Inheritance Tax - A Simple Guide

Inheritance Tax (IHT), no-one likes it, and more and more of us are paying it thanks to a freeze in the threshold that has lasted almost as long as the last ice age (cue wooly mammoth stage right*)!

In all seriousness, the nil rate band for inheritance tax hasn't gone up since 6 April 2009. The purpose of this blog isn't to tell you about the latest tax planning whizz (you have to pay me for that), but rather to outline the basics of inheritance tax to the uninitiated. If you're worried about IHT, then you should probably read on McDuff...

Inheritance tax is, as I'm sure you'll know, a tax on the estate of the deceased. So, technically it's not your problem! However, if you love your nearest and dearest more than the taxman, you won't want them to pay any more of it than is neccesary (note: I'm sure someone loves the taxman, if only it's his Mum). HM Revenue & Customs helpfully state:

        There’s normally no Inheritance Tax to pay if either:

• the value of your estate is below the £325,000 threshold
• you leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club

So, if that's you, job done, thanks for reading!

Oh, some of you are still here? Well, I suppose I better continue then...

Well, if your estate exceeds the £325,000 threshold (or nil rate band) then IHT is definitely a worry, but don't worry there's plenty that you can do about it:

• If you're lucky enough to own a house, then in addition to the IHT nil rate band (NRB) a residence nil rate band (RNRB) was introduced from 6 April 2017. This is available when residential property is left to direct descendants and currently gives up to a further £175,000 of tax free allowances.
• Married couples and civil partners are allowed to pass their estate to their spouse tax-free when they die. So, in effect, your surviving spouse can inherit your entire estate without having to pay IHT. You can also pass on your unused NRB and RNRB to your surviving spouse or civil partner.
• While you’re alive, you have a £3,000 ‘gift allowance’ each year. This is known as your annual exemption.This means you can give away assets or cash up to a total of £3,000 in a tax year without it being added to the value of your estate for IHT purposes.
• You can make gifts in excess of the £3,000 annual exemption, but they'll only be exempt if you live more than seven years from when you make the gift, otherwise your children or family might have to pay IHT on your gift when you die.

That's pretty much the basics of what you can do yourself, anything else is likely to require the assistance of a practitioner of the dark arts (a tax adviser, like me) to help you navigate the pitfalls of trusts, family investment companies and tax efficient investments. There are plenty of other blogs on here covering those subjects so please feel free to check them out, here are a couple of get you started:

• Trusts
• Family Investment Companies

I hope you've found this blog useful, and irreverently light hearted given the subject matter, and if you have any more questions I'd be more than happy to answer them, drop me a note via the contact form on the blog...

(*if the jovial tone of this blog seems a bit off kilter please accept my apologies, I've been reading Terry Pratchett again!)

Family Investment Companies: HMRC are still lurking in the shadows...

HMRC hve been revealed that a secret unit has been created to assess the risks of Family Investment Companies (FICs) to the tax system in the UK, with particular reference to their associated inheritance tax (IHT) benefits. If you're reading this and wondering what a FIC is, then you can find out more about that here.

FICs have become increasingly popular with wealthy families in the last ten years, primarily as a result of changes to the taxation of trusts. As you would expect their rise in popularity corresponds to a matching decline in the use of trusts in the UK. Both of these structures are regularly used to achieve a similar objective: a desire by parents to pass assets down to the next generation whilst retaining some control of those assets during their lifetime. The principal difference is in how the two are taxed!

I would go so far as to state that is is largely a problem of HMRC's own making though. We have seen a great decline in the number of tax-paying trusts in the UK since significant changes were made to the system in 2006, primarily the biggest hurdle being a potential 20 per cent upfront tax charge can arise on assets settled on trust where they are over and above £325,000 (per settlor).

Anyway, why should we be bothered about HMRC's "secret unit"? Well, there are many reasons, not least of which let us take a look at how the "loan charge" debacle played out. The Revenue are starting to develop a reputation for not playing nicely. That said, we know that there has been a long standing review of the IHT system, and several looks at the taxation of trust. In my opinion this will just be an extension of that existing review, after all it would seem churlish to review trusts, but not the tax planning vehicle of choice for wealthy families that replaced them in their armoury. I for one will be very interested to see the outcome of any review!

Stamp Duty Land Tax: ANOTHER Covid Update (Thanks Rishi!)

Rishi Sunak has announced a temporary holiday on stamp duty on the first £500,000 of all property sales in England and Northern Ireland (but not Scotland and Wales as they operate a different system).

In effect, this means that the threshold on which no tax is charged has been temporarily raised until March 2021 from £125,000 to £500,000 to boost the property market and help buyers struggling because of the COVID crisis.

It is unclear (at the moment) as to whether this will apply to second homes or properties purchased through a company, and I for one will be astounded if it does. However, the documents from today's speech do state:

"Temporary Stamp Duty Land Tax (SDLT) cut – The government will temporarily increase the Nil Rate Band of Residential SDLT, in England and Northern Ireland, from £125,000 to £500,000. This will apply from 8 July 2020 until 31 March 2021 and cut the tax due for everyone who would have paid SDLT. Nearly nine out of ten people getting on or moving up the property ladder will pay no SDLT at all."

Regardless of that, the surcharge will still very much apply, so the 3% rate will still get charged on second homes and company purchases of residential property as it is only the nil rate band that is being amended, not the rate itself.

Chancellor Rishi Sunak said: "The average stamp duty bill will fall by £4,500. And nearly nine out of 10 people buying a main home this year, will pay no stamp duty at all."

So the more you pay - up to the new £500,000 threshold - the more you could save on stamp duty. For example, before the stamp duty holiday, if you bought a house for £275,000, for instance, the stamp duty you'd have had to pay would have been £3,750.

• 0% duty on the first £125,000;
• 2% on the next £125,000, so £2,500; plus
• 5% on the final £25,000, so £1,250 (a total of £3,750).

Stamp Duty Land Tax Reclaims: A Covid Update

If you've been caught with an SDLT surcharge as a result of purchasing a second property then there may well be a bit of relief available to you if the COVID lockdown in the UK has meant that you have exceeded the three-year reclaim window.

There have been some relaxations in respect of COVID for most taxes, and following a written ministerial statement by the Financial Secretary to the Treasury and in light of the coronavirus pandemic's impact on the housing market, HMRC has updated its guidance on exceptional circumstances for claiming an SDLT refund outside of the normal time limits. This will allow homeowners to apply for a refund of the higher rate of SDLT even if the previous home was not sold within the three-year time limit, where that period came to an end on or after 1 January 2020.

HMRC has updated its guidance on exceptional circumstances that allow refunds following a sale outside of the normal three-year limit to specifically include the impact of COVID-19 preventing the sale. The updated guidance can be found here.

The written ministerial statement also advises that once this reason has ended, the previous home must be sold as soon as practicable to be able to apply for the refund. The claim must include an explanation of why the taxpayer was unable to sell the previous home within three years. Decisions will be made by HMRC on a case-by-case basis.

It is not exactly a panacea, but where the sale or marketing of the sale was delayed by COVID, then we can apply for a refund in writing, the forms for which can be found here.

Business Asset Disposal Relief: A Change of Name for ER

I seem to be having lots of conversations about Entrepreneurs Relief (now Business Asset Disposal Relief of course), and much like Business Asset Taper Relief before it (pre-2008), I'm pretty sure both practitioners and clients alike will use the old nomenclature rather than the new for a little while yet.

However, what is more important than the change of name is the reduction of the lifetime allowance from a generous £10m back to the original £1m that was granted when it was introduced over 12 years ago. Now, whilst most people will have been aware of that, what a lot of (admittedly non-tax) people will have overlooked is the anti-forestalling provisions, i.e. banging a contract in quickly before the deadline date! This has been a favourite of lawmakers for some years now.

So, what is "anti-forestalling" and what does it mean for you? Well, although the reduction of the business asset disposal relief lifetime limit from £10m to £1m only applies to disposals on or after 11 March 2020 the anti-forestalling provisions mean that there are circumstances in which the reduction of the allowance can apply to transactions as far back as 6 April 2019 (and potentially even earlier). Generally, these circumstances fall into these main areas:

• Unconditional Contracts, where normally the "tax point" for a capital gains tax transfer is the date of contract rather than the date of exchange, so where one has exchanged contracts (i.e. ones on which there are no qualifying conditions to be met) it could have been quite simple to exchange contracts before 11 March 2020, but not complete for some months thereafter. If you find yourself in this position seek advice immediately as there are some "get-out" clauses in the provisions that might apply.

• Reorganisations and Share exchanges, being what we would usually refer to as a paper transaction, but where an election has been made to disapply the no disposal treatment (arising under s127 TCGA 1992) to have the effect to trigger a taxable gain on what would normally be a tax-neutral event. The rules around these have many similarities, but a few distinct differences as well, and both can apply to transactions occurring on or after 6 April 2019 but before 11 March 2020.

Interestingly you'll notice there is no "start date" for unconditional contracts, so they can be caught by the anti-forestalling measures if they've been in site for an extended period of time. It would seem odd, but believe me, it happens.

So, if you entered into an unconditional contract before 11 March 2020, or performed a "taxable" exchange of shares or reorganisation, then you might want to revisit those contracts and see whether you're caught by these new measures...

IHT: Beware the Claw(back)...

After my last blog I've had a few people reach out to me about the potential clawback that can occur with the Main Residence Nil Rate Band, and as it's a bit confusing I thought it might be worth explaining further. Most people have by now heard of it, some even carry the misconception that the first £1million pound of a joint estate is IHT exempt. Well, it's far from that simple and can lead to problems if not properly planned for...

The Main Residence Nil Rate Band is tapered by £1 for every £2 that the net value exceeds £2million. The £2million is calculated using the value of the estate before reliefs such as Business Property and Agricultural Property Relief. The effect of this means that, for example, shareholders of unquoted trading companies may find that they do not qualify for the Main Residence Nil Rate Band if the shareholding is valuable, even if the shares themselves are not subject to IHT!

The relief is restricted where the total net value of an individual's IHT estate, after deduction of liabilities but before deducting any reliefs and exemptions, is more than £2million.

The threshold means that no additional relief will be available for an unmarried individual’s estate that exceeds £2.35million in 2020/21.

For the second death in qualifying married couples and civil partnerships, the upper limits will be  £2.7m in 2020/21 (i.e. the £700,000 over £2m will reduce the Main Residence Nil Rate Band by £350,000, cancelling out the 2 x £175,000 residence Main Residence Nil Rate Band’s).

Even if you can get your head around the numbers, you need to make sure you're current Wills and estate planning are up to task. Many with "care fees planning" trusts could find themselves not qualifying. Those with Wills that don't specify the property passes to a lineal descendant could well be in the same predicament. If you're in any doubt I'd recommend a review today!

Do you want to save 80% tax?

I know, hey if you're here looking for the latest dodgy tax scheme I'm going to have to disappoint you, as all of my clients and contacts know I just don't do them, never have, never will. So, that leaves you asking how on earth I can title a blog like this if I'm not bending the rules somewhere right? Throughout my various businesses over the years I've only ever undertaken tax planning with my clients within the bounds of the legal framework we're given. In almost all cases I've found more than enough scope to make sure that my clients only end up paying the tax that they're due to pay. So the first thing I do is make sure that they're positioning all of their assets in the best possible way to obtain the maximum reliefs.

If there is one area of tax for which this couldn't be more true, its inheritance tax, be that from making sure there are no investment assets in a clients trading business (to make sure they qualify for business property relief) to helping them structure family investment companies, it is all about having the right pieces on the right parts of the board, and like chess, you're always having to plan several moves ahead.

So, this is where I hear everyone screaming:

"What about this 80% tax saving Steve!"

and the answer to that is relatively easy. If you've heard of the Main Residence Nil Rate Band (MRNRB) then great, but if not the long and short of it is that it is an extra inheritance tax allowance that you receive on death up to £175,000 per spouse/civil partner. So for a married couple or civil partners, there's a potential £350,000 worth of extra relief there at 40%. Now, that relief can be lost for any number of reasons, but the most common is that the property doesn't go directly to a lineal descendant due to poor drafting of a Will. So, you'll need to review that and make sure it's right.

"But that's still only 40%, right? 

£350,000 x 40% = £140,000 tax saved"

You'd be right if you'd said this, but the other area where people lose out is where their estate exceeds £2million. For every £2 over £2million you lose a £1 of relief, so by the time you get to an estate of £2.35million, you've lost all your MRNRB. The chess players amongst you might be seeing where this is going, let me give you an example. Mrs Smith has died leaving her estate to her children, her husband died several years ago, but she qualifies for his transferable nil rate band...

Mrs Smith has an estate of £2,350,000.

Her house is left to her two children in her Will.

Due to clawback she loses her MRNRB.

IHT due on her estate is £680,000.

Now, let us say I'd advised Mrs Smith to make a gift of £350,000 to her two children during her lifetime (and of course assume that she'd survived 7 years!). Her estate on death is now £2million, so not only does she get her husband transferrable nil rate band still, but she also gets the MRNRB for both estates. This increases her IHT allowances to £1million, so she's only liable for 40% IHT on £1million, a total of £400,000.

The numerically minded will have spotted that a reduction from £680k to £400k isn't 80%. The 80% saving I'm talking about is on the planning. In order to save 80% total IHT Mrs Smith would have had to make a much larger gift than £350k. The purpose of this planning is to make the smallest possible gift to make the largest marginal gain. Where the 80% comes in is :

Mrs Smith had saved 40% on the gift of £350k = £140k.

As a result she also GOT BACK her MRNRB allowances.

This resulted in another £350k x 40% = £140k. 

So, the planning around a single £350k gift saved £280k of IHT = 80%, voila!

Simple planning, but crucial for estates like Mrs Smith...

Tax in a Post-Covid World

I've been reading some very interesting commentary recently on this subject, from the International Monetary Fund to our domestic policy experts such as the London School of Economics and the University of Warwick. Even the FT weighs in with stories about potential tax increases on the horizon. It must be apparent to all who've been paying attention that our tax system is going to be due some painful attention in the coming weeks, months, even years. 

However, what is clear is that we're not alone in this, and we could very well be looking at a new age of not just national, but international tax change, the IMF state:

"...aggressive tax minimization by large taxpayers – however legal it may appear – will become even more intolerable to society at large."

Now, that's a trend that I think almost everyone can agree has been playing out in the UK for some time now, and not just with large taxpayers. The effect of the loan scheme charge is still being very acutely felt by many contractors and self-employed, and that's before we even get on to IR35 and off-payroll working!

Looking to the FT's views, a survey of 75 MPs across all major parties showed 72 percent agreed taxes would increase while 83 percent thought the state would play a greater role in the economy post-Covid. Should this come to pass, which it inevitably must, it's reasonable to assume the greatest changes will be to income tax, as it makes up the largest part of the exchequer's purse. I've been in practice for 20 years now, and when I started out basic rate income tax was 23%, and the personal allowance was only £4,385. Compare that now to a basic rate of 20%, and a personal allowance of £12,500. Even through most of the noughties, income tax has been higher, so it would seem likely to see that change fairly soon post-lockdown.

What else could we see change? Well, some within the UK, and already in Europe are mooting a cut to VAT to encourage post-lockdown spending, and that could well be popular with consumers and business, especially if we see an increase in personal and corporate income taxes.

Of course, with the tax-climate as it is in the UK, I doubt we'll see wealthier taxpayers evade the burning eye of HM Treasury either. Low tax rates on dividends and gains almost exclusively benefit investors and business owners rather than employed or self-employed earners. The LSE report says  that up to £20 billion a year could be raised from taxing all income and capital gains at the same rate as earnings. Good news for the exchequer I'm sure, but could it be potentially catastrophic for the nation's business community?

Regardless of the outcome, it is helpful to the profession and to business to gain an understanding of the research and thought that is likely to drive government thinking in the coming years. We should also remember that it is not all doom and gloom either. In recent years the UK has become a "tax-haven" for many as we've enjoyed the lowest percentage income (personal and corporate) tax take we've ever known. In the words of the market makers, think of it as a rebalancing of the scales...

SEISS Update: HMRC finally attempt to define "adversely affected"

Following on from my blog last week, HM Revenue & Customs have produced some useful examples (read them here) to help illustrate exactly what they view being "adversely affected" might mean for the purposes of the first and second grants under the scheme.

To recap on my recent blogs, it's important to remember that in order to be eligible for the scheme, you have to have been (and continue to intend to) carrying on a trade which has been adversely affected by COVID-19 and the lockdown measures put in place by the Government and various sectors of the economy (building sites shutting down is a good example, as the Government didn't mandate that). 

Unfortunately, when looking through HMRC's examples of whether a trade has been adversely affected, there seems to be no specific monetary threshold, and no requirement for income or profits to have fallen by a certain amount as many (including myself) had hoped. Given that HMRC has used builders as their chosen example, it's worth noting that in conversation with clients in that sector many have now returned to work (equally many have not), but those that have are reporting having greatly reduced quantities of work that is impacting their turnover by as much as 50-60%. So financial impact has explicitly not been cited by HMRC as an example of being "adversely affected".

Instead, it seems to hinge on whether or not the person carrying on said trade was "able" to go back to work or not. So following on from the examples given it would seem the only way for anyone to qualify for the second tranche of SEISS is to either have their workplace closed down, or contract the illness (or someone else in their household does) and have to self-isolate as a result.

So, unfortunately for all you builders out there that have been able to go back to work, no second grant for you, it would seem. However, if you're unable to find work (even though the sites are open) as a result of social distancing requirements, then maybe there's some hope.

Those claiming under the scheme should evidence how and why their business has been adversely affected by COVID-19 and keep a record of this. For the first round that will be relatively easy for most, but the second dose of SEISS is most likely to be of no help to the beleaguered self-employed construction industry. 

So, if you were hoping for a second bite of the cherry in August please be wary as HMRC's systems will allow you to make the claim without having to prove being "adversely affected" at the time of claim. However, when you file your 2020/21 self-assessment tax return you might get a nasty surprise (check out this blog for further details)! This is especially important as HMRC and the Government has been quite clear that advisers shouldn't be making claims for their clients (the word fraud was used I believe).

Round 2 for SEISS

HMRC has announced that in August, self-employed individuals who meet the criteria for the Self-Employed Income Support Scheme (SEISS) will be invited to apply for a second grant. This will be in addition to anything they received in May/June under the first round of the same scheme.

There are some significant changes as to how the grant is calculated, although many of the rules applying with the regard to the first grant will apply with regard to the second grant meaning that effectively the same eligibility criteria will apply. The principal change is a drop from 80% of averaged profits to 70% of the same figure. So, the second grant is equal to the lower of A and B where:

• A is the self-employed person’s average monthly trade profits × 70% × 3; and
• B is £6,570.

Although applications for the first grant must be made on or before 13 July, failure to make a claim for the first grant does not prevent you from claiming the second grant.

It's also probably worth a brief reminder of what the eligibility criteria are for both tranches of the SEISS. You can claim if you’re a self-employed individual or a member of a partnership and all of the following apply:

• you traded in the tax year 2018 to 2019 and submitted your Self Assessment tax return on or before 23 April 2020 for that year
• you traded in the tax year 2019 to 2020
• you intend to continue to trade in the tax year 2020 to 2021
• you carry on a trade which has been adversely affected by coronavirus

You can check your eligibility on HMRC's website here: https://www.gov.uk/guidance/claim-a-grant-through-the-coronavirus-covid-19-self-employment-income-support-scheme#eligible

It's also worth mentioning that you don't have to be "out of work" to claim under SEISS, that final point of eligibility is the interesting one, that your trade has been adversely affected by coronavirus. HM Treasury have published a Direction setting out the legal framework of SEISS, unfortunately (as with a lot of legislation) it doesn't helpfully define what "adversely affected by coronavirus" means. So, that must leave us to assume (for now) that it relates to a period of non-working, or of reduced profits due to reduced working. It would seem to prove to be a very grey area for now at least.

Finally, of course SEISS is going to be taxable in 2020/21, so check out my blog on that here.