Category Archives: Inheritance tax

Inheritance Tax

Is Inheritance Tax payable on gifts made from income?

Gifts made before someone dies may be liable for inheritance Tax (IHT) unless they are made from income or are in an exempt category.

When an estate is administered, the Executor or Administrator will have to assess gifts that have been given by the deceased during their lifetime and decide whether or not they should be included in IHT calculations.

Gifts given during the last seven years of a person’s life may be liable for IHT. There are some exceptions to this, including the giving of gifts from surplus income.

Inheritance Tax on gifts

A maximum of £3,000 can be gifted each year free of IHT and, if not used, this allowance can be carried over for a single year. Single gifts of £250 do not attract IHT when made to different people.

Money can be given to family or friends who are getting married or entering into a civil partnership, in the sum of £5,000 for children, £2,500 for grandchildren and £1,000 for anyone else.

Payments made to support children under 18 or elderly relatives are usually exempt from IHT.

Gifts given from income may be exempt from IHT where they can be shown to be normal expenditure out of income.

Other gifts given in the seven years before death will be liable for IHT on a sliding scale where the value of the estate exceeds the IHT threshold, which is currently £325,000.

Gifts given out of income

For a gift given out of income to qualify for exemption from IHT, it must be possible to prove the following, to the satisfaction of HM Revenue and Customs:

  1. The gift is normal expenditure

The giving will need to be a regular or usual event. The estate Executor or Administrator can look for a pattern of giving over several years to try and establish whether it is an habitual occurrence.

  1. The gift is given from income

An exempt gift would usually be made from cash, or possibly from life insurance or pension income. Gifts from assets are not exempt unless the gift was purchased from income specifically to be given.

  1. The giver did not need it to live

The gift needs to be given out of income that is deemed surplus to the donor’s requirements. This means that the donor must be able to subsist on their remaining income without resorting to assets.

The rules around the giving of gifts are complicated, so to ensure you make the best decisions for your loved ones and your estate it is advisable to seek expert advice.

If you would like to speak to a Wills and estate planning expert, ring us on 01243 216900 or email us at info@legalmatters.co.uk.

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Inheritance Tax

Review your Inheritance Tax situation in the New Year…

Inheritance Tax (IHT) can be a nasty surprise during the administration of a Will. New Year is the ideal time to check that you’ve done all you can to minimise the burden.

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

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Premium Bonds

What happens to Premium Bonds after someone dies?

If Premium Bonds form part of someone’s estate, they must be dealt with in accordance with the National Savings & Investments (NS&I) rules.

Many people hold Premium Bonds among their financial assets. They are issued by NS&I, a Treasury-backed government savings scheme.

The minimum investment is currently £25, although older Bonds may be for smaller sums. Each £1 unit has a unique number and is entered into a monthly prize draw, with a chance of winning an amount of £25, £50, £100, £500, £1,000, £5,000, £10,000, £25,000, £50,000, £100,000 or £1,000,000. There are usually two prizes of the highest sum, around 6 x £100,000, and increasing numbers of lower prize winners, depending on the amount of bonds in any particular draw.

No interest is paid on the Bonds, and the chance of any £1 unit winning is 1:24,500. A maximum holding of £50,000 is allowed.

When a Premium Bond owner dies

NS&I have a death claims form available via their website which will need to be completed by the executor or administrator of the estate and returned to them together with a Registrar’s copy of the death certificate and a certified copy of any Will.

Premium Bonds cannot be transferred to a new owner. On death, there is the option of leaving them in the draw for up to a year following the date of death, or they can be encashed.

If they are left in the draw, then any prizes are either paid to a beneficiary, if one has been named, or accrue to the estate.

If the beneficiary of the funds wants to invest in Premium Bonds, they would have to buy them in their own name. It is not possible to own Premium Bonds jointly with anyone else.

A Grant of Probate or Letters of Administration is required by NS&I if the amount the deceased held with them exceeds £5,000. This includes other NS&I assets such as Savings Certificates.

If the amount held is below £5,000, then NS&I will not need to be provided with a Grant of Probate or Letters of Administration, but it may still be needed for other assets held by the deceased, depending on their value.

Is tax payable on Premium Bonds?

No Income Tax or Capital Gains Tax is payable on Premium Bond winnings, however the value of any Bonds held by someone is included in their estate for Inheritance Tax purposes.

If you would like to discuss Wills or probate with one of our expert team, ring us on 01243 216900 or email us at info@legalmatters.co.uk.

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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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