"Government increasing taxes on death" says probate expert
Government proposals to alter fixed rate probate fees to a banding system has been called "inheritance tax by the back door" by probate specialist, Tony Crocker of IWC.
The fixed fee for probate applications rose recently – a move, said the government, which was deemed necessary to fund additional administrative work carried out by the Probate Service.
These new proposals however, which are out for consultation until 1 April, would see probate fees being charged on estates valued in excess of £50,000 according to a banding system. Fees would then start at £300 for estates valued between £50,001 and £300,000; up to £20,000 for estates valued above £2 million.
Currently, estates under £5000 are not subject to probate legislation and the government plans to raise this threshold to £50,000, meaning that according to its figures, over half of estates would pay no probate fee at all.
IWC questions the validity of this view however, with the average London house price now standing at over £500,000. It is these house prices, the company claims, which will cause problems for executors faced with paying money up front for probate fees, funeral fees and inheritance tax at 40% – and not enough money in the deceased's bank account to cover them. These executors will be forced to offer up the remaining funds themselves or, as the government suggests, to take out a short term bank loan, until the property sells and they can recoup the funds – which of course will attract interest rates and affect their credit rating.
Although packaged as a move to assist those dealing with smaller estates, IWC's Tony Crocker says that, in its bid to raise £250 million for the Exchequer, the government is actually "giving with one hand and taking with the other".
For anyone who suspects that their next of kin may find themselves struggling financially with these new proposed changes, they may be able to avoid probate altogether, by placing their property into trust, now.
In our next blog post, we'll outline how trusts can be a means of avoiding probate, how to create a trust and what happens to it after your death.
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Will I need to pay inheritance tax before I die?
Much has been made recently of government proposals to force certain people to pay inheritance tax before they die, rather than leaving the financial burden and responsibility to those left behind.
These proposals are currently being discussed, as a direct result of a significant number of individuals using trusts to shield their estates from inheritance tax liability.
At the moment, inheritance tax is calculated on the basis of the value of a person's final estate, at the time of their death. Any value over £325,000 (or £650,000 for married couples) is taxed at 40 percent, unless any reliefs can be applied. It is difficult therefore, to envisage how a value can be calculated whilst they are still alive and it must be stressed that this scheme, should it be applied, would be used only to chase more wealthy individuals suspected of deliberately trying to avoid paying inheritance tax.
It is unlikely that these proposals will affect the average individual who is simply seeking ways to minimise their inheritance tax liability through effective estate planning, but we will of course keep you up to date with the progress of these discussions and what they mean for us all. If you have any questions, contact the IWC inheritance tax team on 0800 612 6105 or 020 8150 2010.
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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.
New estate planning solutions will be needed
New estate planning solutions will be needed by many individuals, in the very near future. This comes on the back of house prices rising once again and the inheritance tax nil rate band frozen at £325,000.
IHT revenue collected by HMRC is expected to average around £3bn per year, with the number of estates expected to fall into the IHT trap, doubling by 2017.
Whilst trusts have offered a viable solution for many years, HMRC is now looking to change the way in which periodic and exit charges are calculated. This could have a significant effect on many estates, with higher tax charges being imposed.
Instead, many professional estate planners are advising clients to consider the tax advantages of Business Property Relief (BPR) as a means of reducing inheritance tax liability – specifically, investing in assets which could qualify for 100% BPR in two years.
For further information on the proposed changes to tax on trusts and the advantages of BPR, or to review your current estate, contact our estate planning experts at IWC.
Could we see the end of multiple trusts?
Currently, in order to calculate the amount of any inheritance tax due for a specific period charge, trustees must give the historic value of any other property in a trust which was set up at the same time as the trust concerned. They must also give the historic value of any chargeable transfers made within seven years before the relevant trust was set up.
This complicated endeavour is made even more difficult when the trustee is also expected to submit:
• the current value of the property in trust
• the value of any transfer of relevant property out of the trust during the last ten years, along with dates
• the value of any transfer of relevant property into the trust during the last ten years, along with dates
• the historic value of any property that is not relevant, within the trust
Instead, HMRC has stated in its proposals that any previous lifetime transfers will be ignored, when determining the nil-rate band for transfers on exit charges and 10 year anniversary charges.
It also proposes to ignore non-relevant property, with the nil-rate band being split by the number of relevant property settlements made. Tax will then be charged at a rate of six percent of the chargeable transfer.