Over the last 12 months, HMRC has collected over £5 billion in inheritance tax. Inheritance tax has never reached this record level in one year before, and the level for this most recent period is 19 percent higher than in the previous year.
Why is this? Why is so much more money being paid in inheritance tax?
The first reason is that although the IHT allowance has been frozen at £325,000 for a number of years now, house prices have continued to rise. This means that more estates than ever are worth more than the allowance. However, this should be combated thanks to the new nil-rate tax band (essentially allowing the estate an extra £100,000 grace if it is being left to a descendent) which came in in April 2017.
There are a number of other ways to reduce your IHT liability. One is to give away your assets so that they are not part of your estate when you die. You can make one gift per year that is worth £3000. Any more than that and inheritance tax will be due. You can choose to make that gift in one lump sum, or you can split it into bundles of £250 at a time. You cannot choose to give small £250 gifts as well as the £3000 gift to the same person, however.
Special dispensation is given for wedding gifts. You can give as much as £5000 to each of your children. The amount reduces to £2500 for grandchildren, and for anyone else it is £1000. Also, if you use your money to support a child in full time education, there will be no IHT due.
It is possible to make other transfers and gifts, but not everything will automatically be exempt – some will have the caveat that you need to live for at least seven years after the gift is given. If you do not, then IHT may be due when you do die.
Inheritance tax can, at first, be an inexact science. Although it may seem as though it is something that can be calculated exactly, there are various factors that mean it is sometimes overpaid. Equally, your inheritance tax payment can be underpaid too. Why is this?
When someone dies the estate will often have to pay inheritance tax (IHT), assuming the estate is worth enough for the government to charge IHT on it. The executor will need to fill in a tax return and pay the money calculated to HMRC. Only after this will they be able to obtain probate and distribute the assets.
The difference in the figures comes when an asset – for example a property – is sold for more or less than the valuation. With properties this is very common, and they do often sell for less than the asking price. However, the tax returns and the payment will already have been made at this point, and therefore the overpayment will need to be recovered. Equally, if the property (or other asset) sold for more, an additional payment will have to be made.
If an overpayment has been made then you will need to contact the Capital Taxes Office (CTO) which is part of HMRC. Unfortunately the process of recovering money like this can take many months, even in the most straight forward of cases. This can cause a major impact on the distribution of the rest of the estate, as everyone has to wait until the money is returned.
Confused by inheritance tax?
Many of us are confused by the issue of inheritance tax – how it’s calculated for example, when and how we pay it. Sadly, perhaps because it can be such a complicated subject, it is often overlooked. This lack of planning can have devastating consequences on the financial circumstances of beneficiaries however, with the difference between inheritance tax payable on a planned estate as opposed to unplanned, often reaching thousands of pounds.
A recent survey revealed that 81% of people are irked by the idea of so much of their hard earned cash going direct to the tax man in the event of their death, yet three in ten of us expect our loved ones to be saddled with an inheritance tax bill, whilst another four in ten aren’t sure or don’t understand the process. So what can you do about it?
First of all, what you need to know is that when you die, everything you own (including property, shares and savings) will be valued and totalled. If this amount comes to over £325,000 (or £650,000 if you had a spouse who died before you), then under normal circumstances, 40% of everything above this amount will need to be paid under inheritance tax rules. After you’ve gone, it will be up to your executors to pay this amount – before they receive a penny from your estate. If they don’t pay up within six months, interest can be added to the amount due, resulting in an immense financial headache.
So how can you reduce this whopping 40%? Well, there are a number of ways but they need to be examined right now, whilst you’re still alive. These can take the form of gifting (giving specific amounts of money to your loved ones from now on, to reduce the value of your savings when you die for example) or tax relief, which may be applied in certain circumstances, such as within farming families or businesses.
The message is this – if someone were to relieve you of thousands of pounds right now, whilst you’re still alive, you’d be rightly furious and perhaps feel as though you’d been robbed. So why allow the tax man to do it after you’ve gone? Think about what could be facing your loved ones and act now.
#iwcprobate #bereaved #probate
Worried about inheritance tax.
It may shock you to learn that if you have been named the executor of a will, then you may well be held responsible for paying any inheritance tax (IHT) due on the deceased's estate, BEFORE you have received any money from probate.
If the deceased was a single person and their estate is valued at above £325,000, then you can expect to pay 40% of the value above this amount, if no tax reliefs are applicable. If they were the surviving partner of a marriage, the amount, known as the nil rate band, is doubled to £650,000. This means that thousands of pounds may be required to pay off the inheritance tax debt, before you receive a penny from the proceeds of the estate.
It may be that there are enough cash savings held within the estate to pay off this debt, in which case HMRC might allow you to make a direct payment to them, straight from the deceased's savings account(s). However, if there is not enough cash available, it will be up to you to make up the shortfall. Although you will be able to recoup the money when probate has been granted, you must find a way to pay the debt up front. You might choose to borrow the money from within the family or borrow it from the bank. Banks are very familiar with this scenario and, as they know the loan will be settled relatively quickly, they are often amenable.
A slightly better scenario arises when the bulk of the estate is made up of property. In this instance, HMRC will normally allow probate to be granted and the inheritance tax debt to be paid in installments over a maximum period of ten years. Be careful though – this extended term brings with it additional interest to be paid on the outstanding balance.
In some cases, the estate may be held principally in the form of shares. Technically, probate must still be granted and the inheritance tax debt paid before any shares can be sold. However, HMRC often offers some flexibility here and you may be able to discuss the possibility of HMRC waiting until the shares have been sold, in order for you to pay the IHT bill, so long as it is considered a priority when allocating proceeds from the estate.
#iwcprobate #bereaved #probate
New IHT Family Home Allowance
A new monthly record for the amount of Inheritance Tax taken by HM Revenue and Customs was set this April. The take of £397 million stands well in excess of the average monthly take of £260 million over the last ten years. Furthermore, the Inheritance Tax of £1 billion collected by HMRC for the three months to the end of May is the highest figure for any three month period since 2007, when £1.1 billion was taken in the three months to the end of August.
Although the government has announced reforms which it says should reduce the Inheritance Tax burden, some commentators believe that the proposed reforms are too complex and could distort the housing market.
As currently proposed, a new 'family home allowance' of £175,000 per parent will be added to the current individual IHT tax-free allowance for bequests made to children or grandchildren which include a main home. As a spouse or civil partner can pass on their tax-free allowance to their spouse or civil partner, this means that the IHT tax-free threshold can therefore rise to up to £1 million for estates including a main home left to children or grandchildren by a married couple or civil partners.
The basic IHT tax-free allowance of £325,000 is otherwise unaffected by the proposals.
Some commentators have observed that the proposals would add unnecessary complexity to the system and be of benefit only to those whose wealth is tied up in the family home.
It has also been noted that that as the proposals do not appear to apply to lifetime gifts, they may have the effect of deterring elderly people from downsizing for fear of increasing the amount of Inheritance Tax due on their estates. This could lead to some elderly people feeling that they are effectively trapped in houses that are now too large for their needs. Moreover, a reluctance on the part of elderly people to downsize could put further pressure on the already stretched supply of family homes in many parts of the country.
It is believed that there will be some restrictions on the proposed allowance, with the maximum amount of the family home allowance being reduced on a sliding scale for estates worth between £2 million and £2.35 million. Estates worth £2.35 million and above would not benefit from the allowance.
Critics of the proposals say that a better, simpler and fairer way to reduce the IHT burden would have been to increase the tax-free threshold for all estates.
It remains to be seen what effect, if any, the cost of implementing the current proposals might have on other IHT reliefs, but concern has been expressed that pressure may be put on other important IHT reliefs such as agricultural property relief and business property relief.
Inheritance tax payouts at six year high
The Office for National Statistics has just released figures which show that £3.4 billion was collected by the Government last year in Inheritance Tax – the highest amount for six years.
This figure was last exceeded in 2007/2008, when HMRC takings stood at £3.8 billion.
Given the dates, it doesn't take a genius to link this trend to two outstanding factors:
a. High/rising house prices
b. An inheritance tax threshold which has been frozen at £325,000 per person since 2009, in order to catch as many individuals as possible.
Currently, although the allowance for a deceased person can be passed to the surviving spouse; ultimately, the joint estate will then be subject to inheritance tax at 40%, if it is valued over £650,000, although some reliefs may be applied in certain circumstances, to reduce this value and so lessen the amount of death duty which must be paid.
It has been forecasted that the number of families who will receive inheritance tax bills this year will rise by one third to 35,600 – with no sign of this number falling, until the threshold is raised.
Now more than ever, it is vital that you look at ways to reduce the financial burden on your family whilst you are still alive, by planning your estate well in advance. Exemptions and reliefs do exist, but you must take action now to avoid causing unnecessary stress for your loved ones, in the future.
IHT band for trusts creates demand for financial advice
With HMRC cracking down on individuals using trusts as a means of reducing inheritance tax liability, estate planners are experiencing an increase in demand for their services, as reassurance and advice regarding future plans are sought.
The consultation paper, entitled: "Inheritance Tax: a fairer way of calculating trust charges", highlights instances whereby an individual has set up multiple trusts on different days, each one with its own nil rate band below the formal IHT limit – an often used technique in the past, for distributing the wealth of an estate.
To combat this tactic, HMRC has suggested introducing a single nil rate band to be applied to all new trusts set up by one individual after 6 June 2014. Existing trusts will continue to be taxed under the old regime, although if any further assets are added to them or they become a relevant property trust after 6 June 2014, they will then automatically be transferred over to the single nil rate band scheme.
All this means that for many, their trust arrangements will need to be reviewed to ensure that taxation will definitely continue as before and that they will not be affected by these proposed changes to legislation which, if passed, are likely to take effect from 6 April 2015.
Inheritance tax revenue shows north/south divide
Statistics collated by Prudential show that half of HMRC's inheritance tax revenue during the period 2010-11 came from London and the south east alone – indicating a huge north/south divide.
These statistics are somewhat unsurprising, given the difference in house prices between the south east – the capital in particular, and the rest of the UK.
In the north east, the average inheritance tax bill was £130,000, whilst in Wales, it was around £126,000. In London, the average amount billed was £234,000 – perhaps ultimately, a high price for living in the capital. The total overall IHT revenue during this time was £2.6bn.
Since the period in question, HMRC's IHT revenues have continued to climb, as the property market begins to prosper once more. The government reaped £2.9bn in 2011-12 and £3.1bn in 2012-13. This trend looks set to continue – a great reason to start planning your estate and minimising your IHT liability right now.
Frozen IHT means more focus on trusts
The government's Autumn Statement included its intention to freeze the inheritance tax nil rate band at £325,000 until at least 2017/18. This is a move which presumably hopes to capitalise on increasing house prices, which will see more estates attracting inheritance tax liability.
Most of us are now aware of the government's intention and many are looking at ways in which to protect their assets, so that their loved ones will benefit as much as possible, after they've gone. One way to do this is to use a trust.
HMRC is aware that a great number of people with significant assets will be looking to minimise any IHT payable through a trust and last year, it brought out a consultation document on how it might deal with taxation and trusts. So far, this has caused great debate, which is still continuing.
Currently, trusts are valued and taxed at each 10 year anniversary. Valuations are not always straightforward however, and calculations and payment dates can be exceptionally complex. Once the new guidelines have been agreed, we will publish them on the IWC blog but until then, it is advised that if you wish to set up a trust to minimise IHT, that you seek the advice of an experienced UK estate planner.
Inheritance tax forms abolished
In the Autumn statement, the chancellor revealed on behalf of HMRC, that paper-based inheritance tax forms are to be abolished within the next three years.
As we all know, the current system of probate can sometimes be a very slow and laborious process, depending on the complexity of the estate. On average probate can take several months to process, which can cause significant stress and even financial difficulties for executors and beneficiaries.
It is thought by HMRC that by allowing executors to apply for probate and submit inheritance tax valuations online, this will free up more staff, who can then help to move the rest of the probate process along more smoothly. In turn, this, it is hoped, will significantly reduce the amount of time it takes to grant probate.
Personally, I feel that this step, which seems such a simple solution to the rest of us, will make a huge difference to a process which, it may be argued, has become somewhat antiquated and often more complicated than it needs to be. I look forward to seeing this online system implemented, and examining any changes in processing time.