Category Archives: Inheritance tax

Inheritance tax

Is Inheritance Tax payable on property gifted during lifetime?

It is a mistake to think that Inheritance Tax (IHT) can be avoided by giving away assets during your lifetime.

While it may often be the case that it is beneficial to pass on gifts during your life, you need to be aware that there could still be an IHT liability.

The tax rules on lifetime gifts

Gifts of cash or valuable items made in the seven years before death may need to be counted when the estate executor calculates IHT liability.

Up to £3,000 can be given tax-free each tax year, or £6,000 if no gift was made the previous year.

Each parent can give their child £5,000 tax-free towards a wedding, and a grandparent can give £2,500 and other relatives £1,000 towards a wedding.

When a gift is given in the seven years before death, it will need to be included in estate calculations for IHT. It is the job of the executor or administrator to find out what gifts have been made and account to HM Revenue & Customs for any IHT that may be due.

Where gifts exceed the amount allowed to be given free of tax, then they will be deducted from the nil-rate band, ie. the amount an individual can leave tax-free on their death. The figure currently stands at £325,000.

There is a sliding scale for calculating the amount of IHT payable on gifts. Where the sum was given less than three years prior to death, then IHT is payable at 40 percent. In the three to four years before death it is 32 percent and the sliding scale continues for each year at rates of 24 percent (four to five years), 16 percent (five to six years) and 8 percent (six to seven years).

Tax-free gifts

Small gifts of £250 or below can be given free of tax, as can gifts made from income you receive and maintenance payments made to relatives or ex-spouses.

Tax-free giving to spouse or civil partner

As your whole estate can be passed free of IHT to your spouse or civil partner, it follows that lifetime gifts to them are also free of tax. However, if you put money into a trust, this may create a tax liability. It is a complex area of law and it is advisable to speak to an expert tax and trusts lawyer.

An experienced adviser will also be able to help you make the most of IHT allowance and suggest ways of structuring your assets to minimise the amount of tax payable. When done properly, this can make a substantial difference to your liability.

It is also possible to appoint a professional executor who would be responsible for calculating IHT liability and preparing estate accounts.

If you would like to speak to one of our expert tax and trusts professionals, ring us on on 01243 216900 or email us at info@legalmatters.co.uk.

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Big rise in contested estates attributed to DIY wills…

The continuing rise in numbers of contested Wills is being attributed to more and more people attempting to write their own Will.

The number of cases heard by the High Court went up from 227 in 2016 to 282 in 2017 and 368 in 2018.

Drafting a Will

Drawing up a valid Will can be a complicated undertaking. Matters to be considered include whether to leave beneficiaries lump sum gifts or a percentage of the estate, who will inherit first if your estate is smaller than expected, how to ensure first and second families are both provided for, even if you die before your new spouse and how to minimise Inheritance Tax liabilities.

A small error made in drafting a Will can mean that it is invalid. If this happens, then there is a risk that the estate will pass under the rules of intestacy. This details which relatives will receive the estate and in what proportions. Unmarried partners and stepchildren do not inherit anything under the rules.

Why a Will might be challenged

If the wording of a Will is ambiguous or the wrong terminology is used, there may be an opportunity for someone to challenge it in court. Even the incorrect execution of a Will by the signatory and witnesses can mean that a Will is invalid. Mistakes are easy to make in this complicated area, with the risk that will result in a long and expensive court case.

What happens if a Will is challenged

Dealing with a death can be difficult and when family members feel that they have not been left what they felt they were entitled to, problems can arise. When emotions run high, if there is ambiguity or an error in the Will, then they may take the opportunity to bring a legal case. These can take years to resolve and are likely to be expensive. Saving a few pounds now by drafting your own Will can result in the loss of thousands later on if the Will is proved to be invalid or ambiguous.

Why a professionally drafted Will is always recommended

Speaking to an expert Will writer allows you the opportunity to explain exactly what you would like to happen to your estate. If, for example, you have remarried and you would like your spouse to live in your home after your death, but ultimately want it to pass to your children, a professional will be able to explain to you how this can be done and draw up a Will that you can have confidence in.

They will be able to help you avoid pitfalls, such as leaving cash gifts that might reduce your residuary estate far lower than you anticipate and will be able to translate your wishes into a legally binding Will. When a Will has been clearly thought out and well drafted, it significantly reduces the risk that your family will start to wonder if it was exactly what you meant to do.

To speak to one of our expert Wills lawyers, call us on 01243 216900 or email us at info@legalmatters.co.uk.

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Inheritance Tax planning

What is the transferable nil rate band in Inheritance Tax and how can you claim it?

When someone dies, the first £325,000 of their estate is exempt from Inheritance Tax (IHT). If they don’t use all of this allowance, it can be transferred to their spouse’s or civil partner’s estate in due course. This is known as the transferable nil rate band.

This increases the exempt amount for the partner’s estate when they die, meaning they could have a potential IHT threshold of up to £650,000.

The relevant dates

The transfer of the nil rate band can be applied for if the remaining spouse or civil partner died on or after 9 October 2007.

In respect of civil partnerships, the transferable nil rate band can be claimed only if the first partner died on or after 5 December 2005, the date that the Civil Partnership Act became law.

How much nil rate band is transferable?

Where the first spouse or partner to die leaves all of their assets to the remaining spouse or civil partner, no IHT is payable, so the entire £325,000 can be passed to the remaining spouse, subject to the deduction of any non-exempt gifts made during the previous seven years.

How to apply to transfer the nil rate band

Two forms need to be sent to HM Revenue & Customs (HMRC). The first is the standard IHT form, while the second is the application to transfer the unused allowance. There are two options for this second form.

Form IHT217 Claim to Transfer Unused Nil Rate Bank for Excepted Estates

This form should be used when the estate of the first person to die is an excepted estate, ie. IHT was not payable, for example where the estate is worth less than £325,000 or where the assets are left to charity.

Form IHT402 Claim to Transfer Unused Nil Rate Band

Where some of the £325,000 IHT allowance was used by the estate of the first spouse to die, then only the remaining balance can be transferred to benefit the second estate. Other financial information will need to be included on the form, for example gifts made within the last seven years and pension details.

Both forms need to be signed by the estate Executor or Administrator and sent to HMRC together with the main IHT form, IHT400.

A probate lawyer will be able to work out the correct figures to be included on the form, which isn’t always straightforward, for example in the case of disposal of cash or assets by the deceased prior to their death or where gifts are made to charities, which could potentially reduce IHT liability.

To speak to one of our probate specialists, call legalmatters on 01243 216900 or email us at info@legalmatters.co.uk.

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Client Testimonial

Client Testimonial…

When you lose someone you love it is always a difficult time. Having to deal with the paperwork involved in administering an estate after a death – and when you’re grieving – can be extremely upsetting.

That’s why at legalmatters we will always try to make the process as pain-free as possible for you – and why we’re always delighted to hear from a client when we’ve helped a family or an individual through such a stressful time. So thank you Jane for your kind words.

“Thank you and Megan, and all in the office staff for making my journey – sorting my dad’s estate through yourself and legalmatters – a professional, reassuring and stress free time. It’s been a pleasure and I would highly recommend you to friends.”

UK Inheritance Tax

What Inheritance Tax liability do non-domiciled residents have in the UK?

When someone is classed as being domiciled outside of the UK, Inheritance Tax will only be payable on their UK assets.

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.

This can be beneficial for those who may have lived in the UK for more than 15 out of the previous 20 years, as it will mean that they are considered as UK-domiciled.

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 legalmatters on 01243 216900 or email us at info@legalmatters.co.uk.

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Inheritance Tax rules on lifetime gifts

Giving gifts of cash or valuables before your death means that you can see your loved ones benefit from your generosity. But make sure you understand the Inheritance Tax situation before you give.

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 someone about gifting, call one of our specialist team at legalmatters, on 01243 216900 or email us at info@legalmatters.co.uk.

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Estate Administration

Making payments from a deceased’s estate…

If you’ve been left money or a share in someone’s estate, you may be wondering what liabilities you have. Do you need to pay tax on the money, and who is responsible for clearing any debts the deceased may have left?

After someone dies, their personal representative is responsible for winding up the estate. It is their job to collect in all the assets, sell any property and pay debts, including tax liabilities. Once this has been done, they will then distribute the funds in accordance with the Will or, if no Will was made, under the rules of intestacy.

Who is responsible for making payments from an estate?

If a Will was made, this will usually name a personal representative, known as an executor. If there was no Will, the Probate Registry will appoint an administrator.

This is the person who will be responsible for gathering in the money and settling any bills.

Debts are payable in a set order.

  1. Secured debts such as a mortgage
  2. Reasonable funeral costs
  3. Estate administration expenses
  4. Payments due to employees
  5. Unsecured debts

Estate administration expenses

These are usually the main expenses to be dealt with when winding up an estate and include the costs incurred by the personal representative, such as probate fees, estate agency and valuation fees, Income Tax and Inheritance Tax.

Making payments to beneficiaries

Once all of the debts have been paid, then the estate can be distributed to the beneficiaries. Personal possessions will be passed in accordance with the terms of any Will.

Cash payments are made in a strict order of priority.

Firstly, specified gifts of money are made to named beneficiaries.

After these have been paid, the residue is divided in accordance with the terms of the Will. A residual beneficiary can request a copy of the estate accounts, which will set out all income and expenses.

The amount of any taxes and other debts will therefore reduce the money paid to the residuary beneficiaries, as they are the last in the queue, after any specific cash legacies.

For help with administering an estate, call the probate experts at legalmatters on 01243 216900 or email us at info@legalmatters.co.uk.

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The importance of inheritance to the younger generation

Data published by the Office for National Statistics shows that the wealth gap between generations in the UK continues to widen. The findings also show that inheritances are becoming increasingly important to younger people.

Over recent decades, rising levels of household affluence mean that the older generation has higher levels of wealth that can be left to younger family and friends. This wealth is passed on through inheritances, gifts and loans.

The latest Government report looks at how the transferal of assets impacts wealth inequality, social mobility and the intergenerational transference of advantages in the UK.

According to the findings, on average:

  • Individuals with the most income and wealth were likely to receive the most substantial gifts and loans
  • Those aged under 45 were the age group most likely to accept cash gifts or loans from friends and family of the value of £500 or more, and also received the highest amounts
  • Those aged 55 to 64 were the most likely to receive an inheritance and also received the largest legacies
  • The least wealthy and youngest individuals receive smaller estates, but they make up a much more significant proportion of their total net wealth
  • Those in the middle of the wealth distribution were the most likely to receive cash gifts or loans from friends and family of the value of £500 or more.

Gifts and loans

Of 25-to-34-year-olds, 11% had received a gift or loan above £500 in the last two years. This is the age most people become first-time buyers and have children, which could suggest that older family members are keen to help support these expensive life stages. The next highest beneficiaries of gifts or loans is 25-44 year-olds (9%). So, the research could also indicate an ongoing dependence of adult children on their parents in the modern world.

Inheritances

When it comes to receiving an inheritance, the average age a person is likely to inherit is between 55 and 64. This is thought to be because people are living longer.

Inheritances are more likely to be received by those who already have relatively high levels of wealth. However, bequests received by those in the bottom income group were equivalent to 13% of their net wealth, while for those in the top income group inheritances were equivalent to 5% of their net wealth. So, legacies could play some role in reducing inequalities.

Knowing how people save and spend money – and understanding the impact of transfers of wealth between generations – is a crucial step in helping people reach their financial objectives.

To find out how best you can pass on your wealth, speak to one of our expert team by calling 01243 216900 or email us at info@legalmatters.co.uk.

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Inheritance tax

Understanding Inheritance Tax…

Inheritance tax is a tax that, if due, is payable upon a person’s death. Whether it needs to be paid depends on how much the deceased person’s estate is worth, and who is inheriting.

When does inheritance tax need to be paid?

If the total value of an estate is over £325,000 (nil rate band), then inheritance tax will need to be paid. It is charged at 40% on any amount over £325,000.

What is included in a person’s estate?

An estate includes all of the assets which the deceased owned or was entitled to on the day they died. This can include things like property, money, shares, investments, pensions, and possessions.

How can you reduce inheritance tax?

There are exceptions which can help to reduce inheritance tax. For example:

Spouse exemption

Spouses and civil partners are exempt beneficiaries. So inheritance tax does not need to be paid, regardless of how much an estate is worth.

Charity exemption

Where at least 10% of an estate is left to charity, inheritance tax can be paid at a reduced rate of 36%. Where the whole estate is left to a charity, inheritance tax does not need to be paid at all.

Transferable nil rate band

Everyone is entitled to a nil rate band for inheritance tax. Assets that pass from one spouse or civil partner to another are exempt from inheritance tax. So, if someone dies and leaves everything to their spouse or civil partner, they won’t use any part of their allowance. This can be transferred to the second person’s estate leaving a nil rate band of up to £650,000 when they die.

Residence nil rate band

This is available in addition to the inheritance tax nil rate band. It is possible when a home is passed on death to a direct descendant. In 2018-19, if a property is left to children or grandchildren a residence nil rate band of £125,000 can be added to the original nil rate band. So the total threshold will increase to £450,000.

Transferable residence nil rate band

The residence nil rate band can also be transferred between spouses and civil partners. This only applies if the deceased had a spouse or civil partner who died before 6 April 2017, or if they died after this date but did not use all their available residence nil rate band.

Inheritance tax comes out of the estate funds. It is payable by the person who is dealing with the estate (the executor or administrator), and they can be held responsible for any errors in payment.

Find out about our Inheritance Tax Planning service on our website here: https://www.legalmatters.co.uk/inheritance-tax-planning.php. Call us on 01243 216900 or email us at info@legalmatters.co.uk.

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Are you a Homeowner? Concerned about Inheritance Tax? Read on…

Holding your properties as tenants in common is a simple change to the way your property or properties are held which can save you thousands of pounds.

But what does this mean? This article aims to explain the legal terminology of tenants in common in plain English and how it could benefit you.

How tenants in common works
Most couples own their homes as joint tenants, meaning they both own the whole home. Holding the property as tenants in common means that each owns a share of the property, either a percentage or half each. This protects the agreed share for couples who have put unequal deposits into a property. If parents are gifting deposits to their children, it is also a way of easing fears in case of a break-up or death.

In the case of tenants in common, one partner can leave their share of the property on death whilst allowing the other partner to continue living there, passing the remaining share on death. It can also prevent your home being sold in the event you need to go into long term care.

Tax implications
There is no Inheritance Tax (IHT) for assets left in a Will to their spouse – in other words the surviving partner doesn’t have to pay IHT. After the remaining partner dies, the beneficiaries of their estate, usually the children, do have to pay IHT.

The rising cost of houses means that one property alone can put the estate over the IHT threshold. If the house is owned as joint tenants, both own the whole property. If one partner dies, the other automatically becomes the sole owner of the home. In the case of tenants in common each person owns a share of the house, usually split half and half.

Joint owners can split their home in two, therefore benefiting from tenants in common. By doing so, the half belonging to the person who passes away first, would be inherited by the beneficiaries immediately.

Provided the half is worth less than £325,000 – the current IHT threshold, no tax will be due. When the remaining partner dies, their half, inherited by the same children, could be under the threshold which again would mean no IHT is due.

Making it happen
You’ll need to inform Land Registry of the split and also write to each other to specify your intentions of the split.

As providers of Wills, Lasting Powers of Attorney and Trusts we can take care of all of this on your behalf. For further information or to arrange an appointment please call one of our expert team at legalmatters on 01243 216900 or email us at info@legalmatters.co.uk.

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