Is it possible to overpay on your inheritance tax bill? It may seem as though everything would be calculated exactly when it comes to inheritance tax, and that the bill you pay is the correct one, but that is not always the case. Sometimes it is possible that you have overpaid. However, bear in mind that it can also be possible to underpay the bill. But why does this happen?
Assuming the estate of the deceased is worth more than the inheritance tax (IHT) threshold (currently £325,000), the government will require you to pay a 40 percent tax on anything over that amount. The estate’s executor will have to complete a tax return, and the calculations made at this point will determine what needs to be paid to HMRC. Once this is done, probate can be granted and the assets distributed.
However, since this figure needs to be paid straight away, and not wait until the property in question is sold, the calculations could be wrong. It is very common for properties to be up for sale at a certain price, but for the true sale price to be either more or less than that figure. It is more likely that the house will sell for less than the asking price, although more is sometimes possible (particularly if there is a lot of interest, or if it is sold through an auction system). The IHT will already have been paid, though, so when the actual sale figure for the property is confirmed, a new IHT bill will need to be issued. Any overpayments will need to be recovered, and any underpayments will need to be rectified.
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.
How to ensure your grandchildren receive their inheritance
A recent survey by insurance company Sunlife has revealed that a large number of grandparents intend to leave part of their estate to their grandchildren, but surprisingly, don't trust their own children to ensure that these instructions are carried out.
The results of the survey showed that seven in ten grandparents plan to leave their grandchildren an inheritance. 55 percent of those grandparents are looking for ways in which they can protect this aspect of their legacy, without having to rely on their children to pass it on, according to their final wishes.
In some instances, such a legacy is not as straightforward as simply leaving a sum of money in a will. It may be that the grandparents wish to leave a property such as the family home instead – the problem being that children under the age of 18 are not legally able to own property.
One way to get around this problem is to leave assets in trust for the grandchildren. When doing so, it is vital to consider an appropriate age for the child to receive the inheritance, so that they are mature enough to use it wisely. An age contingent trust such as this is normally written into the will.
It is worth remembering however, that any assets left in a trust may incur an inheritance tax charge every ten years, of up to six percent of the value of the trust, above the IHT threshold.
The key to ensuring that your grandchildren will benefit from your estate as you would want, is to take control now and have a will and trust drafted, which both reflect your wishes and family circumstances. Through effective estate planning, it may also be possible to identify ways to reduce any inheritance tax payable on your assets.
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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.
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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.
Life insurance and inheritance tax planning
The reason for having life insurance is simple: to provide for your loved ones in the event of your passing. However, unless you take suitable precautions it's possible that some of the proceeds of your life insurance policy might end up going to an unintended beneficiary: the taxman.
The reason for this is simple. It's called Inheritance Tax ('IHT'), and it applies to estates worth over £325,000.00. Worse still, IHT is charged at 40%. So that could mean that your loved ones lose as much as 40% of the proceeds of your insurance policy.
You may think that this doesn't apply to you, but rising house prices and a static IHT threshold could mean that your estate falls within the threshold for IHT when the time comes.
If that isn't sobering enough, consider this: a recent survey by Legal & General indicated that over 90% of their whole-of-life policy holders had taken no steps to protect the proceeds of their life policies from IHT. This is backed up by Aegon's own research, which indicates that 94% of whole-of-life policies are bereft of IHT protection. And this research comes on the back of research by Unbiased that estimated £530 million is paid out annually to HMRC by way of IHT charged on the proceeds of life insurance policies.
The problem is worse, says Legal & General, for unmarried couples, as they do not benefit from the same tax allowances that apply to spouses and civil partners. And this is no small problem – approximately 5.3 million adults in the UK fall into the category of unmarried couples.
There is, however, a solution to this problem – have your life insurance policy written in trust rather than have the proceeds of it paid directly to one or more individuals. In this situation, the proceeds of the life policy are paid to trustees, do not form part of your estate and are therefore not counted for IHT purposes.
Apart from the IHT benefits, there's one other advantage of writing your life insurance policy in trust in that the proceeds don't have to go through probate. This means that it's likely that payment will be made to the beneficiaries quicker than if the policy had not been written in trust.
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Planning for IHT liability
Planning for IHT liability is absolutely vital, in order to ensure that your loved ones or chosen charities receive as much as possible from your estate, and the taxman as little as possible.
We cannot emphasise enough how important it is to start planning your estate right now. There are stipulated time periods within English law which have significant bearing on your estate planning and, should you leave it too late, you run the risk of ultimately increasing the amount of inheritance tax to be paid.
For example, the concept of "gifting" has long been recognised as an accepted means of reducing the value of your estate whilst you are still alive – thereby reducing inheritance tax liability after you've gone. Small gifts up to the value of £250 each time can be gifted to as many loved ones as you wish. In addition, a parent can make a £5000 wedding gift, a grandparent can gift up to £2,500 for their grandchild's wedding and anyone else, up to £1000. However, there is a condition attached to these gifts.
As the individual giving a gift to a beneficiary, you must then live for at least another seven years from the date of the gift, if the value of your estate is to be reduced by that amount. Should you not live that long, then your executor will be expected to pay a percentage of the whole IHT liability. This is known as Taper Relief. So, should you die within three to four years of making a gift, then 80 percent of the inheritance tax will be charged. Alternatively, between years six and seven, 20 percent will be charged.
From this then, it should be clear that you need to start planning for IHT liability well in advance. Any delay could cost your loved ones potentially thousands of pounds.
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Can I write a will myself?
We're often asked about DIY wills and the reasons why we suggest that it's far safer to have an experienced will writer draft the document, rather than try to do it yourself.
Legally, there is nothing to stop you from writing your own will. However, the consequences of getting it wrong can be far-reaching.
A DIY will is often fine for very simple circumstances and estates of smaller value – a husband with an estate of £250,000 leaving everything to his wife, for example.
Remember however, that in order to be valid, wills must be worded correctly and witnessed by two independent adults at the same time, who are not beneficiaries. Any incorrect spellings of names, ambiguity or incorrect witnessing may well result in significant delays in the probate process or even render the will invalid.
Wills should not be considered as a one-off document. Why? The reason is simple – the will you prepare as a new parent at the age of 30 is unlikely to have any significance by the time you're a grandparent aged 70. Undoubtedly, the family unit will have altered several times, and relationships will be forged and lost over those four decades. These changes must be taken into consideration, but amending your will is not as simple as crossing through existing content and adding new instructions in pen. Any changes in assets or beneficiaries must be reflected in a new will.
It's worth remembering too, that a professional will writer and probate practitioner will be able to advise you on how to structure your estate so that your beneficiaries will receive as much as possible, and the inheritance tax (IHT) liability on your estate will be minimised. By not seeking this advice and writing a will yourself, your loved ones could potentially lose out on thousands of pounds.
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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.
What is a family investment company?
These tax changes mean that many trusts no longer offer the tax-efficient benefits they once did. With this in mind, individuals are being urged to consider other options, which include using a plc to pass down assets to other family members.
With a family investment company (FIC), the shareholders are other family members. Large amounts of cash can be invested tax-free into the company, which can be used by the family members as a means of generating income. Gifting shares in this way is treated as any other gifting, in that the transfer is completely free of tax and the gift itself will remain completely free of inheritance tax liability, should the donor survive for at least seven years after the date of gifting.
If all profits are retained within the company, no further tax becomes payable.
Family investment companies may not form the best tax-efficient solution for everyone, however. For example, farming families may automatically be eligible to receive business property relief or agricultural property relief, in which case a trust may be more suitable.
If you would like to know more about the advantages and disadvantages of family investment companies, or would like to discuss your personal needs and objectives in more detail, contact the IWC estate planning experts, who will be able to help.