Category Archives: Tax Planning

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.”

Is Capital Gains Tax payable on an estate?

When someone dies and their assets are sold at a profit, their executor will need to calculate whether Capital Gains Tax is payable.

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 2019

An executor is given a Capital Gains Tax allowance of £12,000 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 team at 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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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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Critical Event Protection…

What is Critical Event Protection and is it relevant to me?

If you are a member of a Death in Service Scheme, if you have a separate Critical Illness and Life Insurance Policy or even if you have a Pension Plan, you should look at Critical Event Protection.

What are these schemes and policies for?

Death in service schemes are often part of your employers’ group policy scheme which provides a lump sum for family or to cover the death of a shareholder in a business.

Critical illness policies produce an income supplement in the event of a critical illness and on death there is usually a lump sum paid.

Life insurance policies may make provision to cover inheritance tax, provide a lump sum for family or to cover the death of a shareholder in a business.

An occupational or self-invested pension plan may have a lump sum which will be paid on death.

What happens to these assets when I die and why would I need Critical Event Protection?

These valuable assets usually only pass to your next of kin if you’ve nominated them. If you haven’t, they go into your estate and may then become subject to Inheritance Tax at 40%. In this way, sometimes funds are wasted or end up with people you don’t even know yet, for example if your current partner or next of kin starts a new relationship.

How can I protect these assets for my dependents?

Using a trust preserves the use of these funds for your dependents, avoids direct ownership, can avoid the need to incur estate administration costs and may save inheritance tax. A trust protects and ringfences these lump sum proceeds and means a quick claim by the trustees upon your death can make the funds available in a protected trust environment to meet family costs.

At legalmatters, we have put together a simple solution, which will enable you to deal with these valuable assets, called Critical Event Protection.

To find out more, download the Critical Event Protection Guide or speak to one of our legal team on 01243 216900 or e-mail info@legalmatters.co.uk.

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What can legacy giving do for your tax bill?

Who are you going to leave money to in your Will? Your spouse or partner is probably first in line, any children or extended members of the family may pop up here and there too.

But what about charity?

Thousands of people every year choose to leave a gift to charity in their Will, whether it’s a fixed amount, a fixed percentage of their estate or even just what’s left after other gifts have been handed out to their surviving loved ones.

It doesn’t have to be a charity that you’ve been particularly involved with during your life either – you can leave money to any registered charity.

There’s another bonus to doing this, besides simply helping a good cause. Legacy giving – where you leave money to a charity – can also reduce your inheritance tax bill.

With inheritance tax, you – or rather your estate – is charged a rate of 40% on every £1 that the estate is valued above the nil rate threshold, which currently stands at £325,000 (though couples essentially enjoy a £650,000 threshold).

However, when you leave money to charity, it won’t count towards the value of the rest of your estate, giving you the opportunity to reduce the value of your estate below that threshold, ensuring no further tax is payable.

Even if your estate is still valued about the threshold, charitable giving can help reduce your tax bill. If you leave 10% of your net estate to charity, then the inheritance tax charged on the remainder of your estate falls from 40% to 36%, a reduction which could see the estate save thousands of pounds in tax.

Many of us regularly give to charitable causes while we’re alive. To do so after your death will not only help support good causes with some of your estate, but for your beneficiaries there are tax benefits that can come with it. Obviously, you should discuss this carefully with your loved ones and your will writer when drafting your Will.

It’s important for you to be clear when drawing up legal documents. Legalmatters can help, we’re always happy to discuss your needs or answer your questions. Call us today on 01243 216900 or email us at info@legalmatters.co.uk for further details.

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Grandparents and gifting options…

Many grandparents are intending to gift their grandchildren financially, with recent research from Saga suggesting that more than £37bn has passed from grandparents to their grandchildren.

Part of this is down to the fact that older people are worried about their grandchildren’s future. The increase in cost of houses, cars and the day to day necessities mean they’re likely to suffer financially and be much worse off than those of generations gone by.

So how could you go about helping out your younger relatives?

Skipping a generation

According to the research, around 14% of parents are skipping a generation and are instead looking to leave assets to their grandchildren.

Making use of a gift allowance

In certain scenarios, grandparents are choosing to give money without causing a tax event such as a £3,000 annual gift allowance. This can cover financial gifts which can be passed over each year, free of Inheritance Tax. Additionally, grandparents can also give away up to £250 to any number of people each year.

Putting it in a trust

With a discretionary trust, it is up to the trustees to determine how and when any potential beneficiaries may be able to access the cash. You can appoint yourself as the trustee, so that you have final say over where the money goes, or you can go for an independent trustee. What’s more, the money within the trust is classed as separate from your estate, so it’s free of Inheritance Tax.

There are also bare trusts, which mean the grandchildren would be completely entitled to whatever is in the trust once they reach 18. Unlike the discretionary trust, the beneficiaries are fixed, so once the trust is declared it is not possible to add (or remove) beneficiaries.

It’s important that you consider where and to whom you want your assets to go to – a comprehensive will is the only place where you can formally set this out.

Don’t keep putting it off. Speak to legalmatters today to make sure that your final wishes are carried out. Call us on 01243 216900 or email us at info@legalmatters.co.uk

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Importance of business succession planning…

You’ve spent years building up your business, but have you given any thought to what will happen when you die?

Do you have an exit plan, and if not, how do you go about building one?

First of all you must decide what you want to happen.

Do you want it to be sold? If that’s your goal then how do you make it as healthy and profitable as possible to get the best price when the time comes to sell?

If you have children, do you want them to take over your business, are they able to and do they want to? If you have more than one child, do you want all your children involved; should they own it and someone else manage it?

If you are handing the business on, then you still want it to be in good shape but you also need to think about who will take it over, what training they might need and whether you need to mentor them.

It’s obviously very important to have a Will in place which will detail how you want the business to be passed on and to protect it from inheritance tax. Your business assets may qualify for relief from inheritance tax or there may be things that you can do to reduce the impact of the tax.

For instance, did you know that business relief for inheritance tax reduces the value of a business or its assets for inheritance tax purposes when you die?

The proceeds could one day become taxable for your beneficiaries, so it may well be wise to establish a Business Property Relief Trust which will ensure that the relief is protected.

If you’d rather your family receive money than the responsibility of taking over your company, then have you considered a share purchase agreement? This allows surviving business owners to buy your shares when you die.

To find out more about the different approaches to ensuring your business is protected for your beneficiaries, contact legalmatters. Call us on 01243 216900 or email us at info@legalmatters.co.uk to discuss your particular situation.

Business Property Relief; none of your business

Tax. Famously one of life’s inevitabilities, it is a necessary evil that can’t be avoided (just ask Al Capone).

Rightly or wrongly, inheritance tax is often named as one of the UK’s most hated taxes. Thankfully, with the introduction of the Residential Nil Rate Band earlier this year, we are in a much more fortunate position than we have been previously. Theoretically, a married couple can now leave up to £1 million pounds to their descendants without paying a penny to HMRC, but is there anything else you can do to avoid your estate going to the tax man? If you have a business interest or run your own company then indeed there is. So sit down at the back and pay attention.

If you have owned a business for at least two years prior to your death, your executors will be able to claim Business Property Relief (BPR) on certain business assets. Good news, huh? It gets better. Qualifying assets can obtain relief of up to 100%. That means that even if the assets are worth £1 billion, you can give them away without paying a penny in tax.

You can get 100% business relief on a business or interest in a business, or shares in an unlisted company, while 50% relief is available 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; and
  • land, buildings or machinery used in the business and held in a Trust that it has the right to benefit from.

It’s important to be aware that you can’t claim business relief if the asset is not needed for future use in the business.

What’s more, business assets can actually be given away while the owner is still alive and qualify for business relief. However, certain criteria need to be met – for example, the recipient must keep them as a going concern until the death of the donor.

Despite the booming buy-to-let industry, it should also be clarified that rental property does not qualify for the relief, as it does not meet the criteria of ‘trading’. A business which only generates investment income will not attract BPR, so this excludes:

  • A residential or commercial property letting business
  • A property dealing businesses
  • A serviced office business.

Some business activities are borderline: whether they will qualify for relief depends on the nature of services provided, typically these include holiday businesses, property management and caravan parks – where there is letting, holidays and caravan sales.

Business property relief can make a huge difference to the eventual inheritance tax bill of your loved ones and can also help with succession planning. But it requires careful planning in order to ensure it is available when you need it. Dictating exactly what happens to your assets after you die is incredibly important, whether you own a business or not, and a Will is the best way to do that. It is a terrific way to reduce the uncertainty and upset your loved ones face after you pass away.

If you own a business, or are interested in becoming a business owner, and would like advice on how to include this within your Will, talk to legalmatters. Check your eligibility and ensure that what HMRC is entitled to, is none of your business.