Frequently asked questions - Tax and Estate Planning
1. I have heard that the nil rate band is transferable between spouses/civil partners. What does this mean?
Everyone has a nil rate band for inheritance tax purposes that is set by the government. This is the sum you can gift on death and in some circumstances during your life, which is taxed at 0%. This is currently £325,000 ( frozen until April 2020). Anything above this is potentially charged to tax at 40%. If a spouse or civil partner does not use up their nil rate band with gifts to non-exempt beneficiaries, then any percentage remaining can be transferred to the surviving spouse or civil partner. This is particularly useful if couples are leaving their estate to each other. The transfer of assets between spouses in lifetime or on death is an exempt transfer, so no tax would be payable on the first death. On the second death the surviving spouse would have the benefit of a nil rate band of £650,000 (£325,000 + £325,000).
An additional nil rate band of £175,000 per spouse/civil partner is being introduced in stages from April 2017 (for those who own their own home on 8 July 2015) providing it passes on death to a direct descendant. This effectively means that couples who own their own home, may not have to pay inheritance tax if their combined estates are less than £1 million. There will be a tapered withdrawal for estates over £2 million.
2. I am not married and have assets in excess of the nil rate band, what can I do to reduce my inheritance tax liability?
Any assets in your estate over the nil rate band (currently £325,000) are taxable at 40% so it is a good idea to consider whether tax planning measures might be of benefit.
Giving some of your assets away is a possibility but you have to think about whether you can afford to do this. Tax planning is all well and good but you have to be able to live and people are living longer and longer.
If looking at your future needs you feel that you can afford to give some of your assets away then currently HMRC allows you to give up to £3,000 away in any tax year without any liability to inheritance tax. Any amounts given above this amount are called PETS (potentially exempt transfers). They become exempt to inheritance tax if you survive the gift by 7 years. If you don’t the amount of the gift is added to your estate.
HMRC also allow you to make unlimited gifts out of your surplus income (for example paying school fees for grandchildren). Whilst this does not reduce your capital, it will prevent some of its growth. Such gifts should of course only be considered if you can still support your lifestyle with the remaining income and in fact will not be exempt if you cannot. Good record keeping is essential for this useful exemption to succeed.
These are very simple ways to reduce your potential inheritance tax bill on death, but there are other ways, for example the establishment of trusts that can protect assets as well as potentially saving tax. We can provide full advice on the various courses of action open to you, dependant on your individual circumstances and what you wish to achieve.
3. Someone has suggested to me that I can reduce my potential inheritance tax bill by giving my home to my children now. Is this right?
Forgetting whether there might be a tax saving to be made, does it make sense to give your home away to your children or anyone else for that matter? No matter how well you may get on with your children now, no one can foresee the future for themselves or others. If you give your house to your children, it is their property. They can sell, mortgage, or live in it. You may say, “they would never do that!”, but what about circumstances outside their control? They could be involved in a messy divorce or become bankrupt and then as one of their assets, your home will become part of those proceedings and you could ultimately be made homeless. It is therefore very important to think carefully about giving your home away.
In terms of tax planning, if you give your home to your children but continue to live in it, you are considered to be reserving a benefit, unless you pay market rent. This means HMRC treats the gift as if it were never made and even though you no longer own your home, your estate will be treated as if you do.
4. I am an executor for my friend who sadly died recently. He was working and paying tax via PAYE before he died so I don’t need to submit an income tax return do I?
Every estate needs to satisfy HMRC that any tax due from the deceased has been paid. Equally it may be that HMRC owe the estate money. For this reason it is important to file tax returns.
As an executor you are personally liable if you fail to pay any debts of the estate (e.g. tax bills) or to collect in all the estate's assets (e.g. tax rebates). If your friend died at the beginning of the tax year there is a good chance that tax could be owing to the estate as his salary and income tax liability based upon that will have been divided over the whole year. Even if a person dies part way through a tax year they are entitled to the full personal allowance. Dependent on your friend’s salary, unless he had significant income from other sources (e.g. dividends or bank interest), there is a good chance that the estate is due an income tax rebate. This is a further asset of the estate that will need to be declared for inheritance tax purposes.
5. I am the sole residuary beneficiary and executor of my mother’s will but I don’t really need the money now and my children do. Is it ok to just give it to them?
If you inherit the money and simply give it to your children, you are creating a PET (potentially exempt transfer) and you need to survive for 7 years to be sure that inheritance will not be payable on the gift.
A better course of action would be to gift the money you are due to inherit to your children. The most tax efficient way of doing so is in what is known as a deed of variation. For inheritance tax purposes these gifts will be treated as if your mother had made the gifts and therefore there is no requirement for you to survive for 7 years.
6. I am executor of my husband’s will and he leaves everything to me. We owned our house jointly as well as a couple of bank accounts. His only other assets are a few shares. Do I need to apply for a grant of probate?
The short answer is - it depends.
You say you own your house jointly. If you own it as joint tenants this means that you as the survivor now own the property in its entirety and no grant is needed for this asset. If however you own it as tenants in common, that is, you each own a 50% share, you will need a grant of probate to transfer your husband’s share.
The joint bank accounts will pass by survivorship, so no grant is needed to deal with these.
You may need a grant to deal with the transfer or sale of your husband’s shares, depending on the value of the holdings and whether a grant is needed to transfer the interest in the house.
7. I am thinking about setting up a trust for my grandchildren but have heard that I might have to pay inheritance tax when I set it up. Is this right?
All trusts created during your lifetime are liable to a potential inheritance tax charge of half the death rate which is currently, 20%. Should you die within 7 years of creating the trust then a further 20% will become payable. This charge is only applicable however if the value of the assets in the trust (together with any other potentially exempt transfers made in the previous 7 years) amount to more than the current nil rate band. If it is less than this, there is no inheritance tax payable.
These lifetime trusts also have anniversary charges every 10 years and exit charges (when capital is paid out to beneficiaries) but these charges can be avoided by limiting the value of the trust assets to below the nil rate band.
Capital gains and income tax implications also have to be considered when establishing a trust and we can advise you on how to limit or avoid these taxes altogether. It should however be borne in mind that when establishing a trust, tax planning is not always the main priority. Trusts are excellent vehicles to enable individuals to provide for minors, vulnerable individuals and to protect family assets.
8. I currently have a will which divides my estate between my 3 adult children. However I have concerns about my youngest son who is a drug addict and my daughter who is going through a rocky patch in her marriage. I don’t want to fund my son’s drug habit or my daughter’s divorce but I want to ensure they are provided for. What should I do?
You could consider leaving all of your estate on a discretionary trust with the beneficiaries being your children and perhaps their children too.
A discretionary trust is a very flexible way of leaving assets that is suitable for a large number of scenarios. It is particularly helpful where there is concern about the uncertainty of events in the future.
A discretionary trust has a group of potential beneficiaries but none of them are entitled to any defined share in the trust fund, they just have a mere hope of benefiting. The trustees (who will usually also be the executors of your will) will decide who receives what and when and will be guided by a letter of wishes that you leave with your will. In this letter of wishes you will give the trustees guidance as to how you would like them to exercise their discretion. For example, you may say that you do not wish your youngest son to receive anything whilst still using drugs, or your daughter to receive significant sums if going through a divorce. Your trustees are given the advantage of being able to assess the situation at the time, rather than you trying to predict the future before your death.
You must ensure however that you choose your trustees well and trust them implicitly as they are not bound to follow your letter of wishes, but must exercise their own discretion whilst taking into account your expressed views.
We are able to provide full advice on the suitability of life time or discretionary will trusts to your circumstances, administration of these trusts and any potential tax consequences.
9. I own a small family business and am worried about the potential damaging financial effect of a large inheritance tax bill on my death.
As a matter of public policy HMRC is keen to ensure that family businesses and farming businesses in particular, do not suffer as a result of the death of the owner. For this reason business property relief (BPR) and agricultural property relief (APR) are available.
BPR is available at 100% for an interest in a business whether as a sole owner, a partnership or a limited company. It is based on the whole value of the share in the business less any liabilities, rather than on the value of individual assets. It is however available at a reduced rate of 50% for any assets (for example premises) that are used by the business.
APR is also available at 100% on the agricultural value of farmland and farm buildings to a working farmer, after 2 years. It can also be available at 100% where farmland is owned by an investor rather than a farmer, but in this case it needs to be owned for 7 years for the relief to be claimed.
10. I am struggling to decide who to appoint as my executors in my will. What things do I need to consider?
Executors are responsible for giving effect to your will and for the administration of your estate following your death. This includes dealing with any potential tax consequences and can be a very time consuming and onerous task. It is also worth noting that executors can be personally liable both to creditors and to beneficiaries if they distribute the estate incorrectly.
It is perfectly acceptable for a lay person such as a family member or beneficiary to be appointed as an executor and that lay person has the option of engaging professional help after your death if they require assistance. You should always choose someone that you trust, who is sensible and who ideally has a good grasp of financial matters. You should also check with them that in principle they are happy to take on the role. Lay executors always have the option of instructing lawyers like us to assist them and we are happy to deal with as little or as much of the estate administration as required.
Alternatively, you may prefer to appoint a professional executor and trustee either with or without a lay executor and trustee. The advantage of a professional executor and trustee is that they are experienced in dealing with estates of varying complexity and can offer a calm and objective approach at what can be a very emotional time.
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