Inherit, Inheritance tax, Uncategorized

No Inheritance Tax on estates worth up to £1 million? Not quite!

George Osborne announced the introduction of an additional Inheritance Tax (IHT) Nil Rate Band (NRB) for a person’s main residence in the Summer 2015 Budget. This was good news for with wealth tied up in their family home. The existing NRB of £325,000 per person or £650,000 per couple, on which 40% IHT is not paid, will remain the same. But from 2017/18, an additional Residence Nil Rate Band (RNRB) of £100,000 per person will be introduced, which will increase to: £125,000 in 2018/19; £150,000 in 2019/20; and £175,000 in 2020/21. In 2020/21, this means a house worth £1 million could be passed on tax free. But tax planning is still important, as there are a number of drawbacks you have to avoid in order to make sure you are eligible for the full amount.

Drawback 1 = you need to be married

Spouses* can inherit their other half’s share of an estate tax free so the NRB does not need to be used up. This means the deceased’s £325,000 NRB can transfer to the survivor, who will then have an IHT allowance of £650,000 when they die. The RNRB can also be passed on to the survivor so in 2020/21, this will equal £1 million. Unmarried couples do not have the right to pass on NRBs to each other.

Drawback 2 = only your children can benefit

Spouses who do not have children will miss out on the RNRB. The property must be passed to lineal descendants, such as children (including adopted/foster/stepchildren, children under a guardianship, and their direct descendants) and grandchildren, but not nieces and nephews.

Drawback 3 = the £1 million allowance does not apply now

The allowance will be phased in over the next five years so the £1 million will actually only apply in 2020/21.Drawback 4 = keep your wealth in your home

If you have a large investment portfolio and no house, you cannot benefit from the additional allowance, only the £325,000 NRB. But if your total estate is over £2 million, the RNRB will be tapered away. An estate with a net value of more than £2 million will see the band withdrawn at a rate of £1 for every £2 over the threshold.

Other points to consider

Trusts

The RNRB may be lost where, for example, the property is placed into a discretionary Will trust for the benefit of the children or grandchildren.

Downsizing

The family home does not need to be owned at death to qualify. This helps those who may have downsized or sold their property to move into residential care or a relative’s home. The RNRB will still be available provided that:

  • The property disposed of was owned by the individual and it would have qualified for the RNRB had they retained it;
  • The replacement property and/or assets form part of the estate and pass to descendants;
  • Downsizing or disposal of the property has to take place after 8 July 2015. But there is no time limit on the period between disposal and death.

Multiple residences

Only one residential property will qualify. It will be down to the personal representatives of the estate to nominate which one should qualify if there is more than one. A property which was never the deceased’s residence, e.g. a buy-to-let, cannot be nominated.

*For ease, spouse will refer to civil partner as well.

 

Advertisements
Inheritance tax, Tax planning

Season of Goodwill …. and Tax Planning Gifts to the Family

At this season of goodwill it is worthwhile also considering some tax planning. Why not surprise the family with a slightly more substantial gift this Christmas to assist with whittling away against your Inheritance Tax liability?

In general, an individual has an Inheritance Tax-free sum which they can dispose of on their death of £325,000 and for married couples this totals £650,000. Inheritance Tax is charged on your death not only on the value of your estate but on the value of any gifts made in the previous 7 years unless they are exempt. So why not make some exempt gifts?

An individual can give away £3,000 tax-free each tax year. In addition, an individual can give away any number of gifts of £250 to persons who have not received any part of the £3,000. Why not broaden the smile on your grandchildren’s faces by giving them £250 each this year?

Finally, a less well known exemption is when you make gifts out of your surplus income. Regular giving to family out of your surplus income will also be exempt. This applies even if the sums are quite high as long as it can be shown that you are giving away surplus income and not dipping into your capital.

All in all this may well be food for thought. There is no substitute for getting professional advice on the subject (and this email is only a taster – it is always hard to keep the subject of food away from Christmas-related matters!) but why not give it some thought?

Uncategorized

Someone has died. What do I do?

It can be overwhelming when someone close to you dies. However, at the same time you know that you need to make important decisions. Some of the steps below are matters that you will want to deal with yourself, others you may want to consider instructing a solicitor:

  1. Find the last Will:

If the deceased left a Will it can usually be found amongst their personal belongings or with their Solicitor/Bank. If there is a Will, the first thing to check is for requests in relation to funeral arrangements.

  1. Legal responsibility:

If there is a Will, there will be named Executors who have legal authority to deal with the Estate (property, possessions and money).

Where there is no Will the law (Intestacy Rules) sets out how the Estate will be distributed and usually the nearest relative takes legal responsibility becoming the Administrator.

Whether or not there is a Will, the person with legal responsibility will be held personally liable in law if the Estate is not dealt with properly.

  1. Register the death:

Death should normally be registered by the person taking legal responsibility within five days of death. Contact the Local Register Office. They will help with the process.

  1. The funeral:

This is usually arranged by the person taking legal responsibility Funeral directors will help with all arrangements.

The person making the arrangements will be responsible for the costs but where the deceased left sufficient money these costs will be met by the Estate out of the deceased’s bank account.

  1. Probate – what does it mean?

In order to deal with the assets, it is often necessary to obtain authority of the court. The court will issue a document to the Executors called “Probate” if there is a Will. If there is no Will, the closest relative will obtain “Letters of Administration”. These documents allow the Executor or relative to sell the assets of the deceased.

  1.          Can I manage without Probate?

If the estate is small and none of the financial institutions require Probate or Letters of Administration, then it is possible to deal with the Estate without applying to the court. The financial institutions have their own procedures which should be followed.

  1. Tax?

Usually there are two taxes which are relevant, Income Tax and Inheritance Tax.

There may be a final Income Tax return to complete for the deceased for the period from the preceding 6 April to the date of death.

Inheritance Tax is a tax which is payable on the value of the estate at the date of death. The current rate of tax is 40% of the value of the estate above the Nil Rate Sum, which currently is £325,000. (However it is also possible to use up any unused Nil Rate Sum from a deceased spouse’s estate so the tax free sum available is often much higher). For large estates, a detailed account must be submitted to the tax office and any tax due must be paid before the court issues Probate.

For further information or advice, contact James Shingleton, or another member of our elderly client team on 033 3344 9600, or complete our contact form.

 

Uncategorized

What does Inheritance Tax mean?

The tax year nears its end so have you used your annual gift exemption for Inheritance Tax (“IHT”) this year?
 
What does that mean?
 
Well….. IHT is the tax which applies to your estate on death and it’s 40% on the value above a threshold figure, currently £325,000. There are certain exemptions e.g. inheritances to spouses and charities. Unfortunately IHT also catches the value of gifts made in the seven years prior to death, unless those gifts are exempt. So someone leaving all of their estate to their favourite nephew Jonny on their death-bed doesn’t save tax.
 
However each person can give away £3,000 to the family (or others) each tax year and this is always exempt. You can also catch up on the previous tax year’s allowance if you didn’t use it last year. There are other gift exemptions which may be useful. The £3,000 figure may not sound much (in fact it hasn’t changed for many years) but you might as well use it.
 
So as the end of the tax year approaches don’t just think about topping up your ISA – give some thought to estate planning as well.