This is also because the IHT threshold (currently 325,000) has not increased since April 2009 and has now been frozen until at least April 2015.

Transcription

1 Inheritance Tax

2 Inheritance Tax Not that long ago, Inheritance Tax (IHT) affected only the wealthy, but with rising house prices more and more people are finding themselves leaving estates valued over the IHT threshold. This is also because the IHT threshold (currently 325,000) has not increased since April 2009 and has now been frozen until at least April There are ways that the impact of IHT can be mitigated, but it is essential to take professional advice. Below we briefly answer a number of questions that we are frequently asked. What is IHT payable on? Inheritance Tax (IHT) may be payable on a person s estate on their death, but can also be payable in particular circumstances on lifetime gifts to individuals and trusts. Who is subject to IHT? Everyone who is domiciled in the UK for IHT purposes, and non-uk domiciled individuals who have assets situated in the UK as well as some trusts, are within the scope of the tax. How do I know if I am domiciled? The rules are complex. An individual acquires a domicile of origin from their parent, usually the father, but this can be dislodged by a domicile of choice. This may not be easy, however, and could require a change of lifestyle and on-going presence abroad and you will still be deemed to be UK domiciled for 3 years after leaving the UK. Domicile is different from residency which, for tax purposes, is simply where someone lives. 2 Inheritance Tax

3 Any individual is deemed to be domiciled in the UK for IHT purposes if they have been tax resident in the UK in 17 out of the last 20 years. It will also be possible for an individual domiciled outside the UK who is married or in a civil partnership with a UK domiciled person to elect to be treated as UK-domiciled for IHT purposes (explained later). What is the rate of IHT on death? If the value of your estate together with certain gifts made in the past seven years exceeds the nil rate band, currently 325,000 (or up to 650,000 for married couples or civil partners) IHT will be charged at 40 per cent on the excess. For a married couple or civil partners any unused nil rate band from the death of the first spouse or civil partner can be transferred on the death of the second spouse or civil partner. This can increase the nil rate band available up to 650,000, based on current rates. For example: Alan dies in May 2008 and leaves an estate of 450,000 to his wife, Beth. Beth then dies in July 2013 leaving an estate of 750,000. At the time of Alan s death the nil rate band was 312,000, but as he had not made any lifetime gifts in the prior seven years and had left his entire estate to his wife none of his IHT threshold had been used. As such, Beth s personal representatives will be able to transfer 100% of Alan s threshold on Beth s death. They do not transfer 312,000 (the nil rate band on Alan s death), but rather 325,000 (100% of the nil rate band on Beth s death) meaning the IHT threshold is increased to 650,000. The IHT due on the estate is therefore 40,000 ( 750, ,000 = 100,000 x 40%) Can I reduce IHT by giving assets away? Yes, and there are a number of possibilities which will not attract any IHT. During your lifetime you can: Make gifts of assets of any size to individuals and certain trusts. Provided you survive seven years from the date of the gift and do not benefit from the assets given away, no IHT will be payable on these assets on your death. These are known as potentially exempt transfers. Give away up to 3,000 in each tax year. If you didn t use your allowance in the last tax year it can be carried forward for one year only, meaning you could give up to 6, Inheritance Tax 3

4 Make a gift on marriage from 1,000 up to 5,000 depending on your connection to the donee. Make family maintenance payments to a spouse or minor children or children in full-time education. Give away up to 250 per donee per tax year (this cannot be combined with the 3,000 annual allowance). Make regular gifts out of income (not capital) provided these do not affect your standard of living. If you gift an asset but still benefit from it, then this will be considered a gift with reservation. The asset will still form part of your estate for IHT purposes, unless you either pay market value rent for the use of the asset or pay income tax on its deemed rental value. A common asset caught by the above is the family home. During your lifetime and on death, you can: Transfer unlimited value of assets between spouses/civil partners without IHT. However, if the transferor spouse/civil partner is domiciled in the UK, but the transferee spouse/civil partner is not, the lifetime exemption is equal to the prevailing nil-rate band, i.e. currently 325,000. If the non-domiciled spouse or civil partner makes an election to be treated as UK domiciled (as mentioned earlier) then the amount is unlimited. Make transfers to EU charities, UK political parties or for national purposes without IHT. Giving to Charity via your Will A lower rate of IHT of 36%, now applies to those who leave 10% or more of their net estate to charity when they die. 4 Inheritance Tax

5 If you were already planning to leave part of your estate (at least 4% of the net estate) to charity on your death, it may be worthwhile increasing this to 10% in order to benefit from the reduced rate of IHT. Not only will the charity be better off, but there is likely to be more available to distribute to the other beneficiaries of your estate as there should be less tax paid overall. What if my estate includes shares in a company? Shares in unquoted trading companies may qualify for 100% Business Property Relief. If the shares do qualify, and provided you have owned the shares for at least two years, no IHT should be payable on their value. What about agricultural land? There are provisions similar to shares in an unquoted trading company, but the amount of relief available (50% or 100%) will depend on the nature of the land. If the land does qualify for the maximum Agricultural Property Relief, no IHT should be payable on the agricultural value of the land. Do trusts have a role in IHT planning? Yes. For example, if you wish to transfer assets for the benefit of a younger member of the family, but keep control of them (the assets, that is), a trust may be suitable. Trusts have a role to play, but are likely to be restricted to smaller amounts being settled or confined to certain types of property. What about Life Assurance? It is sometimes possible to take out a life policy written in trust that will pay a lump sum upon your death to go towards your estate s IHT liability. This may not be appropriate in every case. Expert advice is essential. What other points should I consider? Is your Will up to date? The way it is drafted can influence your IHT liability and this may need updating to keep up with current legislation. Inheritance Tax 5

6 Is your Will up to date? The way it is drafted can influence your IHT liability and this may need updating to keep up with current legislation. 6 Inheritance Tax

7 Have you considered other taxes? IHT planning can have income tax, capital gains tax, stamp duty land tax and other tax consequences. It is essential that you make sure you keep records and evidence of any gifts made. Learning more If you would like further information about IHT, or would like to discuss planning opportunities, our tax department would be pleased to hear from you. The department is headed by seven partners and three principals, and includes some 40 specialist staff. We provide IHT planning for a great many individuals and families, and have a reputation for the quality and effectiveness of our work in which we take pride. To learn more, please speak to your usual HW Fisher & Company contact or our tax department. Inheritance Tax 7

8 HW Fisher & Company Business advisers - A medium-sized firm of chartered accountants based in London and Watford. Related companies and specialist divisions: Fisher Corporate Plc Corporate finance and business strategy FisherE@se Limited Online accounting and back-office services Fisher Forensic Litigation support, forensic accounting, licensing and royalty auditing Kingfisher Collections Royalty administration and collections services for IP owners Fisher Partners Business recovery, reconstruction and insolvency services Fisher Property Services Limited Property investment, management and finance Jade Securities Limited Business divestments, mergers, management buy-outs and acquisitions Stackhouse Fisher Limited Specialist insurance services Eos Wealth Management Ltd Intelligent wealth management and financial services VAT Assist Limited UK VAT representative London office Acre House William Road London NW1 3ER United Kingdom T +44 (0) F +44 (0) E advice@hwfisher.co.uk Watford office Acre House 3-5 Hyde Road Watford WD17 4WP United Kingdom T +44 (0) F +44 (0) HW Fisher & Company and HW Fisher & Company Limited are registered to carry out audit work in the UK and in Ireland. A list of the names of the partners of HW Fisher & Company is open to inspection at our offices. Fisher Forensic, Fisher Okkersen, Fisher Partners and Kingfisher Collections are trading names of specialist divisions of HW Fisher & Company, Chartered Accountants. HW Fisher & Company Limited, Fisher Corporate Plc, Fishere@se Limited, Fisher Property Services Limited, Jade Securities Limited, Fisher Forensic Limited, VAT Assist Limited, Eos Wealth Management Limited and Stackhouse Fisher Limited, are related companies of HW Fisher & Company, Chartered Accountants. HW Fisher & Company, HW Fisher & Company Limited and Jade Securities Limited are not authorised under the Financial Services and Markets Act 2000 but are regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. They can provide these investment services only if they are an incidental part of the professional services they have been engaged to provide. Fisher Corporate Plc is authorised and regulated by the Financial Conduct Authority under reference Eos Wealth Management Ltd is authorised and regulated by the Financial Conduct Authority under reference Stackhouse Fisher Limited is an Appointed Representative of Stackhouse Poland Limited who are authorised and regulated by the Financial Conduct Authority under reference HW Fisher & Company is a member of the Leading Edge Alliance, an alliance of major independently owned accounting and consulting firms that share an entrepreneurial spirit and a drive to be the premier providers of professional services in their chosen markets. If you would like to subscribe / unsubscribe to our publications, please info@hwfisher. co.uk This briefing is printed on Essential Velvet recycled paper. HW Fisher & Company Print date: September All rights reserved.