There aren’t many people in the UK who like the idea of inheritance tax – it seems that it’s just the politicians who are keen on it. But what can be done about it? Surely it is something that must simply be paid and be done with?
Not necessarily. There is an inheritance tax loophole that more and more people are taking advantage of.
It all relates to the ‘deed of variation’. The dead of variation allows the beneficiaries of a will to redirect the assets left to them to other people. But how does this help?
Firstly, it means that the inheritance can be given straight to those who might have a more immediate need for it such as grandchildren rather than children. Secondly – and perhaps more importantly in many respects – it can reduce the overall inheritance tax liability for the family. It effectively diverts wealth away from an estate that is already close to the inheritance tax liability threshold, and it means that the estate won’t be taxed twice.
There are certain criteria that need to be met for this to happen, however. The changes must be made within two years of the death. All the beneficiaries within the will must agree to any changes made, otherwise it cannot happen. They must all sign the variation. The variation deed must be very clear about who is to inherit, and everything must be set out in writing. It should also contain a stamp duty exemption certificate if any stocks or shares have been changed. If the changes are being made with regards to inheritance tax or capital gains tax, there must be a signed note to that effect along with the deed of variation.
An executor is always expected to act reasonably when it comes to dealing with someone’s will and estate. They must act in the best interests of the estate, and the beneficiaries named in the will. This involves a number of things including getting the best possible price for any property or assets that are sold. It also means that they should ensure that the death is registered correctly. If this is not done, there could be serious implications that affect many people, and their inheritances.
The estate must be calculated correctly as well. This is to make sure that, if any inheritance tax is due, it is paid on time, and at the correct figure. This needs to be done before any of the money and assets are distributed.
The death should also be ‘advertised’, for example it could be announced in a national newspaper. This is so that anyone who is not mentioned in the will but who is owed money by the estate can contact the executor to arrange for payment. These debts must be paid off before any beneficiaries can inherit. If this is not done, and someone makes a claim after the money has been distributed, the executor may be liable for the debt.
If someone disputes the will (ie, if they question whether the will is valid, or if they have evidence that there is a newer will, for example) then there could be further claims. Being executor is an important job with huge responsibility, and it is always worth getting independent legal advice if you take the job on, to prepare you.
Applying for probate can be a complicated process, particularly if you have never had to do it before. If you don’t seek expert advice, there are some common mistakes that are often made. These mistakes can cause probate to take much longer than it needs to, making it more costly, and more stressful.
The first mistake that often occurs is that people apply for probate in the wrong country. The only place to apply for probate is in the country where the person was living before they died. Many people applying for probate apply in the country where the person was when they died, rather than their country of residence. This is not always the same place, and if you are unsure it is best to check.
The forms required can also be confusing and lead to mistakes. The forms can be found online, but although they are easy to find, they are not always that easy to fill in. Every part of the form needs to be completed, and that might require some research because all the names of the person need to be entered. Those names much match the ones on the will. This might relate to middle names, or perhaps maiden names. All the information much be correct and the same on all the forms.
Estate fees are the last area where big errors can be made. There is a special formula that needs to be used to calculate the fees and taxes due. Mistakes here can mean big problems further on, which is why hiring an expert to help at this point can save you a lot of trouble in the long term.
The richer are going to become richer, and the poorer poorer, and it’s not just to do with income. A lot of it is linked to inheritance. It is said that half of the country are set to inherit large amounts, whereas the other half will inherit nothing, or very little.
The study comes from the Institute for Fiscal Studies (IFS) who has said that the reason inheritances are, in some cases, growing hugely, is down to house prices. When property prices rise, and those properties are left to relatives who go on to sell them or even keep them for the price to rise even further, they can make a rather healthy profit.
The IFS has said that around half of Britain’s young people will inherit about 90 percent of the country’s wealth in a few short years. At the moment, 72 percent of people say that they expect to inherit something from their parents. Just a decade ago, that number was at 60 percent.
These figures mean that the inequality between the ‘haves’ and ‘have nots’ will only widen over time, making the country potentially unstable because so much of its wealth will be wrapped up in a relatively small number of people.
Another worry is that the big cuts to inheritance tax that David Cameron unveiled are continuing under Theresa May. This is even though it will actually only benefit a small number of people, but it will affect the country by not bringing in as much money as it once did. The very richest people will effectively be receiving a tax break whilst our essential services are cut.
Something that executors often ask is how do they pay the inheritance tax that is due on a deceased person’s estate when it is due before the estate is sold?
The first step is to hire professional valuers to come in and work out how much the estate is actually worth in terms of property, assets, savings, and anything else that is left over. Using an inheritance tax return (which needs to be submitted within six months of the death), the executor will need to inform HMRC of that valuation.
If the estate is worth less than £325,000 then no inheritance tax will be due since the estate falls into the nil rate band. Anything over £325,000 is taxed at 40 percent. So if, for example an estate was worth £800,000, inheritance tax would be due on £675,000, and, at 50 percent, that leaves a bill of £270,000.
That’s a lot of money to pay straight away.
But there are ways to deal with this. Firstly, HMRC allows the tax bills to be paid over 10 annual instalments, meaning that the amount that needs to be paid up front is much smaller than the entire bill. It could still be many thousands of pounds, though. In this case, banks and building societies are often happy to release funds from the estate in advance if they are going to pay inheritance tax. If this is the case, it may be better to pay the entire bill in full at the beginning, and be done with it.
Alternatively, if for any reason the bank won’t release any funds, there is such a thing as an executor’s loan, which can be borrowed against the property and paid back once it sells. It is best to speak to a bank about this.
Some people are pleased to receive an inheritance (despite the fact that it means someone they loved, or who at least loved them, died), and some would prefer not to for various reasons. But no matter what, some inheritances which, from the outside, might not look like much, or might not be overly welcome, could actually be worth a lot more than even the testator realised.
This was the case recently in France when a man inherited a house from a deceased relative and soon found that he had a lot more than he bargained for in terms of what he had been given. Because, hidden in strange places throughout the entire house were gold bars and coins. Not just a few, not just a handful, but around 5,000 coins, two 12kg gold bars, and 37 1kg ingots. They weight over 100kg in total, and they are all worth millions – around £3 million in all.
The treasure trove was apparently extremely well hidden, and it is unclear whether the beneficiary of the house was meant to find it at all. But find it he did when he began to move the old furniture out. The first thing he found was a tin of coins which had been screwed in place under a sofa. Once he discovered this and more, he called a solicitor as he wasn’t sure what he should do with the stash.
After further investigation, it was discovered that there were certificates of authenticity also hidden within the house, and the gold had been bought in the 1950s and 1960s. It has now all been sold.
But what about inheritance tax? The haul could well be liable for a 45 percent inheritance tax, as well as three years’ worth of back taxes if the original owner failed to declare the gold in the first place. And considering how well he had hidden the treasure, it’s unlikely that he did.
Inheritance tax planning sounds like something that only the rich and famous need to really think about, but is it actually something that everyone should consider? Although it may seem as though it’s only something that affects other people, inheritance tax can actually affect anyone and everyone, so ensuring that your estate won’t fall foul of the laws is an important part of creating your inheritance plan.
Inheritance can affect more people than you might think because once you add up your estate – savings, belongings, life insurance proceeds, your pension, and your property, it could well be over the threshold for having to pay inheritance tax. When property involved this is even more likely since house prices are rising.
There is an inheritance tax allowance of £325,000 on any estate. If the estate is worth more than that then tax will be owed on the ‘extra’ amount, and it is payable at 40 percent. However, if you have a spouse or a business interest (or both) then it is possible to carry out inheritance tax planning through your will. It could be that inheritance tax won’t be due at all since there is a spousal exemption from the tax, and also business tax relief.
If you are single, living with a partner but unmarried, or you have no business then your will may not be able to help you reduce inheritance tax. But there are other things you can do. For example, everyone has an annual inheritance tax exemption of £3,000 which can be used to give gifts. If you give more than £3,000 the rule is that you must ‘outlive’ the gift by a further seven years (otherwise it could still be subject to inheritance tax).
The best thing to do is to contact an expert who will be able to talk you through your options and reduce your liability for inheritance tax as much as possible.
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.
Intestacy problems on the rise
The BBC reported yesterday that according to Citizens Advice, the number of enquiries it receives about intestacy problems has more than doubled over the last five years.
Despite attempting to drive home the message that dying without a will can cause immense stress and financial pressure on those left behind, Citizens Advice still received 3,747 intestacy enquiries last year, compared to 1,522 in 2011.
These figures appear to contradict the findings of a survey carried out by YouGov last year, which indicated that 38 percent of people in England and Wales had made out a will – a rise of three percent from the previous year.
Failing to make out a will does not only mean that the funds from an estate may not be distributed in the way that the deceased would wish. It also means that any charities could potentially miss out on vital income. Also, effective estate planning will not have taken place and so the next of kin could lose thousands of pounds unnecessarily, by way of inheritance tax.
The BBC report for example, cites the case of a man who left around £700,000 but no will. His cousin administered the estate but this process took around two years and £240,000 was given to the tax man. The rest was split among 17 people, a number of whom had never even met the deceased.
Interestingly, the number of enquiries received from executors of a will also rose last year to 11,137 from 8,160 in 2011. This shows how estates are becoming increasingly more complex, making the role of executor more difficult, particularly for those who attempt to distribute an estate without taking specialist advice from a probate expert.