IHT reliefs and exemptions. 14 November Anthony Nixon. Partner Page 1 Irving Mitchell Private Wealth

Transcription

1 IHT reliefs and exemptions 14 November 2017 Anthony Nixon Partner Page 1 Irving Mitchell Private Wealth

2 What I aim to cover today What reliefs are available on lifetime and on death? Residence nil-rate band Nil rate band discretionary trusts IHT charity reliefs

3 The Tax Inheritance tax (IHT) is charged on the value of assets on death Also on lifetime gifts to some trusts Also within the lifetime of some trusts which have their own regime

4 Rates of IHT Main rate of tax is 40% applies both to the value of the estate on death and to gifts in the seven years before death Value under the nil rate threshold (currently 325,000) is taxed at 0% Lifetime rate of tax on gifts to most trusts is 20%. These trusts pay ten yearly charge up to 6% These trusts pay an exit charge at a fraction of 6% These trusts can benefit from the nil rate threshold under which tax is paid at 0%

5 Main exemptions and reliefs (1) Lifetime gifts PETs 250 3,000 On marriage Normal expenditure out of excess income Maintenance of donor s family

6 Main exemptions and reliefs (2) Type of donee lifetime/death Spouse/civil partner Charities Political parties National museums and art galleries Type of asset lifetime/death Business property Agricultural property Heritage assets Excluded property

7 Main exemptions and reliefs (3) Extra allowances (at 0%) at death only NRB TNRB RNRB TRNRB

8 TRNB and RNRB Extra allowances (at 0%) at death only TNRB - transferable nil-rate band + 325,000 RNRB residence nil-rate band + 100,000 this year Rises by 25,000 yearly to reach 175,000 from 6 April 2020 Tapers on estates over 2m TRNRB - can be increased or doubled for widow/widower whose spouse did not use it No spouse who died before 6 April 2017 could use it So most survivors of a couple dying now have double RNRB

9 RNRB the magic million In 2020/21 reach the magic 1m for spouses! RNRB of 175K + NRB of 325K = total 500K each So a married couple (including civil partners) get total of 1 million free of IHT Price for this: NRB frozen at 325K to 2020/21 Already frozen eight years + four more years = NRB will be frozen for total of 12 years! 9

10 RNRB: Trusts and s.144 S.144 can be used to re-write will/intestacy within 2 years of DoD So that read back into the will etc Provided no IPDI arose in meantime If was an IPDI on death, income beneficiary would need to vary entitlement under s.142 DoV You can use IHTA s. 144 to put right a trust through use of:- S. 32 Trustee Act 1925 power of advancement, or Extended s.32 or express power of advancement Need to advance out within 2 years of DOD absolutely or on appropriate trusts so that qualifies for RNRB Page 10 10

11 RNRBs: Wills for unmarried couples If want survivor to have right to live in home, no RNRB on first death E.g. When L/I to partner, no RNRB and no spouse exemption So waste say 100k RNRB in 2017/18 & if 1 st to die was widowed, may waste 2 x RNRB On second death L/I to family of 1 st partner = not gifts to stepchildren So no RNRB when capital goes to those children The only RNRB on 2nd partners gift to his/her own children Page 11

12 RNRB Example - sisters sharing home Lily is widowed & lives with her unmarried sister Tillie Lily wants Tillie to have benefit of their 300K home No RNRB on any kind of gift to Tillie No RNRB when Tillie dies & property passes to Lily s children Gift of IPDI to Lily s children, with power to benefit Tillie Page 12

13 RNRB downsizing provisions Will be backdated to cover any changes since Will apply where deceased: 1. Sold and downsized to lower value property Provided new property and equivalent value of lost RNRB left to descendants = low-value death interest in home Cf. no residential interest at death : 2. Sold only residence and moved to rent or care home Provided sale proceeds or equivalent value left to descendants 3. Gifted property since and assets of equivalent value left to descendants Page 13

14 Planning to avoid losing RNRB estate over 2m For moderately wealthy, see if can plan to reduce below 2m Review whole use of assets including pension funds Pensions in trust are not part of taxable estate for 2m limit So consider spending other capital in estate to meet living needs, keeping as much as possible of pension with favourable tax treatment Planning between spouses needs review re what one passes on Watch risk capital passed to 2 nd spouse is caught twice 1 st spouse s estate over 2m, 2 nd estate includes some from 1 st, also 2m+ Page 14

15 RNRB 2M limit - lifetime gifts not counted Doesn t count lifetime gifts Can do death bed planning to reduce estate below 2m E.g. Consider gifting property and paying full market rent So no GWROB Little used exemption need to find rent and income tax paid when received But if client terminally ill, could be effective -pay for just a short period Page 15 15

16 RNRB 2M limit - planning values of estates Roger dies in 2021 leaving his whole estate (value 1.2M, including his 500K share of their home) to his wife Sally When Sally dies, a few years later, her estate is worth 2.7M (including whole house, now worth 1.4M) no RNRB If Roger s half of house had gone to children perhaps flexible IPDI trusts, with Sally still beneficiary No IHT on Roger s death 325K NRB + 175K RNRB Sally still has 175K RNRB for her estate Page 16

17 RNRB 2M limit : excluded property Estate is the estate for UK IHT purposes, so excludes e.g. excluded property trusts which remain excluded property after changes now taking effect -6 April 17. Non-dom clients, who keep assets outside UK, are only liable to IHT on their UK situs assets unless they become deemed domiciled for IHT purposes So the 2m threshold would apply to the UK estate only So can disregard the value of the excluded property Page 17 17

18 Nil Rate-Band Discretionary Trust NRB D/T s a major tax planning vehicle until Oct 2007 To get 2 bites of the cherry -2 NRB s rather than waste one. Introduction of transferable NRB means much less need Some clients & solicitors see as superfluous But still a real value for the right clients /potential estates So encourage use of NRB D/T by appropriate clients We tell clients not to remove them from existing wills Page 18

19 RNRB Planning remarried widows Denis and Pamela were each widowed in early 2000s, married 2012 Both their late spouses set up NRB trusts, fully using NRB Live together in Denis s house, worth 500K Pamela s old home, worth 400K, is let out 450K in total savings First to die should leave 350K slice of house to own children So can use their 2 RNRB including the C/F RNRB from late spouse Second to die has own 350K RNRB and 650K NRB and TRNB No IHT to pay 4 x RNRB between the 2 as both widowed Page 19

20 NRB D/T s : to use a 3 rd NRB Possibility of 3rd NRB if widow(er) remarries Max of 2 NRBs in one estate Deceased s own & a total of 1 transferable! So ensure NRB used on death of 1st spouse Deed of variation may be useful Page 20

21 NRB D/T s: more planning opportunities NRB 325K until 2017/18 i.e. 3 more years = total 9 years! Assets in an NRB may grow -short term -more than NRB Assets likely to increase significantly in value Especially land with development potential E.g. put ransom strip into trust at 50K Say worth 1m in 10 years, take out of D/T before 10 year anniversary with 950K gain free of IHT can hold over capital gain to beneficiaries Page 21

22 NRB D/T: more planning opportunities Business & Agricultural Assets qualifying for BPR / APR Joint assets whose combined value is more than value of 2 separate parts e.g. shares in family company not qualifying for BPR & Jointly owned property Page 22

23 NRB D/T: Joint property discount example Cottage = 760K when H dies W dies in few years: property +30% = 988K and NRB + 30% = 420K (a) If H s 1/2 share to W, on W s death 2 NRBs = 840K but 40% IHT on 148K = 59.2K (b) Cf. H s 1/2 to NRB D/T = 15% discount on 1/2 share when transfer to D/T, i.e. 380K 323K H s 1/2 all to D/T On W s death ½ = ( 988K 2 10%) = 444.6K, only 24.6K over NRB x 40% = 9,840. IHT saving = 49, % of value of house taken out of IHT. Page 23

24 NRB D/T: Assets qualifying for BPR+APR Maximise value of APR & BPR when use D/T BPR at 100%: 325K + assets qualifying for APR/BPR to trust Residue on life interest trust for surviving spouse Two years to see if full relief given If not, move assets into IPDI for spouse Shares or business can be sold after death with no clawback of relief If business is kept in family, is double dip available? Page 24

25 What is a charity? Traditional rules: Relief of poverty Advancement of education Advancement of religion Other public benefit purposes To obtain tax reliefs Finance Act 2010 requires: Subject to court jurisdiction in EU or in Norway, Iceland or Liechtenstein Registered in that jurisdiction Fit and proper managers Page 25

26 Politics and charities An organisation cannot be a charity if it has a political purpose A charity can carry out political activity if it facilitates or supports the delivery of its charitable purposes May also carry out non-political campaigning activities if this clearly is a means of furthering its charitable purposes Anti-vivisection campaigns Might 1947 case now be decided differently? Advancement of animal welfare is now a charitable purpose Page 26

27 A charity in Jersey Mrs Beryl Coulter died in 2007 had lived all her life in Jersey Estate exempt from IHT, except nearly 2M investments in the UK Nearly 600K IHT if taxable Trust for charitable purposes Restriction on freedom of movement of capital Page 27

28 What should Mrs Coulter s executors have done? Within the two years after Mrs Coulter s death: form and register UK charity to carry Mrs Coulter s wishes into effect variation of Mrs Coulter s will under IHTA section 142 in favour of new UK charity Page 28

29 Mixed charity and non-charity gifts by will Florence has estate of 2.4 M Leaves ¼ to nephew Jim and ¾ between 3 charities IHT on ¼ - 600K is 110K Without special provision this is all payable by Jim who gets only 490K for his ¼ while the charities each get 600K Page 29

30 Mixed charity and non-charity gifts by will (2) If Florence gives Jim a gift of 600K and the rest of her estate to the three charities Jim s gift will normally be free of tax so that: It is grossed up to 783,333 IHT is 183,333 The charities each contribute 61,111 to the tax bill Much more than the 110,000 Jim would pay on a gift subject to tax Page 30

31 Mixed charity and non-charity gifts by will (3) Better equality would be to give 717K to Jim, subject to its own IHT IHT is then 156,800 Jim gets 560,200 Charities each get 561,000 HMRC still get 46,800 more than first alternative Tax is not fair Tax does not promote fairness Page 31

32 10% to charity IHT relief Applies to reduce IHT on death only At least 10% of taxable estate must be given to charity IHT on rest of estate reduces to 36% If a will gives 4% to charity it is worth giving 10%

33 10% to charity relief: 10% of what? Baseline amount is: net value of estate less Any available nil rate band incl any transferable NRB All exemptions & reliefs on death other than charity relief Page 33

34 10% to charity relief: example (1) Phyllis dies with an estate of 625,000 Her NRB = 325,000 Gives 30,000 to Pallant House This is 10% of taxable 300,000, so IHT on remaining 270,000 is 36% = 97,200 Leaving her nephews with 497,800 Page 34

35 10% to charity relief: example (2) Ronald dies with an estate of 625,000 His NRB = 325,000 Gives 12,000 to Chichester Festival Theatre Only 4% of taxable 300,000 IHT on remaining 288,000 is 40% ( 115,200) Leaving his children with 497,800 Page 35

36 10% relief Charity % Taxable Rate Family 12,000 4% 288,000 40% 497,800 15,000 5% 285,000 40% 496,000 18,000 6% 282,000 40% 494,200 21,000 7% 279,000 40% 492,400 24,000 8% 276,000 40% 490,600 27,000 9% 273,000 40% 488,800 30,000 10% 270,000 36% 497,800 Page 36

37 Varying an inheritance Within two years of death Prescribed form with specific reference to IHTA s142 Can increase both gift to charity and family s inheritance If no gift to charity in will, every 1,000 in 10% gift costs family 240 Page 37

38 Any questions? Thank you for listening Anthony Nixon This material is for guidance and is not a substitute for legal advice Page 38

39 Page 39