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.
 
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.