Tag: IHT

How to reduce IHT with a Deed of Variation?

Predicting the value of your Estate isn’t easy, not least because you don’t when you will die.

After someone dies it is possible for the beneficiaries to change the Will using a Deed of Variation, there are free examples on the internet for example Deed of Variation UK Template – Make Your Free Deed of Variation (rocketlawyer.com)

Note that Beneficiaries under 18 can’t enter into Deeds of Variation.

HMRC also provide a Checklist IOV2 Instrument of Variation checklist (publishing.service.gov.uk)

You can’t re-write a Will but a Deed of Variation will change the content of it and the Inheritance Tax (IHT) payable.

For example by making a donation to charity.

Where a gift is made to a Charity its taken off the value of the estate and as such will reduce IHT, it could even reduce the rate of IHT on the whole estate currently by 4% (40% to 36%), click here for HMRC reduced rate calculator.

In summary, your donation will either:

  • be taken off the value of your estate before Inheritance Tax is calculated
  • reduce your Inheritance Tax rate, if 10% or more of your estate is left to charity

You can donate:

  • a fixed amount
  • an item
  • what’s left after other gifts have been given out

The Deed of Variation can be prepared before or after the Grant of Probate but generally in must be made within 2 years of the date of death.

FA 2010 definition of charity

Under Sch 6 Para 1 FA 2010 a charity is a body of persons or trust that:

  • is established for ‘charitable purposes’ only
  • meets the jurisdiction condition (i.e. is subject to the jurisdiction of a relevant UK court or the courts of a relevant territory)
  • meets the registration condition (i.e. has complied with any requirement under the applicable law to be registered), and
  • meets the management condition (i.e. the managers are fit and proper persons).

This definition of charity allows charities of relevant territories to qualify as charities for the purposes of UK legislation (provided the conditions above are met). Relevant territories are those in EU Member States, Iceland and Norway

Other reasons why you might need a Deed of Variation

  1. Equalising distributions between the Beneficiaries
  2. Including beneficiaries such as a grandchild born after the Will was created
  3. Including someone who the Rules of Intestacy do not apply to, such as a partner or step-child
  4. Resolving uncertainty in the Will

steve@simple-probate.co.uk

How will the Residential Nil Rate Band (IHT) work? 5 key points

Contemporary house with pool

The new rules come into force in April 2017.

The current nil rate band for Inheritance Tax is £325,000. Which can be transferred between spouses, so basically £650k for a couple.

The maximum amount of RNRB per person will be phased in so that it is:

  • £100,000 for 2017 to 2018
  • £125,000 for 2018 to 2019
  • £150,000 for 2019 to 2020
  • £175,000 for 2020 to 2021

It will then increase in line with CPI for subsequent years.

Key points to note:

  1. It is transferable between spouses – A claim will have to be made on the death of a person’s surviving spouse or civil partner to transfer any unused proportion of the additional nil-rate band unused by the person on their death, in the same way that the existing nil-rate band can be transferred.
  2. The qualifying residential interest will be limited to one residential property but personal representatives will be able to nominate which residential property should qualify if there is more than one in the estate. A property which was never a residence of the deceased, such as a buy-to-let property, will not qualify.
  3. If the net value of the estate (after deducting any liabilities but before reliefs and exemptions) is above £2 million, the additional nil-rate band will be tapered away by £1 for every £2 that the net value exceeds that amount. The taper threshold at which the additional nil-rate band is gradually withdrawn will rise in line with CPI from 2021 to 2022 onwards.
  4. You need to be a linear descendant to benefit – A direct descendant will be a child (including a step-child, adopted child or foster child) of the deceased and their lineal descendants.
  5. Downsizing is catered for – legislation in Finance Bill 2016 will provide that where part of the main residence nil-rate band might be lost because the deceased had downsized to a less valuable residence or had ceased to own a residence on or after 8 July 2015, that part will still be available provided the deceased left that smaller residence, or assets of equivalent value, to direct descendants. However, the total amount available will not exceed the maximum available residence nil-rate band. The technical details of how the additional nil-rate band will be enhanced to support those who have downsized or ceased to own their home will be the subject of a consultation to be published in September 2015 ahead of the draft Finance Bill 2016.

steve@bicknells.net

A few quick tips on how to save IHT

Signing Last Will and Testament

There are lots of things you can do to save inheritance tax.

Pensions

IHT only applies if the pension company has to pay the value of your scheme to your estate, in which case it becomes like any other asset, but generally the pension pot is held in a discretionary trust, which means it isn’t taxed on death.

You can now nominate anyone not just dependents to be the beneficiary.

How a Family Pension Scheme will save you Tax

Potentially Exempt Transfers and Lifetime Gifts

The original owner must live for 7 years after giving the gift. Any gifts made less than 7 years before death count towards the Inheritance Tax threshold (£325,000). They count towards the threshold before the rest of the estate.

If the donor gave away more than £325,000 of gifts in their final 7 years, tax is due on everything over that threshold.

Gifts made 3 to 7 years before the death

The rate of tax is reduced for gifts over the threshold made between 3 and 7 years before the person died. This is known as ‘taper relief’.

Annual Exemptions

The estate doesn’t pay Inheritance Tax on up to £3,000 worth of gifts given away by the deceased in each tax year (6 April to 5 April). This is called the ‘annual exemption’.

Leftover annual exemption can be carried over from one tax year to the next, but the maximum exemption is £6,000.

Certain gifts don’t count towards the annual exemption and no Inheritance Tax is due on them, eg gifts worth up to £250 and wedding gifts.

Wedding gifts

There’s no Inheritance Tax on a wedding or civil partnership gift worth up to:

  • £5,000 given to a child
  • £2,500 given to a grandchild or great-grandchild
  • £1,000 given to anyone else

The gift must be given on or shortly before the date of the wedding or civil partnership ceremony.

Gifts up to £250

There’s no Inheritance Tax on individual gifts worth up to £250. You can give as many people as you like up to £250 each in any one tax year.

You can’t give someone another £250 if you’ve given them a gift using a different exemption, eg the £3,000 annual exemption.

If you give someone more than £250 in a tax year, the whole amount counts – the first £250 is not exempt.

steve@bicknells.net

Will you be taxed if you inherit a Pension Fund?

Signing Last Will and Testament

IHT only applies if the pension company has to pay the value of your scheme to your estate, in which case it becomes like any other asset, but generally the pension pot is held in a discretionary trust, which means it isn’t taxed on death.

You can now nominate anyone not just dependents to be the beneficiary.

Since 6th April 2015 anyone who inherits a pension fund from a person who dies before the age of 75 is entitled to receive it tax free and the you can take the money as a lump sum or income. Once over 75 a special tax of 45% applies (previously 55%), you could reduce this by taking a regular income.

From 6th April 2016 the 45% tax is likely to be scrapped and income tax rates will be applied.

The BBC website has a useful post which explains the changes in 10 questions, click here to read it

steve@bicknells.net

 

 

How do you give away property in stages?

Mosaïque de logements

As long as the home you give away is your main home, Capital Gains Tax won’t be payable.

However, if you give away a second home, Capital Gains Tax may be payable if the property has increased in value between when you first owned it and when you gave it away.

If you sell your second home and give the money to your children, the gift won’t be included in your estate for Inheritance Tax purposes, provided you live for 7 years after you make the gift.

Each year individuals have a capital gains tax allowance, called an exemption

 

Annual Exempt Amounts
Customer group 2012-13 2013-14 2014-15
Individuals, personal representatives and trustees for disabled people £10,600 £10,900 £11,000

 

It is possible to to gift property in stages.

Your solicitor will draw up the required documents to conveyance a percentage of the property and register the transactions with the Land Registry.

In order to calculate the capital gain you will need to know the acquisition cost and any reliefs such as PPR.

Giving away your property in stages could save you from having to pay capital gains tax.

The person you give the property to may not have to pay SDLT…

If the property is received as a gift there’s no SDLT to pay, so long as there’s no outstanding mortgage on it.

steve@bicknells.net

10 tax allowances we fail to claim

Tax Money

In 2012 Unbiased.co.uk reported that £12.6 billion was unclaimed by UK tax payers, here is a list with some ideas:

  1. Income Related Tax Credits – Check and find out what you are entitled to – UK Benefits https://www.gov.uk/benefits-adviser
  2. Tax Relief on Pension Contributions – There are estimated to be over 4 million people not paying into a pension, auto enrolment should help to change that, this blogs explains the tax advantages http://stevejbicknell.com/2012/05/02/why-invest-in-a-pension-because-of-tax-relief/
  3. Tax Relief on Charity Donations – Are you using Gift Aid? are you a higher rate tax payer entitled to additional relief?
  4. Saving on Inheritance Tax – Many people don’t have a Will let alone any IHT planning!
  5. Making Use of ISA’s – Why get taxed on the interest on your savings if you could have an ISA? Its easy to get an ISA and you can still have access to your ISA savings if you need it, the current ISA allowance is £11,520 or £5,760 for cash ISA’s
  6. Child Benefit – Use the benefits adviser to check if you can claim – UK Benefits https://www.gov.uk/benefits-adviser
  7. Avoiding tax penalties and late filing – This just requires you to be organised, make sure you know the filing dates http://www.hmrc.gov.uk/sa/deadlines-penalties.htm and get the information needed in plenty of time
  8. Savings on Capital Gains – The current allowance for 2013/14 is £10,900 (previously £10,600) for an individual many people seem to forget they have this allowance
  9. Making Use of Employee Share Schemes – The government love employees to have shares and this year introduced a new share ownership option http://stevejbicknell.com/2013/08/03/employee-shareholders-will-your-employees-want-shares/
  10. Income Tax and Personal Allowances – Consider who should own assets (and get income from those investments)  – you or your spouse – so that you can minimise your tax liability

Steve@bicknells.net