IHT GUIDE Inheritance Tax Guide 2013/14 1
Introduction From 9th October 2007, it is now possible for spouses and civil partners to transfer their nil rate band allowances so that any part of the nil-rate band that was not used when the first spouse or civil partner died can be transferred to the individual s surviving spouse or civil partner for use on their death. If you have an estate valued at more than 325,000 (single person 2013/14) / 650,000 (married or civil partnership in 2013/14) you may be concerned about Inheritance Tax (IHT). We suggest you ensure that your Will is up to date and reflects your wishes and you find out whether setting up trusts would be of benefit. I can help you to achieve the above as well as offer further solutions to reduce your exposure to Inheritance Tax. So if your home alone is worth around 325,000 or more, inheritance tax will almost certainly fall due on your estate. Furthermore, cash deposits, directly held shares, securities and ISAs account for nearly one half of financial assets in estates where inheritance tax is payable. So it is not just the super rich who need to consider inheritance tax planning with their financial adviser. Many ordinary families will lose a substantial slice of their assets if they do nothing. What is IHT? Inheritance Tax is a tax that may be charged on a transfer of value from one person (the donor) to another (the donee); at the time of the transfer; upon the death of the donor, or; as a consequence of the actions or inactions of the donee. The death of a person will cause them to be treated as if they had made a transfer of value equal to the value of their entire estate immediately before their death. Many people feel they do not need to worry about inheritance tax. It is true that no liability arises if the estate on death is less than the nil-rate band ( 325,000 single person 2013/14) 650,000 married or civil partnership in 2013/14) or where the estate is left to an exempt beneficiary, such as a surviving spouse, civil partner or a charity. However, as personal wealth and property values increase, more and more people need to consider estate planning. So what can make up your estate? Your home and furniture Jewellery and artwork Life Insurances Savings & Investments Land Car Holiday home (in UK and abroad) Inheritance tax is a significant source of taxation and the rate charged on death is currently 40%. Take the example of a single person, leaving a taxable estate of 700,000. The tax payable amounts to nearly one quarter of the gross estate on death. Taxable Estate 700,000 Less nil rate band ( 325,000) Taxable Estate 375,000 Inheritance Tax @ 40% Available to beneficiaries 150,000 550,000 This means that if the estate is left to the children then each receive little more than HMRC. So what can you do to reduce the taxman s slice? See the back page of this guide. 2
IHT GUIDE Make a will The first step in inheritance tax planning is to make a will. Without a will, your estate will be subject to intestacy rules, which could mean that the things you leave behind do not go to the people you would have chosen. If you make a will then there may be less tax to pay. The best way to make a will is to seek expert advice from a lawyer or a will writing specialist. You need to consider who you wish to receive items from your estate. A will can be altered once death has occurred, but only with the agreement of all the beneficiaries affected. This is a complex area and should not be seen as a substitute for tax planning. Professional advice must be sought. Wills should be reviewed regularly to ensure they are still reflecting your wishes and circumstances and to ensure the will meets your requirements. There are a number of exemptions that could be used to immediately reduce that value of your estate. If used correctly they are the most efficient way to reduce any inheritance tax bill. If you can afford to gift some of the assets you own it may be possible to reduce the size of your estate, which could immediately reduce your potential inheritance tax bill. MAKE USE OF EXEMPTIONS One of the simplest solutions is to give your assets away, however, gifts will only avoid inheritance tax if they meet two conditions; they must be made without any strings attached and you must survive seven years. It would not, therefore, be acceptable to the taxman if you simply gave your house away, but continued to live in it, unless you pay a market value rent to live in the property. It is not all bad news in respect of gifts made within seven years of death. Such gifts are called Potentially Exempt Transfers and are subject to a reduced sliding level of tax. In addition to the seven year rule, a number of further exemptions are available. Years between transfer and death These include: Percentage of tax charged (taper relief) 0-3 100% 3-4 80% 4-5 60% 5-6 40% 6-7 20% All assets transferred between UK domiciled spouses or civil partners are free from inheritance tax. From 9th October 2007, it will be possible for spouses and civil partners to transfer their nil-rate band allowances so that any part of the nil-rate band that was not used when the first spouse or civil partner died can be transferred to the individual s surviving spouse or civil partner for use on their death. An amount up to 3000 given away each tax year, which is commonly known as your annual exemption allowance. Any unused allowance can be carried forward one year. Gifts you make as part of normal expenditure out of income such as regular payments for a gifted life assurance policy. 5000 for your children s marriage/civil partnership, given either to your child or to their prospective spouse/ partner. 2500 for your grandchildren s marriage/civil partnership, given to either party. 1000 to anyone else getting married or entering a civil partnership. Payments for the maintenance of your spouse/civil partner, ex-spouse/civil partner, dependent relatives and usually your children who are in full-time education or under 18. Individual gifts not exceeding 250 to each person in any one tax year. Gifts to charities, the National Trust, National Museums, registered housing associations and political parties are exempt from IHT. More than one exemption can be used at the same time. For example; you could give 8000 to your child when they get married:- 5000 would be exempt as a gift to your child on their wedding and the remaining 3000 could be your annual exemption allowance for that tax year. 3
Are there any tax reliefs available? Depending upon your own circumstances part of your estate may be eligible for tax relief. For example, if you are transferring a business, tax relief is available if you have owned the business for at least two years and providing that business is not an investment company. It is possible for this exemption to be as much as 100% for sole traders and partnerships, although only assets that are predominately used, or will be used, for business purposes are eligible for exemption. In addition to sole traders and partnerships, business property relief is available on unquoted shareholdings as well as farms, agricultural land and woodland. You must have owned the farm for at least two years or owned a share in it for at least seven. TRUSTS There is often a mystique surrounding trusts. Put simplistically, a trust is a legal arrangement where you choose a third party (called a trustee) to hold some of your assets for someone else (called a beneficiary). If structured carefully, trusts can assist in reducing or eliminating your inheritance tax liability. Some trusts involve making a gift, which will reduce the value of your estate. Like any other gift, not covered by one of the exemptions mentioned, the assets placed into certain trusts are considered to be a potentially exempt transfer. If you survive seven years there will be no inheritance tax to pay on the value of the gift. One advantage of using the trust is that it allows you to retain some control over the asset you want to gift. Examples of common trusts Interest in possession trusts Nil-rate band trust/will trust Probate trust Loan trust Discounted gift trust Gift trust Trusts are complicated and you should speak to us and we will advise you on which trust, if any, would be best for your needs. Making the decision of which route to take is not straightforward and is very much dependent upon your requirement for access to income and/or capital. You will notice, from the preceding pages, that the more the investor is prepared to sacrifice in terms of access, the more effective the plan is for reducing the IHT bill. We can give you specific advice on what the best options are for you. We can also carry out periodic reviews with you. Investing a little time and thought now means you could rest easy, knowing that the people you want to leave your possessions and wealth to will not be faced with an unexpected tax bill at a difficult time. No one wants to think about what will happen when they die. This is probably why too few of us make wills or take a serious look at our money and the financial impact our death will have on our families. Planning to reduce a potential tax bill on your death need not be a difficult process. With a little planning now, you can save your family a lot of financial pain later and ensure that they benefit from your estate, not the taxman. From March 2006 the following changes have taken place: The mainstream inheritance tax regime for discretionary trusts means that when a trust is created there is an immediate charge to tax at 20% on lifetime transfers above the nil-rate band ( 325,000 single or 650,000 married/civil partnership for 2013/14). A periodic charge applies (maximum 6%) every 10 years on the value of the trust assets above the nil-rate band and an exit charge applies when capital is distributed to beneficiaries between 10 year anniversaries. 4
IHT GUIDE Life Assurance A life assurance plan, placed under trust, is not used to reduce the inheritance tax bill but can be used to pay the bill on death. Provided the plan is placed under a suitable trust, it does not form part of your estate and the money is available immediately upon death. The plan has to be set up carefully and is something we can help you with. If you make a mistake, you could actually make the inheritance tax bill even bigger than it would have been without the plan. Any payout which is over the nil-rate band could be liable to a 6% tax charge, if you are unlucky enough to die, or are seriously ill, on the 10th anniversary of the trust. Existing life assurance policies written under trust will not be affected by changes introduced in March 2006. If policy terms are varied, the trust will still be protected provided the original terms of the policy allowed for the specific change. Changing the beneficiaries on an existing flexible trust, after 6 October 2008 (other than as a result of the death of the default/named beneficiary) will bring the trust into the new regime. Example: Henry dies on 14th April 2007 with an estate of 450,000 which he leaves entirely to his spouse Jane. Jane dies on 17th June 2011 leaving an estate of 675,000 which she leaves equally between her two children. When Jane dies the nilrate band is 325,000. As 100% of Henry s nil-rate band was unused, this means an amount chargeable to IHT of 25,000 on Jane s death, and a tax bill of 10,000. As Jane required Henry s money to provide her with income after his death, he did not wish to pass any of his assets to his family in his will. Henry and Jane took out a joint life assurance policy for 10,000 payable into a suitable trust for their family on the second death. On the death of the last survivor, this money was paid to the family free of tax and was used to pay the inheritance tax bill of 10,000 due on the estate, leaving the family with the full benefit of their inheritance. Policies can be written under a bare trust and are unaffected by the changes, although these are inflexible and you should seek specific advice from us. Don t let the taxman take your hard earned cash! Inheritance Tax planning With careful planning, you can ensure that your inheritance tax bill is either reduced or completely wiped out. Your estate passes to your beneficiaries rather than the taxman! Tax planning need not mean giving up access to all of your money. Harley Financial Services Limited is authorised and regulated by the Financial Services Authority. Not all tax planning services are regulated by FSA. This guide is for information only. It is not intended as a substitute for legal or other professional advice and should not be considered as personalised advice. You should seek independent advice from a qualified will writer, solicitor or financial adviser. Taxation levels, bases and reliefs quoted are correct as at April 2009 and the value of tax benefits depends on individual circumstances. You should bear in mind that the Government may alter or withdraw these benefits without notice. The information contained in this report is based on our understanding and interpretation of current regulations. Any examples used are for illustrative purpose only. Use the table on the back page to work out your potential liability to IHT. 5
What will the tax man receive from your estate? Use the following table to work out your potential liability to inheritance tax, on second death, if you do nothing. Assets Yours Partner Joint Properties Vehicles Savings Policies Pension pot Investments Valuables Contents Other TOTAL Liabilities Mortgages Loans Credit cards Overdraft Funeral Other TOTAL Total Assets Total Liabilities Left over 1 2 3 Total Value (1+2+3) Deduct Taxable Estate Tax @ 40% Please note: Compliance First nor any associated parties shall not be held liable for any errors contained within. 6