing so.

Note that the rules around the RNRB are still subject to government “tweaking” until it becomes law, and is not effective until April 2017, so there may be additional factors to consider which we will endeavor to keep our readers informed of in good time.