Category: Inheritance Tax

There are a number of reliefs available that can reduce liability to IHT if you inherit the estate of someone who has died. One of these reliefs is known as Business Relief and is a valuable tax relief for taxpayers with business interests, offering either 50% or 100% relief from IHT on the value of the business assets if certain conditions are met.

• 100% Business Relief can be claimed on a business or interest in a business or on shares held in an unlisted company.
• 50% Business Relief can be claimed on:
  – shares controlling more than 50% of the voting rights in a listed company
  – land, buildings or machinery owned by the deceased and used in a business they were a partner in or controlled
  – land, buildings or machinery used in the business and held in a trust that it has the right to benefit from

Relief is only available if the deceased owned the business or asset for at least 2 years before they died. There are a number of restrictions to the relief, for example if the company in question mainly deals with securities, stocks or shares, land or buildings, or in making or holding investments. In some cases, partial Business Relief may be available.

Claiming the relief can be a complicated process. We can of course help review the facts and advise.

A trust is an obligation that binds a trustee, an individual or a company, to deal with the assets such as land, money and shares which form part of the trust. The person who places assets into a trust is known as a settlor and the trust is for the benefit of one or more 'beneficiaries'. The act of transferring an asset – such as money, land or buildings – into a trust is often known as ‘making a settlement’ or ‘settling property’. For Inheritance Tax (IHT) purposes, each asset has its own separate identity. 

Some assets are classed as ‘excluded property’ and IHT is not due. However, the value of the assets may be included when calculating the rate of tax on certain exit charges and 10-year anniversary charges.

Types of excluded property can include:

• property situated outside the UK – that is owned by trustees and settled by someone who was permanently living outside the UK at the time of making the settlement
• government securities – known as FOTRA (free of tax to residents abroad)

This can be a complex area and specialist advice is usually required to ensure that a trust operates as effectively as intended.

Most gifts made during a person’s lifetime are not subject to Inheritance Tax at the time of the gift. These lifetime transfers are known as 'potentially exempt transfers' or 'PETs'.  These gifts or transfers achieve their potential of becoming exempt if the taxpayer survives for more than 7-years after making the gift. If the taxpayer dies within 3-years of making the gift, then the Inheritance Tax position is as if the gift was made on death. A tapered relief is available if death occurs between 3 and 7 years after the gift is made.

The rules surrounding PETs have resulted in many people wanting to make gifts long before they die. The problem in practice is that they do not want to give up control over the assets concerned.

The effective rates of tax on the excess over the nil rate band are:

• 0 to 3 years before death            40%
• 3 to 4 years before death            32%
• 4 to 5 years before death            24%
• 5 to 6 years before death            16%
• 6 to 7 years before death              8%
• 7 or more years before death        0%

These tapered rates cannot reduce the tax due on a lifetime chargeable transfer below the amount chargeable when the transfer was made and so are of no benefit to a transfer within the nil rate band.

We would strongly recommend that you keep a list of any PETs that you make. It is also important to keep a record of any exemptions that are used as well as details of any regular gifts made from surplus income.

The Financial Secretary to the Treasury has written to the Office of Tax Simplification (OTS) to confirm that HM Treasury strongly supports some key recommendations on changes to Inheritance Tax (IHT).

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/758368/Final_Inheritance_Tax_report_-_print_copy.pdf

The government recently announced that it will:

• change reporting regulations so that from 1 January 2022 over 90 per cent of non-taxpaying estates each year will no longer have to complete Inheritance Tax (IHT) forms for deaths when probate or confirmation is required; and
• make permanent the ability for those dealing with a trust or estate to provide an Inheritance Tax (IHT) return without requiring physical signatures from all others involved, easing the administration burden in cases where an Inheritance Tax return is still required.

These new rules will result in dramatic changes in reporting regulations from 1 January 2022 for more than 200,000 estates every year.

It was also announced that the government will continue to work on the remaining recommendations made by the OTS: for digitisation, improving processes for lifetime and trust charges, guidance, and working with court services. Some of these are longer term in nature and will be taken forward as part of the wider Tax Administration strategy.

If you require any further information; feel free to contact us.

The Inheritance Tax residence nil-rate band (RNRB) is a transferable allowance for married couples and civil partners (per person) when their main residence is passed down to a direct descendent such as children or grandchildren after their death.

https://www.gov.uk/

The RNRB came into effect on 6 April 2017 and was introduced in stages. The allowance increased to the present maximum level of £175,000 from 6 April 2020. Going forward, the allowance is set to increase in line with the Consumer Price Index. The allowance is available to the deceased person’s children or grandchildren. Any unused portion of the RNRB can be transferred to a surviving spouse or partner. The RNRB is on top of the existing £325,000 Inheritance Tax nil-rate band.

The allowance is available to the deceased person’s children or grandchildren. Taken together with the current Inheritance Tax limit of £325,000 this means that married couples and civil partners can pass on property worth up to £1 million free of Inheritance Tax to their direct descendants.

There is a tapering of the RNRB for estates worth more than £2 million even where the family home is left to direct descendants. The additional threshold will be reduced by £1 for every £2 that the estate is worth more than the £2 million taper threshold. This can result in the full amount of the RNRB being tapered away.

If you need any further help; feel free to contact us.

The majority of gifts made during the life time of a person are not subject to tax at the time of the gift. These lifetime transfers are known as ‘potentially exempt transfers’ or ‘PETs’. These gifts or transfers achieve their potential of becoming exempt from Inheritance Tax if the taxpayer survives for more than seven years after making the gift. There is a tapered relief available if the donor dies between three and seven years after the gift is made.

The effective rates of tax on the excess over the nil rate band for PETs is:

• 0 to 3 years before death 40%
• 3 to 4 years before death 32%
• 4 to 5 years before death 24%
• 5 to 6 years before death 16%
• 6 to 7 years before death 8%

HMRC’s internal Inheritance Tax manual states that subject to certain exceptions, a PET is a lifetime transfer of value that satisfies three conditions. They are that:

• the transfer is by an individual on or after 18 March 1986
• it would be a chargeable transfer apart from IHTA84/S3A (or, if only partly chargeable, is a PET to the extent that it would be chargeable), and
• it is a gift to another individual or to a specified trust.

Inheritance Tax is a tax on the estate (the property, money and possessions) of someone who’s died.

There’s normally no Inheritance Tax to pay if either:

• the value of your estate is below the £325,000 threshold
• you leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club

If the estate’s value is below the threshold you’ll still need to report it to HMRC.

If you give away your home to your children (including adopted, foster or stepchildren) or grandchildren your threshold can increase to £500,000.

https://www.gov.uk/hmrc-internal-manuals/inher-tax-manual/ihtm04057

The Ministry of Justice (MoJ) has confirmed that video witnessed wills in England and Wales will be made legal during the coronavirus pandemic. The change in law to introduce this measure is due to come into force later this month – the reforms will be backdated to 31 January 2020 – the date of the first confirmed coronavirus case in the UK.

This means that any will witnessed by video technology from that date onwards will be legally accepted. The change will remain in place until 31 January 2022, or as long as deemed necessary, after which wills must return to being made with witnesses who are physically present.

Currently, the law states that a will must be made ‘in the presence of’ at least two witnesses. The changes will amend the law to include video-witnessing.

The MoJ has stated that the use of video technology should remain a last resort, and people must continue to arrange physical witnessing of wills where it is safe to do so. Wills witnessed through windows are already considered legitimate in case law as long as they have clear sight of the person signing it.

Even with video witnessing, the Wills still need to be signed by two witnesses who are not its beneficiaries and electronic signatures will not be permitted.

The legislation recognises that:

• An increasing number of people have sought to make wills during the Covid 19 pandemic, but for people shielding or self-isolating it is extremely challenging to follow the normal legalities of making a will – namely it being witnessed by two people.
• In response to this The law (the Wills Act 1837) will be amended to state that whilst this legislation is in force, the ‘presence’ of those making and witnessing wills includes a virtual presence, via video-link, as an alternative to physical presence.