Inheritance Tax

There are a number of reliefs available that can reduce liability to Inheritance Tax (IHT) if you inherit the estate of someone who had died. 

One of these reliefs is known as IHT Business Relief and is a valuable tax relief for taxpayers with business interests, offering either 50% or 100% relief from IHT on the value of the business assets if certain conditions are met.

• 100% Business Relief can be claimed on a business or interest in a business or on shares held in an unlisted company.
• 50% Business Relief can be claimed on:
  • shares controlling more than 50% of the voting rights in a listed company;
  • land, buildings or machinery owned by the deceased and used in a business they were a partner in or controlled; and
  • land, buildings or machinery used in the business and held in a trust that it has the right to benefit from.

Relief is only available if the deceased owned the business or asset for at least 2 years before they died. There are a number of restrictions to the relief, for example if the company in question mainly deals with securities, stocks or shares, land or buildings, or in making or holding investments. In some cases, partial Business Relief may be available.

The majority of gifts made during a person's life are not subject to tax at the time of the gift. These lifetime transfers are known as 'potentially exempt transfers' or 'PETs'. These gifts or transfers achieve their potential of becoming exempt from Inheritance Tax if the taxpayer survives for more than seven years after making the gift. There is a tapered relief available if the donor dies between three and seven years after the gift is made.

The effective rates of tax on the excess over the nil rate band for PETs is:

• 0 to 3 years before death 40%
• 3 to 4 years before death 32%
• 4 to 5 years before death 24%
• 5 to 6 years before death 16%
• 6 to 7 years before death 8%

However, the rules are different if the person making the gift retains some 'enjoyment' of the gift made. This is usually the case where the donor does not want to give up control over the assets concerned and the gift is made with reservation of title. These gifts fall under the heading of 'Gifts With Reservation of Benefits rules' or 'GWROBs'.

A common example is a person giving their house away to their children but continuing to live in it rent-free. Under these circumstances, the taxman would contend that the basic position of the donor remained unchanged and that this is a GWROB. In this is the case, HMRC will not accept that a true gift has been made and the 'gift' would remain subject to Inheritance Tax even if the taxpayer dies more than 7 years after the transfer.

A GWROB can usually be avoided in this type of situation if the donor pays full market rent for the use of the asset gifted.

In certain circumstances, a will can be changed after death. This can be done by using what is known as a Deed of Variation. Any changes to the will must be done within two years from the date of death. However, beneficiaries who would be left worse off by the change must give their agreement before any changes can be made.

This is most often done to reduce the amount of Inheritance Tax or Capital Gains Tax payable, to help someone who was left out of the Will, to move the deceased’s assets into a trust or to clear-up uncertainties relating to the will. For example, a grandparent may have left assets to a grandchild but did not update his / her will when another grandchild was born.

As we mentioned, a Deed of Variation can only be executed upon the agreement of all the beneficiaries and executors. It is more complicated if children are involved as they cannot themselves consent to changes.

For some readers, this might be a timely reminder not just of the importance of having a will but also of ensuring it is updated as circumstances change over time.

There are a number of reliefs available that can reduce liability to Inheritance Tax (IHT) when you inherit the estate of someone who has died. One of these reliefs is known as IHT Business Relief and is a valuable tax relief for taxpayers with business interests. The relief offers a 50% or 100% deduction from IHT on the value of the business assets if certain conditions are met.

• 100% Business Relief can be claimed on a business or interest in a business or on shares held in an unlisted company.
• 50% Business Relief can be claimed on:
  – shares controlling more than 50% of the voting rights in a listed company;
  – land, buildings or machinery owned by the deceased and used in a business they were a partner in or controlled; and
  – land, buildings or machinery used in the business and held in a trust that it has the right to benefit from these assets.

Relief is only available if the deceased owned the business or asset for at least two years before they died. There are a number of restrictions to the relief, for example, if the company in question predominantly deals with securities, stocks or shares, land or buildings, or in making or holding investments. In some cases, partial Business Relief may be available.

The majority of gifts made during a person's life are not subject to tax at the time of the gift. These lifetime transfers are known as 'potentially exempt transfers' or 'PETs'. These gifts or transfers achieve their potential of becoming exempt from Inheritance Tax if the taxpayer survives for more than seven years after making the gift. There is a tapered relief available if the donor dies between three and seven years after the gift is made.

The effective rates of tax on the excess over the nil rate band for PETs is:

• 0 to 3 years before death 40%
• 3 to 4 years before death 32%
• 4 to 5 years before death 24%
• 5 to 6 years before death 16%
• 6 to 7 years before death 8%

However, the rules are different if the person making the gift retains some 'enjoyment' of the gift made. This is usually the case where the donor does not want to give up control over the assets concerned. These gifts fall under the heading of 'Gifts With Reservation of Benefits rules' or 'GWROBs'.

A common example is a person giving their house away to their children but continuing to live in it rent-free. Under these circumstances, the taxman would contend that the basic position of the donor remained unchanged and that this is a GWROB. If this is the case, HMRC will not accept that a true gift has been made and the 'gift' would remain subject to Inheritance Tax even if the taxpayer dies more than 7 years after the transfer.

A GWROB can usually be avoided in this type of situation if the donor pays full market rent for the use of the asset gifted. We would be happy to help you understand what options are available to reduce your liability to Inheritance Tax whilst at the same time protecting your assets.

The Inheritance Tax residence nil rate band (RNRB) is a transferable allowance for married couples and civil partners (per person) when their main residence is passed down to a direct descendent such as children or grandchildren after their death. 

The allowance increased to the present maximum level of £175,000 from 6 April 2020. The allowance is available to the deceased person’s children or grandchildren. Any unused portion of the RNRB can be transferred to a surviving spouse or partner. The RNRB is on top of the existing £325,000 Inheritance Tax nil-rate band.

The allowance is available to the deceased person's children or grandchildren. Taken together with the current Inheritance Tax limit of £325,000 this means that married couples and civil partners can pass on property worth up to £1 million free of Inheritance Tax to their direct descendants. 

There is a tapering of the RNRB for estates worth more than £2 million even where the family home is left to direct descendants. The additional threshold will be reduced by £1 for every £2 that the estate is worth more than the £2 million taper threshold. This can result in the full amount of the RNRB being tapered away. 

The RNRB maximum rate of £175,000 and the taper threshold are currently frozen until at least April 2026.

Domicile is a general legal concept which in basic terms is taken to mean the country where you permanently belong. But actually, determining domicile status can be complex. HMRC guidance states that domicile cannot be defined precisely, but the concept rests on various basic principles.

Although domicile can change, there is generally a presumption in favour of the continuation of an existing domicile. To change a domicile, lots of factors are considered for example, the location family, property and business interests.

There is also a further UK concept of deemed domicile, whereby under rules introduced from April 2017, any person who has been resident in the UK for more than 15 of the previous 20 years are deemed to be domiciled in the UK for tax purposes. This makes them liable to Inheritance Tax (IHT) on their worldwide assets.

IHT is generally chargeable to people domiciled (or deemed domiciled) in the UK or with assets sited in the UK. For example, HMRC’s manuals states that if someone creates a settlement with assets outside the UK, when they are not domiciled in the UK, the settlement could be excluded from the charge to IHT. There are also double tax agreements that can, depending on the circumstances, change a person’s liability to IHT.

There are a number of reliefs available that can reduce liability to IHT if you inherit the estate of someone who had died. One of these reliefs is known as Business Relief and is a valuable tax relief for taxpayers with business interests, offering either 50% or 100% relief from IHT on the value of the business assets if certain conditions are met.

• 100% Business Relief can be claimed on a business or interest in a business or on shares held in an unlisted company.
• 50% Business Relief can be claimed on:
  – shares controlling more than 50% of the voting rights in a listed company
  – land, buildings or machinery owned by the deceased and used in a business they were a partner in or controlled
  – land, buildings or machinery used in the business and held in a trust that it has the right to benefit from

Relief is only available if the deceased owned the business or asset for at least 2 years before they died. There are a number of restrictions to the relief, for example if the company in question mainly deals with securities, stocks or shares, land or buildings, or in making or holding investments. In some cases, partial Business Relief may be available.

We wanted to remind our readers of the Inheritance Tax (IHT) implications of making cash gifts during the current 2021-22 tax year that will end on 5 April 2022.

You can give away up to £3,000 worth of gifts each tax year. This is known as your annual exemption. Any unused part of the annual exemption can be carried forward, but only for one year. So, if you didn’t make any cash gifts in 2020-21, you could gift up to £6,000 before the end of this tax year.

There are also generous exemptions for normal gifts made out of your income, but you must be able to maintain your standard of living after making the gift. There are also reliefs available for wedding or civil ceremony gifts. You can gift up to £1,000 per person with higher limits of £2,500 for a grandchild or great-grandchild, £5,000 for a child.

You can also give as many small gifts of up to £250 per person as you want during the tax year but only if you haven’t used another exemption on the same person. There is no IHT to pay on lifetime gifts between you and your spouse or civil partner as long as you both live permanently in the UK.

Other gifts, outside these limits, count towards the value of your estate and should be carefully considered.

A trust is an obligation that binds a trustee, an individual or a company to deal with the assets such as land, money and shares which form part of the trust. The person who puts assets into a trust is known as a settlor and the trust is for the benefit of one or more ‘beneficiaries’. The trustees make decisions regarding how the assets in a trust are to be managed, transferred or held back for the future use of the beneficiaries.

IHT planning can involve the careful use of trusts. There are a number of trusts which are subject to different tax rules. The main types are bare trusts, discretionary trusts, interest in possession trusts and mixed trusts.

One of the most widely used, and as the name suggests, most basic kind of trust is a bare trust. These trusts are also known as simple trusts or naked trusts. Under a bare trust, each beneficiary has an immediate and absolute title to both capital and income. The beneficiary of a bare trust is taxable on the trust income and gains.

HMRC’s guidance states that beneficiaries must include trust income and gains in any tax return they are required to complete or in any forms R40. The trustees of a bare trust may pay the tax due to HMRC on behalf of a beneficiary, but it is the beneficiary who is strictly chargeable to tax.

There are key differences between a bare trust and other types of trusts that are beyond the scope of this article.