INHERITANCE TAX PLANNING
With the increases in house prices seen over past years more and more people are becoming aware that inheritance tax which is at a rate of 40% could affect them and their family.
Tax planning strategies over the last 20 years or so, which enabled individuals to reduce their exposure to inheritance tax on their family homes, eventually pushed the Revenue into introducing the Pre Owned Asset charge. They introduced an income tax charge to deal with an inheritance tax issue. It basically taxes any benefit that an individual receives on the use of an asset that they have given away. This applies to gifts of assets since 1986 and gifts of cash since 1998. It is important that inheritance tax advice is sought from an advisor who will consider whether their advice is caught by these rules. If you have made any gifts which could be caught please seek advice.
Many individuals do not even have a will in place. This means that they would die intestate. As such their estate will not necessarily pass to their spouses and children but instead other family members such as siblings and parents may benefit.
The pre-budget report 2007 means that a lot of married couples/civil partners will have the use of both nil rate bands which total £600k and that will mean that a lot of couples will not need to implement tax efficient wills and sever the tenancy of their homes anymore. In my opinion that is a welcomed change from Darling. Couples with estates exceeding £600k will still benefit from inheritance tax planning.
Grandparents should always consider how to leave their estate to families. Although they themselves may not have an inheritance tax issue, their wealth when combined with that of their children could create a problem for their children. Alternatives to passing the wealth directly to children may need to be considered.
A lot of court cases have also looked at the inheritance tax treatment of farming estates. Many people believe that farmers benefit from agricultural property relief of 50% or 100%. Although that can of course be true case law illustrates the fact that it is becoming more and more difficult to claim that relief unless appropriate planning is undertaken before it is too late.
For individuals with businesses, a beneficial inheritance tax relief of 50% or 100% is available in respect of the value of the business assets, as long as certain conditions are met. It is foolish to assume that just because you have a business it will not be subject to inheritance tax as that is not always the case. Sometimes shareholders in businesses put shareholders’ agreements in place which although they are extremely important in their own rights can jeopardise the inheritance tax relief if not drafted appropriately.
If you or your wife are from another country and have not resided in the UK for 17 of the last 20 years then you may find that different rules apply to you as one or both of you will be non domiciled in the UK. This could mean that you would have a high exposure to inheritance tax when one of you dies and you really should seek advice on your position.
Although the tax treatment of trusts was somewhat rewritten by last years budget it is still possible to use trusts as part of your estate planning and tax savings can still be made. There is now more emphasis on a long term strategy with early planning, to drive tax efficient transfers to the next generation. Inheritance tax planning cannot be considered in isolation and should be considered in conjunction with capital gains tax planning and other taxes.
Erika Holden is a Chartered Tax Advisor and a Trust and Estate Practitioner and is therefore well placed to advise you on estate and inheritance tax planning, including the use of trusts.
With the increases in house prices seen over past years more and more people are becoming aware that inheritance tax which is at a rate of 40% could affect them and their family.
Tax planning strategies over the last 20 years or so, which enabled individuals to reduce their exposure to inheritance tax on their family homes, eventually pushed the Revenue into introducing the Pre Owned Asset charge. They introduced an income tax charge to deal with an inheritance tax issue. It basically taxes any benefit that an individual receives on the use of an asset that they have given away. This applies to gifts of assets since 1986 and gifts of cash since 1998. It is important that inheritance tax advice is sought from an advisor who will consider whether their advice is caught by these rules. If you have made any gifts which could be caught please seek advice.
Many individuals do not even have a will in place. This means that they would die intestate. As such their estate will not necessarily pass to their spouses and children but instead other family members such as siblings and parents may benefit.
The pre-budget report 2007 means that a lot of married couples/civil partners will have the use of both nil rate bands which total £600k and that will mean that a lot of couples will not need to implement tax efficient wills and sever the tenancy of their homes anymore. In my opinion that is a welcomed change from Darling. Couples with estates exceeding £600k will still benefit from inheritance tax planning.
Grandparents should always consider how to leave their estate to families. Although they themselves may not have an inheritance tax issue, their wealth when combined with that of their children could create a problem for their children. Alternatives to passing the wealth directly to children may need to be considered.
A lot of court cases have also looked at the inheritance tax treatment of farming estates. Many people believe that farmers benefit from agricultural property relief of 50% or 100%. Although that can of course be true case law illustrates the fact that it is becoming more and more difficult to claim that relief unless appropriate planning is undertaken before it is too late.
For individuals with businesses, a beneficial inheritance tax relief of 50% or 100% is available in respect of the value of the business assets, as long as certain conditions are met. It is foolish to assume that just because you have a business it will not be subject to inheritance tax as that is not always the case. Sometimes shareholders in businesses put shareholders’ agreements in place which although they are extremely important in their own rights can jeopardise the inheritance tax relief if not drafted appropriately.
If you or your wife are from another country and have not resided in the UK for 17 of the last 20 years then you may find that different rules apply to you as one or both of you will be non domiciled in the UK. This could mean that you would have a high exposure to inheritance tax when one of you dies and you really should seek advice on your position.
Although the tax treatment of trusts was somewhat rewritten by last years budget it is still possible to use trusts as part of your estate planning and tax savings can still be made. There is now more emphasis on a long term strategy with early planning, to drive tax efficient transfers to the next generation. Inheritance tax planning cannot be considered in isolation and should be considered in conjunction with capital gains tax planning and other taxes.
Erika Holden is a Chartered Tax Advisor and a Trust and Estate Practitioner and is therefore well placed to advise you on estate and inheritance tax planning, including the use of trusts.