inheritance tax planning

Business owners risk higher inheritance tax bills

The introduction of the Finance Bill in July may see families of business owners being hit hard by changes to the way in which inheritance tax falls due.

Currently, should a business owner take out a secured loan against a personal asset such as their home for the purposes of business investment; inheritance tax will be calculated only on the difference between the asset and the balance of the loan. Inheritance tax relief specifies that no tax will fall due on the business asset.

So for example:

The owner of a taxi firm secures a £200,000 loan, secured against his home, in order to invest in ten new cabs. His home is valued at £400,000. If he dies and inheritance tax then falls due, this will be calculated at 40% of £200,000 which would be £80,000.

Under the new rules however, the calculations differ. Reliefs will be withdrawn and inheritance tax will be charged on the value of the asset against which the loan has been secured.

Example:

The same taxi driver takes out the same loan for the same purpose after July. If he then dies, inheritance tax will be charged at 40% of £400,000, making the bill £160,000 – twice what his loved ones would have had to pay in the past.

It’s easy to see then, the significant impact that this could have on many families – even if the business owner didn’t deliberately plan the manoeuvre in order to reduce his eventual inheritance tax bill.

There may be other strategies which can be put into place to lessen the impact that this could cause on a family’s finances, but with only a few weeks to put these in place, affected individuals must seek advice immediately.

Limiting inheritance tax liability becomes more difficult

 


 


Limiting inheritance tax liability has become more difficult since HMRC has launched its campaign to close down many of the usual loop holes and tactics which have in the past, allowed individuals to minimise the amount of inheritance tax which could be applied to their final estate.

 

Generally, the advice being given is to start planning as early as possible; leaving it until later in life will severely limit your options.

 

Many more estates are reported as being investigated by the taxman, meaning that any inheritance tax planning must be watertight.  There are even concerns that the tax threshold may not just be kept static, but may even be lowered during the next election.

Inheritance tax threshold frozen until 2019

 

News last week that the inheritance tax threshold is to be frozen at £325,000 until at least 2019, came as no surprise to most people. This is despite having been told that it would rise in 2015-2016 and would eventually reach £1m.

Unfortunately, it does mean that many more of us will be caught up in the net of inheritance tax (IHT), whilst the government ploughs money into social care reform.

Early figures suggest that around another 5000 middle class individuals will find themselves liable to pay IHT as a result of these recent rulings.

As a result, those who feel IHT may now be applied to their estate are being urged to take steps now in order to protect assets from IHT as much as possible.

Research from Unbiased has revealed that around £448m was wasted by tax payers last year, who failed to plan effectively and whose money therefore went to the tax man.

Don’t wait until it’s too late. Protect your loved ones and make sure you have plans in place so that they will be able to claim as much of your estate as possible.

Inheritance Tax planning for farmers

Under current Inheritance Tax rules for farmers, up to £325,000 per person or £650,000 per couple can be inherited by their next of kin, tax-free. In addition, any assets left to a spouse or charity or also exempt from any Inheritance Tax. 
 
If a child or next of kin inherits assets above this nil rate band however, they will normally be forced to pay tax at 40% of the remaining value, in accordance with general Inheritance Tax rules.
 
Although HMRC is reluctant to apply Agricultural Property Relief to estates, carefully and professionally prepared cases can see farm land and property benefit from up to 100% of this APR.
 
The case should claim that either that the land or property must have been at least owned by the deceased farmer for at least seven years before the date of their death, or that they owned and lived in it for at least two years before their death.
 
Certain types of leased land may also qualify for APR including woodland, farm buildings and studs, if the lease can be terminated within 12 months. 
 
The criteria for claiming Agricultural Property Relief is notoriously strict and relies principally on occupation and retaining farming character and functionality.

Inheritance Tax and gifts of property

If you are in the enviable position of owning and living in a property which is now mortgage-free, you may be thinking of gifting it to your next of kin as a way of reducing your Inheritance Tax liability.
 
You can of course gift your property if you are no longer living in it and in this instance, it will be formally classed as a gift and so will not be taken into consideration when your Inheritance Tax liability is calculated.
 
However, if you have already gifted your home yet continue to live in it without paying rent at the current market rate, you will be considered to be still benefitting from the property – called a “gift with reservation”. In cases such as this, the property although no longer technically yours, will still be classed as part of your Estate in the event of your death and so will be included in Inheritance Tax calculations.
 
It is therefore, more advisable to simply leave your home to your loved ones in your Will, rather than trying to minimise your Inheritance Tax liability by providing it as a gift.

Inheritance Tax Planning for Family Businesses

Although a recent report called for the removal of Business Property Relief for family businesses, the government has refused to alter the way in which Inheritance tax liability is calculated.

Currently, those benefiting from probate by way of a stake in the family business are exempt from paying inheritance tax under BPR rules.

The UK’s Department of Business, Innovation and Skills has argued that by removing BPR, business owners will therefore be encouraged to restructure the business and bring in more revenue for the government.

The government disagrees however, believing that BPR is vital in supporting the sustainability of small, family-run businesses and that it must remain.

Are you the head of a family business?  Have you thought about inheritance tax planning and do you agree with the government’s decision?

Avoiding Inheritance Tax – How Can I Make Gifts?

Weddings

In addition to the permitted annual gift of £3000 in any one year, each parent of a couple being married (whether a traditional wedding or a civil partnership) is able to make a gift to the couple of up to £5000, and each grandparent can give £2,500. Otherwise, a wedding guest can make a present of up to £1000.

So, whether your child, grandchild, friend or member of the family is getting married and you have the funds available, consider giving them a gift in the form of money. In these difficult economic times, they will no doubt welcome the additional cash and you will benefit from using your exemptions and avoiding inheritance tax.

Funds, Pensions & ISAs

Grandparents are able to invest up to £3,600 a year into each grandchild’s stakeholder pension until they turn 18.
Existing Child Trust Funds (scrapped by the government in January 2011) can also provide a route for investing funds which will then be placed outside the remit of IHT. Up to £1,200 can be invested in each account annually. These investments are also exempt from any other tax.

Introduced in November 2011, junior ISAs are a valid alternative to Child Trust Funds in that they allow annual investments of up to £3,600. Whereas a child cannot access the funds from their CTF until they are 18, a junior ISA will allow them to manage their account from the age of 16 although again, they may not access the money until they are 18.

To find out how to manage your money effectively now, to avoid your loved ones having to pay a large Inheritance Tax bill after your death, contact a estate planning professional today.

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