2. Inheritance Tax and Trusts
We can advise you on Inheritance Tax.
What is Inheritance Tax?
Inheritance Tax is charged on value transferred by chargeable transfers. The value transferred is measured by the loss to the transferor/donor's estate. IHT is not simply a death tax. It can be due on lifetime transfers. There are certain exemptions and reliefs available, some examples are given below. Therefore, you can mitigate the IHT liability by sensible tax planning using various exemptions and reliefs but you need to plan early.
Examples of exemptions and reliefs that may be available to you:
There are several reliefs available in Inheritance Tax legislation which can be used during lifetime so that the death estate is reduced. Some of the straightforward examples are given below:
Each individual is granted a Nil Rate Band of £325,000.00. Any unused allowance is transferred to the surviving spouse for use on his/her death.
In addition, each individual receives Residence Nil Rate Band of up to £175,000.00, limited to the value of the residence. Any unused allowance is transferred to the surviving spouse for use on his/her death. If the estate is over £2,000,000.00, Residence Nil Rate Band is gradually reduced to the point that it is not available for higher value estates. Please see details below.
An individual can make a gift/transfer of any amount to another individual and if the maker of the gift survives seven years after making the gift, the gift will be exempt from Inheritance Tax (IHT) on death. Such gifts are called Potentially Exempt Transfers (PETs). If the death occurs between three to seven years of making the gift, then taper relief is available. However, immediate Capital Gains and Income Taxes may be payable depending on the circumstances. Please note that the transfers to or by limited companies are not treated as PETs and are liable to IHT. In practice, however, there will not be any IHT payable because the transferor of the assets to a company will usually be receiving shares in the company in return. Therefore, there is no loss to the estate of the transferor.
An individual can give up to £3,000 per year free of tax. If not used in one year, this can be carried forward once to the next year.
An individual can give £250 to any number of people without being subject to Inheritance Tax provided such gifts are unconditional and given to separate people. If a person receives more than £250, then the whole amount, not just the extra, will come into the IHT regime.
You can make a lifetime wedding gift to the bride or groom but the exempt amount will depend on your relation to the bride or groom. You can only make one gift per couple.
You can make payments for the maintenance of your family, e.g. school fees and life insurance premiums, and you can make a lifetime gift that may be exempt if it constitutes a normal expenditure out of income.
There are business and agricultural property reliefs available in appropriate circumstances. These will depend on whether it is a trading business and whether you are a sole trader, partner or owner a limited company. In the case of agricultural property relief, the relief will depend whether the property is leased and if so when it was leased and the expiry date of the lease.
If you make a gift of an asset but still benefit from the asset, then Gift With Reservation of Benefit (GWRB) rules will bite and the gift will not be considered a PET. If you gift a share of your home to, say, your child and you and your child share the home as your residence and share the running expenses, then such a gift may avoid the GWRB rules but you must keep records of the costs and expenses and each party's contribution as the HMRC will require evidence of the arrangement.
GWRB rules can also be avoided if you pay full market rent for its use to the person to whom you have gifted that asset. The market rent will be taxed as income in the hands of the recipient. You must ensure that you will sufficient annual income to cover the rent and your own living expenses.
Before you gift any asset, you must ensure that your own living standards will not be affected. You should not give away any asset which will leave you in perilous circumstances or even without an accommodation for which you have worked all your life in order to save taxes.
Please note that immediate Capital Gains and Income Taxes may be payable depending on the
The definition of spouse above includes civil partners.
New Rules concerning residence passing to direct descendants:
This measure introduces an additional nil-rate band when a residence is passed on death to a direct descendant.
This will be:
£100,000 in 2017 to 2018
£125,000 in 2018 to 2019
£150,000 in 2019 to 2020
£175,000 in 2020 to 2021
It will then increase in line with Consumer Prices Index (CPI) from 2021 to 2022 onwards. Any unused nil-rate band will be able to be transferred to a surviving spouse or civil partner.
The additional nil-rate band will also be available when a person downsizes or ceases to own a home on or after 8 July 2015 and assets of an equivalent value, up to the value of the additional nil-rate band, are passed on death to direct descendants.
There will be a tapered withdrawal of the additional nil-rate band for estates with a net value of more than £2 million. This will be at a withdrawal rate of £1 for every £2 over this threshold.
The existing nil-rate band will remain at £325,000 from 2018 to 2019 until the end of 2020 to 2021.
A lot of the tax advantages of creating trusts have been eroded by legislation in the last few years. Other than for a very narrow category, all trusts are now chargeable lifetime transfers. This means that a trust is immediately chargeable to Inheritance Tax at the lifetime rate, which is 20%. In addition, the trusts are subject to income tax on any income earned by the trust assets and, in the case of discretionary trusts, exit charge if any asset leaves the trust and principal charges every ten years. However, the first £325,000.00 put into the trust is exempt from Inheritance Tax.
The main advantages of the trusts are that, firstly, the value of the asset will be fixed at the date of it being added to the trust (for example you can add an asset that is likely to increase in value so that any increase in value is outside your own personal assets) and, secondly, you can control by the terms of the trust as to who can be the beneficiary and at what age he/she will inherit.
The above is not exhaustive list and there may be other reliefs depending on the individual circumstances.
Disclaimer: These notes are not a legal advice but only for guidance and no responsibility can be accepted for any reliance placed on them. By their nature, the Wills, Inheritance Tax and Trusts are specific for their purposes, subject to individual’s personal circumstances and subject to complex laws. Therefore, you must seek independent legal advice before making a Will, creating a trust or trying to take advantage of any of the reliefs available in the Inheritance Tax legislation.