Eaves and Co have assisted a number of clients to make disclosures under the Liechtenstein Disclosure Facility (LDF) as well as advice for those affected by the UK-Swiss Tax Treaty.  HMRC have made clear that they continue to target offshore funds with more recent disclosure facilities in Jersey, Guernsey and the Isle of Man.
The LDF has been very successful for HMRC and they have even increased the expected yield from £1billion to £3billion.
We have written previously on the differences between the LDF and other disclosure facilities, in particular the more favourable guaranteed immunity from prosecution under the LDF.
A further, and often overlooked, aspect of the LDF which can be much more favourable than the other disclosure facilities is the ability to elect for a composite rate of tax rather than the actual rate.  This can mean significant savings where Inheritance Tax is involved.  As such, it might be worth those with funds in Jersey, Guernsey or the Isle of Man considering making a disclosure under the LDF where IHT is involved.
We would be delighted to hear from anyone seeking assistance in this area.

CRC v Lockyer and Robertson (as the personal representatives of N Pawson, deceased) – Business Property Relief

HMRC have successfully appealed the landmark Business Property Relief case of N Pawson deceased which, if it is upheld at the Court of Appeal, is likely to have a significant on the potential Inheritance Tax liabilities of individuals with a holiday letting business.

HMRC success in this case is perhaps not as surprising as the fact they originally lost at Tribunal.  The judge gives some extra useful guidance on the distinction between active trading and property letting.

The First-tier Tribunal initially ruled that as long as additional services were provided in conjunction with a holiday let then the  business property relief (BPR) would be available and therefore obtain relief from Inheritance Tax (IHT) at 100%.

HMRC subsequently appealed the above ruling.

The Upper Tribunal Judge focused on “the proposition that the owning and holding of land in order to obtain an income from it is generally to be characterised as an investment activity”.

He said that a property could be managed actively and still be retained as an investment.

The services provided to clients, such as cleaning, providing a welcome pack, and being on call to deal with queries and problems, were unlikely to be significant or sufficient to stop the business from being “mainly one of property investment”.

These services all enhanced the capital value of the property and made it possible to obtain a regular income from its letting.

The judge concluded the First-tier Tribunal should have found that “the business… did indeed remain one which was mainly that of holding the property as an investment. The services provided were all of a relatively standard nature, and they were all aimed at maximising the income which the family could obtain from the short term holiday letting of the property”.

He did not accept the taxpayer’s argument that the innate character of a holiday letting business rendered it outside the scope of a normal property letting business. Rather, it was a typical example of a property letting business.

As a result business property relief was disallowed and the letting operation fully charged to IHT.

Penalties for deceased persons have been an area of contention recently.  For those individuals who die not having their tax affairs in order, HM Revenue & Customs are able to go back and enquire into an individual’s tax affairs for the 6 tax years prior to the date of the deceased’s death, in the case of careless or deliberate understatement of tax.
However, HM Revenue & Customs are no longer allowed to apply penalties for deceased persons in relation to the tax affairs of the 6 tax years preceding the individual’s death as it is deemed to be a contravention of an individual’s human rights.
Eaves and Co have been able to apply this to a recent client situation where an individual had died not disclosing trading income to HM Revenue & Customs. This had led to undisclosed profits resulting in unpaid tax for the 6 years prior to their death. This would have incurred significant penalties for non-disclosure without the case law findings against the application of penalties.

A series of articles highlighting key areas that affect taxpayers and practitioners involved with inheritance tax and estates and identifying opportunities to mitigate inheritance tax.
 
Inheritance Tax & Estate Tax Planning
Overview
Inheritance tax and estate planning is an important tool to ensure that wealth is preserved for future generations.
The nature of the planning undertaken will depend on the type and value of assets in the estate as well as the overall objectives such as who is to benefit from the assets, degree of control and distribution of income.
Examples of inheritance tax and estate planning opportunities include:

  • Business Property Relief – up to 100% relief for the value of qualifying business interests, shareholdings and assets
  • Agricultural Property Relief – up to 100% relief for the value of qualifying land/property used for agricultural purposes
  • Woodlands Relief – up to 100% relief against the value of timber on the land, although a charge may subsequently arise if the timber is later sold
  • Gifts to charity
  • Making full use of allowances such as the annual allowance and gifts on marriage
  • Regular gifts out of income
  • Outright gifts to individuals/trusts
  • Trusts for vulnerable persons

Non-UK Domicile Tax Planning
Non-UK domiciled persons are usually only subject to inheritance tax on their UK situs assets, however where a person has been resident in the UK for 17 out of the last 20 tax years they are automatically deemed to be domiciled in the UK, potentially bringing their worldwide assets within the scope of UK inheritance tax.
However, where a person sets up an offshore trust to hold overseas assets whilst non-UK domiciled/deemed domiciled, the trust will be treated as excluded property and should remain outside the UK inheritance tax net.
In certain cases, it may be possible to restructure the ownership of assets to allow assets that would otherwise be treated as UK situs to qualify as excluded property. Although care will need to be taken, particularly where the recent changes to the stamp duty land tax rules are in point.
Inheritance tax and estate planning is a complex area and advice should be sought before any planning is undertaken.
Anti-Avoidance & Other Considerations
Where inheritance tax planning is to be utilised care should be taken to ensure that the planning does not fall foul of anti-avoidance legislation such as the rules for gifts with reservation of benefit, associated operations, pre-owned asset tax etc.
It will also be necessary to consider the potential impact of the proposed planning on other taxes such as capital gains tax, VAT, SDLT and relevant anti-avoidance rules such as the settlement provisions and transfer of assets abroad.
A further key consideration will be the commercial and practical aspects of the planning – in our experience bespoke advice that is tailored to the individual’s precise circumstances is more likely to achieve the desired result than one size fits all schemes.
 
 
 

A series of articles highlighting key areas that affect taxpayers and practitioners involved with inheritance tax and estates and identifying opportunities to mitigate inheritance tax.
 
Inheritance Tax & Relief for Falls in Value (Part 2)
In the current economic climate reliefs that reduce the amount of inheritance tax payable where assets have fallen in value may be of particular interest to taxpayers and their advisors.
Transfers on Death 
Inheritance tax is generally calculated based on the value of the property at the date of death.
However, in some circumstances it may be possible to reduce the value on which inheritance tax is payable where the asset is later sold at a loss.
Where the claim is made, the base cost of the asset for capital gains tax purposes will be reduced to the new probate value so as to avoid the loss being relieved twice.
Sales of Listed Shares/Unit Trust Units
Where the personal representatives sell listed shares, units in an authorised unit trust or shares in an open ended investment company at a loss within 12 months of death a claim may be made to reduce the value that is subject to inheritance tax.
The claim will normally be made by the personal representatives (as the person liable for inheritance tax on the free estate) therefore the relief is unlikely to be available where the shares/units are distributed and later sold by the beneficiaries.
In the case of a trust in which the deceased had a qualifying interest in possession, there are provisions which permit the trustees to make a similar claim.
The relief is calculated in accordance with special rules and it is important to note that the amount of relief will be affected by:

  • All sales (whether at a gain or loss) by the personal representatives/trustees  in the 12 month period,
  • Purchases by the personal representatives/trustees in the period commencing with the date of death and ending 2 months after the last sale in the 12 month period.
  • Costs of sale and purchase are ignored

Sales of Land & Buildings
Where the personal representatives sell land at a loss within 4 years of death, a claim may be made to reduce the probate value for inheritance tax purposes.
Again, the relief is not available where the property has been appropriated to a beneficiary and later sold.
Furthermore, the relief is restricted where the sale is to certain connected parties with an interest in the property.
The amount of relief will be affected by:

  • Sales at a loss by the personal representatives/trustees within 4 years of death,
  •  Sales at a gain by the personal representatives/trustees within 3 years of death,
  • Profits and losses that are less than the lower of £1,500 or 5% of probate value are ignored.
  • Purchases by the personal representatives/trustees in the period commencing with the date of death and ending 4 months after the last sale in the 3 year period.

Sales of ‘Related Property’
Where assets were valued using the related property rules and there is a sale at a loss within 3 years, a claim for relief may be made.
The relief is given by reducing the probate value to the standalone value of the asset at the date of death (i.e. ignoring the related property rules) and not to the sale value.

A series of articles highlighting key areas that affect taxpayers and practitioners involved with inheritance tax and estates and identifying opportunities to mitigate inheritance tax.
 
Inheritance Tax & Relief for Falls in Value (Part 1)
In the current economic climate reliefs that reduce the amount of inheritance tax payable where assets have fallen in value may be of particular interest to taxpayers and their advisors.
Lifetime Transfers
Where an asset is transferred during lifetime and the transferor does not survive 7 years from the date of the gift, inheritance tax at death will normally be calculated based on the value as at the date of the gift.
However relief is available where:

  1. The asset is retained by the transferee (or their spouse/civil partner) and the value at death is lower than the value at the date of the gift, or
  2. The asset is sold by the transferee (or their spouse/civil partner) at a loss prior to the date of death and the sale does not fall foul of anti-avoidance provisions aimed at transfers not at arm’s length.

The rules apply to most types of assets except wasting chattels (tangible movable property with a wasting life of no more than 50 years such as plant and machinery).
The relief is available in respect of inheritance tax on both failed Potentially Exempt Transfers (PETs) and the additional inheritance tax payable on death in respect of Chargeable Lifetime Transfers (CLTs).
However, the relief does not affect the original computation (i.e. in the case of a CLT there will be no change to the computation of the lifetime tax payable at the date of gift) or the cumulative total for calculating the available nil rate band on subsequent gifts and the death estate.
The claim must be made by person that is liable to pay the inheritance tax in respect of the PET/CLT which will normally be the donee.

A series of articles highlighting key areas that affect taxpayers and practitioners involved with inheritance tax and estates and identifying opportunities to mitigate inheritance tax.
Inheritance Tax – Overseas Issues
General Rules
Where a person is UK domiciled their estate will be subject to inheritance tax on their worldwide assets.
Therefore overseas assets such as foreign bank accounts, holiday homes etc. will be subject to inheritance tax in the UK.
Relief is given for foreign liabilities (for example an overseas mortgage) by deducting the amount of the liability from the value of non UK property.  Any excess can then be set off against UK property.
 Foreign Property – Deduction for Expenses
Where the estate includes overseas property, the personal representatives may incur additional expenses in connection with the disposal.
It is possible to claim a deduction for expenses of administering or selling overseas property up to a maximum of 5% of the value of all foreign property in the estate.
Thus, where the estate of a UK domiciled person includes a house in Spain worth £250,000, the personal representatives may claim a deduction for expenses of up to £12,500 (£250,000 x 5%), potentially saving inheritance tax of £5,000 (£12,500 x 40%).
Double Tax Relief
Where an estate is subject to inheritance tax in both the UK and another country on the same assets the estate may be subject to double tax.
The UK has double tax treaties for inheritance tax purposes with the Republic of Ireland, USA, South Africa, France, Netherlands, Sweden, Switzerland, Italy, India and Pakistan.
These double tax treaties set out the taxes that qualify for relief under the agreement, the taxing rights of each country in respect of different types of assets as well as the mechanism for double tax relief where inheritance tax is payable in both countries.
It is important that care is taken to review the appropriate double tax treaty carefully because the personal representatives will need to understand whether relief should be claimed in the UK or abroad.
Where inheritance tax is payable in the UK and a similar tax is payable in a country that does not have a double tax treaty with the UK, double tax credit relief should be available in relation to assets situated in the other country under the unilateral relief provisions.
For these purposes the location of the asset is determined in reference to UK law.
The amount of double tax relief under the unilateral provisions is limited to the lower of (i) the UK inheritance tax, or (ii) the foreign inheritance tax.
In cases where tax is payable in both the UK and another country in relation to an asset that is situated in a third country, or treated as situated in the UK under UK law and the other country under that country’s law, a proportion of the tax may be relieved in the UK.

A series of articles highlighting key areas that affect taxpayers and practitioners involved with inheritance tax and estates and identifying opportunities to mitigate inheritance tax.
 
Reduced Rate of Inheritance Tax – Charitable Donations
 
Gifts to registered charities, whether in lifetime or on death, are as a general rule exempt from inheritance tax.
 
In addition, with effect from 6 April 2012 where a person gives 10% of their ‘net estate’ to charity, the estate may benefit from a reduced rate of inheritance tax of 36%.
 
There are specific rules to determine the amount of the net estate for these purposes. Furthermore, assets can be owned in different ways (for example; joint ownership, tenants in common and trusts), and the 10% test must be applied to the different ownership types when considering whether the relief is due.
 
In cases where the 10% test is not currently met it should be possible to either (1) amend the Will during lifetime to increase the amount of charitable gifts, or (2) where the taxpayer is already deceased the personal representatives could enter into a deed of variation within two years of death.
 
In certain circumstances, it may be possible to achieve an overall tax saving by increasing the amount of the charitable gift.
 
However, in the majority of cases this is unlikely to be the case because the benefit of the lower tax rate will be offset by the increased cost of increasing the amount of the donation.

A series of articles highlighting key areas that affect taxpayers and practitioners involved with inheritance tax and estates and identifying opportunities to mitigate inheritance tax.
 
Transfer to Spouse
 
The general rule is that transfers between spouses whether on death or during lifetime are normally exempt from inheritance tax.
 
However, where the gift is made by a UK domiciled person to a non UK domiciled person, the spousal exemption is currently limited to £55,000.
 
The Draft Finance Bill 2013 includes legislation that will increase the exempt amount to the amount of the nil rate band at the date of the transfer.
 
Thus increasing the amount that may be transferred free of inheritance tax to a non UK domiciled spouse from £380,000 (£325,000 + £55,000) to £650,000 (£325,000 + £325,000).
 
Furthermore, the non UK domiciled spouse will be able to elect to be treated as though they are UK domiciled for inheritance tax purposes. However, such an election will bring the entirety of the spouse’s estate into the UK inheritance tax net, therefore advice should be taken before an election is made.
 
These changes are expected to come into effect from 6 April 2013, although the precise wording of the legislation may change before the provisions are enacted into law.

A series of articles highlighting key areas that affect taxpayers and practitioners involved with inheritance tax and estates and identifying opportunities to mitigate inheritance tax.
 
Nil Rate Band
 
The amount that may be passed on to a person’s beneficiaries free of inheritance tax is determined by the nil rate band at the date of death.
 
The nil rate band for inheritance tax has been frozen at £325,000 per person since 2010.
 
The Chancellor announced in the Autumn Statement that the amount of the nil rate band will rise to £329,000 with effect from 6 April 2015.
 
Since October 2007 it has been possible to transfer the unused proportion of the nil rate band between spouses, although the benefit of this can only be realised on the death of the second person and not in respect of a lifetime transfer, such as a transfer to trust.
 
Where a person survives more than one spouse, the maximum amount of the nil rate that may be transferred is equivalent to one full nil rate band.
 
However, with careful tax planning, it may be possible for their combined estate to benefit from 3 full nil rate bands. Thus reducing the overall amount of inheritance tax payable.
 
Ideally inheritance tax planning such as this should be undertaken during lifetime through careful drafting of Wills, although it may also be possible to implement the planning post death through a deed of variation.