IHT Planning Matters Limited

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1 IHT Planning Matters Limited Welcome to the 8th three monthly Newsletter Regular readers of our Quarterly Newsletter will have received issues periodically from July 2013 to the last in May The intention in such Newsletters is to provide a sort of pot pourri of issues relating to IHT for the practitioner/professional introducer. In usual circumstances therefore, the next Newsletter would be published/circulated in September. However, such is the impact for IHT of the proposals set out by the Chancellor in his Budget Speech presented on 8 th July that we have decided on this special issue, highlighting the scope of the new proposals. As always, your feedback would be most welcome though any specific queries on the impact of the new provisions to a particular client s circumstances must await ratification of the new provisions in the Finance Act in due course. The presentation as in the past of other (wider) IHT-related issues will be recommenced in the next edition. If you would welcome copies of the first seven editions, please just ask or visit our website ( where they are also available. The main residence tax free threshold It is usually the case that the content and impact for Inheritance Tax (hereafter IHT ) of the occasional Budget Speeches presented by the Chancellor are a cause within IHT Planning Matters Limited of concern and trepidation; what measures will be introduced that might cut across our planning recommendations? In the case of this Budget Speech (the first Tory Budget presented since 1996), everything (or mostly everything) was revealed weeks before so there were few surprises. Issue 8 July 2015 Ingleside House 43a Upper Selsdon Road South Croydon Surrey CR2 8DG Phone: Mobile: Fax: peterlegg@ihtplanningmatters.co.uk This issue: Welcome 1 The main residence tax free threshold 1 The non UK domiciliary 3 Other provisions 4 IHT digital service 5 Our usual modus operandi 5 Peter Legg s future seminar commitments 5 The most important new provision for IHT concerns the increase in the taxable threshold with effect from April 2017 to ½ million per person to the extent the liability relates to the matrimonial home. It is not, as widely reported, a mere increase in the taxable threshold from 325,000 to 500,000; it is relevant only where the taxable estate includes the family home and is thus of no relevance to unmarried persons or estates where the family home has been sold. The main residence nil rate band will thus affect individuals with direct descendants who have an estate including a main residence with total assets above the existing IHT threshold of 325,000 (this threshold frozen incidentally until the end of 2020/2021). The new measure introduces an additional tax free threshold when a residence is passed on death to a direct descendant. This will be 100,000 from 6 th April 2017, 125,000 from 6 th April 2018, 150,000 from 6 th April 2019 and 175,000 from 6 th April It will then increase in accordance with the Consumer Prices Index from 2021/22 onwards. Any unused band will be available to be transferred to a surviving spouse or civil partner. The additional tax free threshold will also be available when a person downsizes or ceases to own a home after 8 th July 2015 and assets of an equivalent value up to the value of the additional tax free threshold are passed on death to direct descendants.

2 Page 2 There will be a tapered withdrawal of the additional tax free threshold for estates with a net value of more than 2 million; this will be at a rate of 1 for every 2 over this threshold. It appears then that it is the value of the estate in those circumstances which will affect the claim for the additional tax free threshold rather than just the value of the property. The new measure affects the relevant transfers on death on or after 6th April It will apply to reduce the tax payable by an estate on death; it will not apply to reduce the tax payable on lifetime transfers which become chargeable as a result of death. The main residence tax free threshold will be transferable where the second spouse or civil partner of a couple dies on or after 6 th April 2017, irrespective of when the first of the couple died. Legislation will be introduced in the Finance Bill 2015 to provide for an additional main residence tax free threshold for an estate if the deceased's interest in a residential property which has been a residence at some point and is included in their estate is left to one or more direct descendants on death. The value of the main residence tax free threshold for an estate will be the lower of the net value of the interest in the residential property (after deducting any liabilities such as a mortgage) or the maximum value of the threshold. 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. A direct descendant will be a child including a stepchild, adopted child and foster child of the deceased and their lineal descendants. The claim will have to be made on the death of a person's surviving spouse or civil partner to transfer any unused portion of the additional tax free threshold unused by the person on their death in the same way as the existing tax free threshold can be transferred. In addition, legislation in Finance Bill 2016 will provide that where part of the main residence tax free threshold might be lost because the deceased downsized to a lower value residence or had ceased to own a residence on or after 8 th July 2015, that part will still be available provided the deceased left the smaller residence or assets of equivalent value to direct descendants. However the total amount available will not exceed the maximum available main residence tax free threshold. The technical details of how this will work will be the subject of a consultation, to be published in September As we have said before in a round robin letter to our clients (in the run up to the recent General Election): The Conservative Party has a very slender lead of 12 seats; it is most unlikely at least until later in its five year term to want to introduce further radical tax reform especially so far as IHT is concerned given that this would benefit less than 10% of the population and risk heavy criticism of tax reform for the limited few. David Cameron promised to the extent we can rely on promises in the run up to an Election, politicians have been known to promise almost anything to get elected! no tax increases for the five year term. That will therefore make it fiscally difficult if the government is to continue with its aim to reduce/eliminate the budget deficit of 83 billion to make further tax cuts. The government will last five years. One would (earnestly) hope that your high net worth clients will survive that term so it would be short termism in the extreme were they to make decisions based on a (revised) set of rules that are likely to have only a short shelf life.

3 Page 3 The non UK domiciliary At the present time, ie., before the Chancellor rose to his feet, a UK resident and domiciled person was taxed on their worldwide income and gains and their estate wheresoever situate was fully liable to UK IHT. A non UK domiciled person who had not been resident in the UK for more than 17 out of the last 20 years was able to claim exemption from UK IHT on all assets situate other than here. It was announced in the Budget Speech that the government intends to abolish non UK domicile status for certain long term residents from April The new rules will apply only where an individual has been resident for at least 15 (not 17, as before) out of the last 20 tax years. Such individuals will thereafter be treated as deemed UK domiciled for all tax purposes, including IHT. Where a non-domiciled person leaves the UK for more than five years, the clock will be re-started should they return. In addition, those persons who have a UK domicile of origin (from the date of their birth) will revert to having a UK domicile for all tax purposes (including IHT) whenever they are resident in the UK, even if they have under general law acquired a domicile in another country. Finally, it was announced that the government will legislate to ensure that, from April 2017, IHT is payable on all UK residential property owned by a non domiciled person, regardless of their residence status for tax purposes, (as now) but including property held indirectly through an offshore structure such as a trust or partnership. The intention is to introduce an IHT charge on the value of UK residential property owned by a company where a chargeable event occurs. Such events are to include the transfer to a trust or distribution by a trust of the company shares, the ten year anniversary of the trust, the death of the individual who owns such company shares and the death within seven years of the gift of the company shares to another individual or where a donor benefits from such gifted property within seven years of death. It is anticipated that some non-domicilaries will wish to extract property from such a structure and the government will consider how to treat the costs arising from such transfers in their consultation towards the end of the summer. However, early review is highly recommended. However, US citizens and green card holders will continue to be liable to US tax on their worldwide income and gains regardless of how long they have been living in the UK. The abolition of non-domiciliary status after 15 years living in the UK will mean that UK taxation will also apply on an arising worldwide basis from that point. However, the foreign tax credit systems operating in each jurisdiction mean that, with careful planning, being exposed to worldwide taxation in both the UK and the US should not lead to a significant change in overall tax costs. Indeed, since the radical reform of the non-domiciliary rules in 2008, many long term American UK residents have chosen not to be taxed on the Remittance Basis to avoid paying the annual remittance basis charge (RBC) of (at least) 30,000. Despite the initial prediction of mass migrations of US persons following the introduction of these rules, no such exodus came to pass. We suspect a similar outcome this time around, especially given the increase in the RBC to 90,000 for 17 plus year residents announced in the December Autumn Statement (which will be redundant following the introduction of the new deemed UK domicile rule after 15 years). Careful planning and timing will be key for those exposed to worldwide US/UK taxation and some classes of investment will be less suitable than others from a tax perspective. It will be essential to establish which country has the primary right to tax an item of income and to pay that tax at the right time, so as to ensure the tax credit in the other location. With the rules set to be introduced in April 2017, there is still time to consider how best to minimise the impact of the new rules.

4 Page 4 Other provisions The simplification of IHT charges on trusts and to target avoidance through the use of multiple trusts. This applies typically on the death of a settlor where assets are added to a number of pilot trusts set up during lifetime. The new legislation applies to trusts created after 10 th December 2014 and also where additions are made on the same day to trusts created before. This measure will simplify the calculation of charges relating to trusts by removing the need to include non-relevant property in the calculation. The proposals also introduce new rules about adding property to relevant property trusts on the same day. The measures also include changes to the relevant property trust legislation to provide more certainty as to the effect of the legislation. A new section 62 of the Inheritance Tax Act will be introduced to ensure that where property is added to two or more relevant property settlements on the same day and after the commencement of those settlements, the value added to the settlement together with the value of the property settled at the date of commencement that is not already in a related settlement will be taken into account in calculating the rate of tax for 10 year charges and exit charges before the 10 year anniversary and for later exit charges. Where a claim for conditional exemption is made, the new legislation will allow the trustees to make a claim for exemption within two years of the 10 year charge arising. For settlements created by individuals before March 2006 giving themselves an interest in possession or to their spouse/widow/civil partner/surviving civil partner, section 80 is amended so that a qualifying interest in possession is substituted for an interest in position wherever it appears in the legislation. This will mean that where one party to a couple succeeds to a life interest to which their spouse or civil partner was previously entitled during the latter's lifetime and that interest is not a transitional serial interest then section 81 applies at that time, with the result that the settled property will be treated as being comprised in the settlement and therefore subject to the relevant property charges. Section 144 of the Inheritance Tax Act is to be amended so that the provisions of section 65 (4) which prevent a charge to tax arising in the first three months after the settlement commenced or within a 10 year anniversary shall not apply to appointments out of the property settled by Will. This will ensure that when an appointment is made within three months of the date of death in favour of the deceased's surviving spouse or civil partner, it can be read back to the Will and exemption under section 18 can be given. These are highly technical changes to the existing legislation, the impact of which is that trusts caught will be aggregated and treated as one for the purposes of calculating the 10 year IHT charge. The provisions were anticipated following an earlier consultation period. The new rules will not affect steps to minimise the 10 year IHT charge though use of multiple trusts as only same day additions would appear to be caught by the new rules. It is unclear whether or not HMRC will introduce further simplification measures on the IHT treatment of trusts, as a much more widespread reform was expected after the consultation process referred to above. There was no reference in the Budget Speech incidentally to a consultation on Deeds of Variation.

5 Page 5 IHT digital service It was announced in the 2014 Autumn Statement that HMRC will provide an online service in 2015/2016 for people to submit IHT accounts and that there would be various ensuing legislative changes, including changes relating to the rules on late payment interest and the instalment option interest provisions and clarifying the period from which interest is charged, with a view to aligning the treatment of interest and penalties for IHT with those for other taxes. These new provisions will apply to personal representatives and others settling the IHT affairs of a deceased person and to trustees. Our usual modus operandi Should we be invited to become involved in a new matter, we would suggest a meeting at the potential client s home or office or at the professional adviser s office so as to gather a comprehensive background and present a raft of planning ideas. We would anticipate charging a one off fee of 350 plus VAT for such a meeting and then setting that fee against whatever ongoing fee was then agreed for the entire exercise, including implementation. We are on a daily basis in receipt of s from other professional advisers raising IHTrelated queries. We are happy to deal with these whether or not they relate to a matter likely to go forward for no commitment. Should you or any of your colleagues have a current IHT prospect where you feel we might play a part, please ring Peter Legg on or send an (peterlegg@ihtplanningmatters.co.uk) and Peter will get back to you. Peter Legg s future seminar commitments th July - Foster Denovo, Bromley (IHT Planning) 23 rd July Collective Legal Solutions seminar, Sheffield (IHT Planning) 9 th September Mid Anglia CIOT (IHT Planning and the Use of Trusts) 17th September Prior Knowledge (IHT Planning) 2nd October Sussex Society of Willwriters, Haywards Heath (IHT Planning) 8 th October Collective Legal Solutions seminar, Leicester (IHT Planning) 13 th October Mercia, Dorking (IHT Refresher including straightforward Estate Planning Tips for General Practitioners) 3 rd November Offa Group (IHT Planning including the use of trusts) 12 th November CIOT North East (IHT Planning) nd June CIOT Essex (Succession Planning and the Family Company) Should you or any of your colleagues wish to attend any of these, we would be happy to put you in touch with the organiser.

6 Page 6 And finally... What topic would you want covered in the next (September) Quarterly Newsletter? Readers of this eighth issue are invited to suggest by a particular IHT topic or topics to be included in the next or future editions. If you have any comments both positive or critical or any observations on any of the articles covered here we would invite you to contact us on enquiries@ihtplanningmatters.co.uk. This feedback is warmly appreciated. Ingleside House 43a Upper Selsdon Road South Croydon CR2 8DG Telephone: Mobile: Fax: Website: General enquiries: enquiries@ihtplanningmatters.co.uk