We can provide assistance in all areas of inheritance tax including compliance work and tax planning services.
For the purposes of this web site “gifts” and “transfers” have virtually the same meaning. However, there will be the odd occasions when their meanings will differ.
Essentially, this legislation taxes accumulated wealth on:
1. gifts during lifetime
2. transfers into /out of some trusts
3. the value of estates on death.
With a little careful planning this tax can often be greatly reduced or avoided completely. Special trusts and forms of insurance exist to reduce the tax. There are also many reliefs and deductions to be claimed. Care must be taken not to overlook the tax planning opportunities.
Brief notes are given on each of the following. Please scroll down to the topic of your choice.
> Basis of tax, tax rates and payment dates
> People who are liable to pay
> Exempted gifts and other transfers
> Wills & Taper Relief on death
> Some thoughts on changing from joint tenancy to Tenants in Common
Basis of tax, tax rates and payment dates
Most transfers during life are not taxed at the point of gift – these are termed “Potentially Exempt Transfers”. If the donor dies within seven years of the transfer the value will be taxed as if it was still in the estate at death.
Any transfer taxable during lifetime (e.g. perhaps into a Trust) is charged at half the death rate(s).
Tax is calculated with reference to all cumulative transfers made in the previous seven years.
For deaths occurring after 5th April 2013 tax rates are:
First £325,000 – 0% called the “nil rate band”
“Residence Nil Rate Band”, now standing at £175,000 – 0% [see notes below]
Remainder where taxable 40%
NOTE >> TRANSFER OF UNUSED NIL RATE BAND >> whatever percentage of the nil rate band is unused on the death of one spouse can be added to the nil rate band of the surviving spouse on the second death IF the executors of the surviving spouse can prove their claim to the satisfaction of the Revenue. It is therefore vital for all papers relating to the first death to be kept safely with the Will of the surviving spouse.
The Residence Nil Rate Band
This is in addition to the Nil Rate Band if certain qualifying conditions are met. The general qualifying conditions are:
1. At the date of your death the estate includes an interest in a dwelling-house which has been occupied as the main family home, or intended to be.
2. The interest in the family home must be ‘closely inherited’ by direct lineal descendants. This includes your children, including step-children, adopted children, foster children and grandchildren.
3. Spouses or civil partners of direct lineal descendants will also potentially qualify for the RNRB.
The RNRB is allowed in full for estates up to a value of £2M. After that it is reduced by £1 for every £2 that the estate is worth more than the £2 million. As can be seen this means the entire RNRB vanishes for estates worth £2,350,000 or more.
Any tax due is payable as shown below:
Lifetime transfers- 6th April to 30th September – due date is the following 30th April
1st October to 5th April – due date is 6 months after the month of transfer
On death – due date is 6 months after the month in which death occurred.
Rules exist to charge interest and various penalties where deadlines are missed.
Particular rules apply to tax payable by instalments, assets “conditionally exempt” on death, tax due from Personal Representatives applying for Grant of Probate and others circumstances.
People who are liable to pay
UK domiciled persons – all worldwide assets are potentially taxable. Non-UK domiciled – assets situated in the UK.
The definition of “domicile” is complex as it is surrounded by much case law etc. Generally speaking, a country of domicile is that which is regarded as “home”. For inheritance tax two extra conditions are very specifically laid down in law. UK domicile is deemed to be established if, on or after 10th December 1974 and:
1. within 3 years prior to the transfer, you had a UK domicile
2. in 17 out of the last 20 years prior to the transfer, you were UK resident (as defined)
Specific rules to non-resident or non-UK-domiciled persons and to persons with temporary residence/non-residence in the United Kingdom. In essence, to escape the tax, an individual must be resident outside the United Kingdom for “five years” (as defined).
IMPORTANT NOTE: In light of some tax case decisions in the courts HMRC has undertaken a major review of the regulations surrounding both residency and domicile for all tax purposes.
The result is a root and branch change in the way both are treated for tax purposes in the UK. A new “Statutory Residence Test” has come into force.
It is intended that any new rules will identify people who have “long term” UK connections and ensure the Treasury gets the “appropriate contribution to the UK exchequer from these individuals”.
Exempted gifts and other transfers
As with all taxes there is much legislation and case law on anti-avoidance so, again, it is important not to use the various relieving provisions inappropriately.
If a transfer or gift is to be exempted it must be made free and unencumbered. A transfer made with conditions attached where, for example, the donor retains rights of ownership in, or ongoing use/enjoyment of, any asset it will be termed a “Gift with Reservation”. The intended exemption will not then apply.
As IHT is a tax aimed at transfers of capital then any transfers proved to be out of regular income (e.g. normal birthday presents and other transfers not affecting normal lifestyle of the donor) are not within this tax.
Married spouses are taxed separately and can each take advantage of all exemptions, reliefs and deductions in their own right. Transfers between UK domiciled spouses are completely ignored for this tax. Other principle transfers exempted are:
“Lifetime” amounts – each donor £3,000 p.a.
each recipient/”small gifts” £250 p.a.
(NB the “small gifts” exemption cannot be used to cover part of a larger transfer)
To non-UK domiciled spouse £55,000 – cumulative
To political parties, as defined, and UK charities no limits
Gifts on marriage – offspring of donor £5,000
grandchild or further issue £2,500
any other person £1,000
Other reliefs include Business Property Relief and Agricultural Property Relief, where a percentage reduction in the transferred value is granted, Quick Succession Relief, where a recipient dies shortly after receiving a transfer, Growing timber election and transfers returned.
Wills & Taper Relief on death
This is a main area for planning to reduce/avoid inheritance tax. Even with the changes to the tax system eroding the benefits of the potential reliefs action can still be taken.
Many spouses have wills that leave all assets to the surviving spouse on the first death. Each spouse has the ability to benefit from a large lifetime exemption (see “Rates of tax” above) but, if the exemption is not used efficiently at the first death, financial benefits will be lost forever. The result can sometimes be large amounts of tax being paid on the second death that could have been avoided. In most cases it is now possible for all or part of the “nil rate band” to be transferred to the surviving spouse if not used fully on the first death. However, even this is not as simple as it sounds. There are restrictions and requirements involved.
Appropriate action is needed to ensure the wills are drafted with tax planning in mind particularly to keep this exemption.
If death occurs before a will can be changed it may be possible for all beneficiaries to agree to a Deed of Family Arrangement. This, in effect, rewrites the will in arrears. There are time limits and other legal considerations to this in respect of which it may be appropriate to seek advice from a solicitor (or other legally qualified source). NOTE: There is much speculation that the Deeds of Variation tax planning tool will be cancelled out by new legislation. This appears to be under review by the Revenue.
Taper relief on death
As indicated above, any tax paid on a lifetime gift is calculated at half the full death rates.
If the donor dies within seven years of the transfer the transfer will be charged to additional tax as if it were still in the estate at death.
The following scale then applies to arrive at the extra tax due:
Time from transfer to death tax due
Less than 3 years 100%
Over 3, less than 4 years 80%
Over 4, less than 5 years 60%
Over 5, less than 6 years 40%
Over 6, less than 7 years 20%
Tax is calculated at full death rates but the tax paid on the original transfer is then deducted. The result is the extra amount payable.
This additional tax is payable by the recipient of the original transfer but, if the tax at full rates is less than the tax paid originally, no refund is made.
WARNING: if a gift escaped tax when made, it may still be charged FULLY to inheritance tax, without reduction, if death occurs inside 7 years.
Some thoughts on changing from joint tenancy to Tenants in Common
There has been much talk about the benefits of transferring ownership of jointly owned assets into Tenants in Common ownership particularly in the case of the family home.
There is clear potential for tax saving here. If a property is owned by a married couple under joint tenancy then, on the first death, property passes straight to the surviving spouse. This is without any IHT charge but also without the benefit of the deceased’s “exempt” amount. In consequence, on the survivor’s death, the whole property falls into that estate and is charged to IHT with only the benefit of one “exempt” amount.
If the ownership was as Tenants in Common then each spouse could leave their share of the property to, for example, their children (taking care to ensure the surviving spouse’s rights to total occupancy during their life). This would mean the couple’s estates would benefit from using both “exempt” amounts.
On the other hand there are also potential pitfalls both financial and non-financial.
How does the surviving spouse feel about one half of their home being in the ownership of their offspring? What happens in the event of a serious family fall out? What happens if the offspring is sued for divorce and the half share in this property forms part of the “assets” to be distributed in the divorce? Not nice.
Another option would be to consider the creation of “nil rate band” discretionary trusts. The trustees would own the property interest so the trust assets would stay outside the estate of the surviving spouse who, with the offspring, are the trust beneficiaries. Legal advice will be necessary here on the drawing up of such trusts and the impact of changes brought about by legislation in recent years.