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MRNB Reduces Inheritance Tax on Property

With the increase in property prices impacting the UK over the last twenty years more and more homeowners were finding they were liable for Inheritance Tax on Property. With this becoming a major issue for many people the Conservative Party promised to legislate a solution during their election campaign. The much publicised change was to take family homes of up to £1m out of Inheritance Tax charge completely and correct the difference on Inheritance Tax on Property.

The mechanism for enabling this is now part of UK law as is known the main residence nil-rate band or MRNB.  The band has been set initially at £100,000 and increases over time:

  • £100,000 from April 2017
  • £125,000 from April 2018
  • £150,000 from April 2019
  • £175,000 from April 2020

It will then increase in line with Consumer Prices Index (CPI) from April 2021 onwards. Any unused nil-rate band will be able to be transferred to a surviving spouse or civil partner.

Other features of MRNB you need to be aware of are as follows:

  • The additional nil-rate band will also be available when a person downsizes or ceases to own a home on or after 8 July 2015 and assets of an equivalent value, up to the value of the additional nil-rate band, are passed on death to direct descendants.
  • There will be a tapered withdrawal of the additional nil-rate band for estates with a net value of more than £2 million. This will be at a withdrawal rate of £1 for every £2 over this threshold.
  • The existing nil-rate band will remain at £325,000 from 2018-19 until the end of 2020-21.
  • The MRNB relief will be available to married couples and civil partners.

The £1m overall relief will therefore not be achieved until April 2020. From this date, on the death of the first spouse or civil partner, if they leave their share in the family home to the surviving spouse or civil partner, this will pass IHT free and the deceased parties’ unused MRNB will pass to the surviving spouse. If the rest of the deceased person’s estate passes to the surviving spouse then their unused nil rate band of £325,000 will also pass to their surviving partner.
On the subsequent death of the survivor, if they leave their home to a direct descendant, their estate may be able to claim a combined MRNB of £350,000 (2 x £175,000) plus £650,000 combined nil rate band (2 x £325,000); a total relief of £1m.

The government has published a number of advisory notices regarding the new band including the following https://www.gov.uk/guidance/inheritance-tax-residence-nil-rate-band which provides some useful examples.

Reducing Inheritance Tax on Property with MRNB

If you would like personal advice concerning Inheritance Tax on Property in order to reduce the burden for your loved ones and ensure that you have all the right plans in place to ease your family’s inheritance tax costs, contact our very own IHT expert Paul Johnston at Bourne Accountancy online or call 01883 708090.

Bourne Accountancy also provides free business advice via our website www.bourneaccountancy.co.uk, and dedicated IHT site http://inheritance-tax.bourneaccountancy.co.uk. We cover the following areas should you wish to meet in person: Addington, Ashtead, Banstead, Biggin Hill, Beckenham, Bletchingly, Bromley, Chipstead, Caterham, Carshalton, Coulsdon, Crawley, Croydon, Dorking, Godstone, Horley, Kenyley, Lingfield, Merstham, Oxted, Purley, Redhill, Reigate, Sanderstead, Selsdon, Shirley, Sutton, Tandridge, Tatfield, Warlingham, Westerham, Whyteleafe.

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The Link Between Wills and Inheritance Tax

There is a strong link between Wills and Inheritance Tax (IHT), its a fact that with the right planning correctly communicated through your will you can reduce your exposure to IHT. Unfortunately, many never get around to setting up a will and become what’s known as intestate.

Dying intestate results in your estate becoming subject to intestacy laws which is a slow process that controls how your property will distributed upon your death and may end up being given to the government if you have no living relatives. Your estate includes money in bank accounts, savings, shares, property and other assets you own at the time of death, if you have a large estate your exposure to Inheritance Tax becomes greatly increased.

So having a Will in place is highly recommended and If you already have a Will then you should ask yourself when was the last time you reviewed your Will.

How do I go about getting a will?

If your circumstances are simple you can write your own will which is valid as long as you get it witnessed and it contains all of the formal requirements, you can also consider using a will-writing kit, which are available from most stationers. However, you should bear in mind that a will that is badly worded could lead to misinterpretation and result in your relatives being saddled with large legal fees whilst its meaning is agreed.

Another possibility is the use online services such as http://www.tenminutewill.co.uk or use a personal Will writing service which should ensure the language and terminology used cannot be misinterpreted and ensure your final intentions are clear. Will writing is not regulated by the government although there are several voluntary bodies, such as the Society of Will Writers and the Institution of Professional Will Writers. To be 100% confident your will is dealt with by a qualified person and you have consumer protection we recommend using the services of a solicitor or member of the Law Society.

What to consider when you make a will?

You should do everything you can to make sure that your wishes are not contested. Make sure you do not ask any of the beneficiaries of your will to help draft it. Older people may ask grown-up children to help them write a will, but this means the will could be challenged by other potential beneficiaries. Make sure your will is properly signed and witnessed by two people who are not beneficiaries.

You will need to decide who your executors are. These are the people who will administer your will. You can pay for a bank or solicitor to do this, or a friend can offer to do it for free however please remember being the executor of a Will can be demanding.

Other items to consider are:

  • Do you have assets that you would like to give to someone in particular.
  • If you have young children, you will need to appoint guardians.

What about tax planning?

Inheritance tax is 40 per cent, but it is known as the “voluntary tax” because it is relatively easy to get out of paying it with proper planning. Anyone who dies with total assets of more than £325,000 could leave their family with a tax liability. But if you leave your assets to your spouse or civil partner, no tax is payable. If you want to avoid tax and leave money to your children talk to Bourne Accounts for advice on setting up a discretionary trust.

You could also:

How much should a Will cost?

To save money, check if your employer, union or home insurer offers a free or discounted solicitor will-writing service. Some insurance policies provide a legal “add-on” you can use to have a will checked. If you are on a low income, aged over 70 or disabled you may be entitled to legal aid.

Will Aid is an annual fundraising campaign involving nine of the UK’s leading charities, with the support of solicitors who donate their skills for free. They encourage people to have their Will drawn up by a professional solicitor in exchange for a charitable donation. Expect to pay a voluntary £95 per single person and £150 per couple. Visit www.willaid.org.uk for more information.

Where do I keep my will?

If a solicitor has made the will, they will usually store it, or you can pay an annual charge to have it stored at a bank. You can keep it yourself, but this is not the safest option.

How often should I review my Will?

If you get married, divorced or have a child, make sure your will reflects this. Ensure that it is properly changed – either with an official change called a codicil if the change is minor, or by making a new will. Either way, make sure the changes are witnessed.

These and many other scenarios, particular to your circumstances, may be available. The key is to explore these planning strategies before the burden of responsibility for settling tax is passed to your executors, and ultimately, your family and beneficiaries.

The Importance of Making Wills and Inheritance tax

If you would like personal advice concerning Wills and Inheritance Tax in order to reduce the burden for your loved ones and ensure that you have all the right plans in place to ease your family’s inheritance tax costs, contact our very own IHT expert Paul Johnston at Bourne Accountancy online or call 01883 708090.

Bourne Accountancy also provides free business advice via our website www.bourneaccountancy.co.uk, and dedicated IHT site http://inheritance-tax.bourneaccountancy.co.uk. We cover the following areas should you wish to meet in person: Addington, Ashtead, Banstead, Biggin Hill, Beckenham, Bletchingly, Bromley, Chipstead, Caterham, Carshalton, Coulsdon, Crawley, Croydon, Dorking, Godstone, Horley, Kenyley, Lingfield, Merstham, Oxted, Purley, Redhill, Reigate, Sanderstead, Selsdon, Shirley, Sutton, Tandridge, Tatfield, Warlingham, Westerham, Whyteleafe.

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Inheritance Tax Gifts

In the article below we explore the effect that making of lifetime gifts can have on reducing an estates exposure to Inheritance Tax (IHT) liability on death.   Commonly referred to as “Inheritance Tax Gifts” it is one of the simplest ways to avoid inheritance tax.

Gifts Exempt from Inheritance Tax

The following gifts can be made without either a lifetime or death IHT charge:-

  • £3,000 annual exemption
  • £1,000 to £5,000 wedding
  • up to £250 per person
  • Regular out of income
  • Payments to help with living costs
  • to charities
  • to political parties
  • to spouses or civil partners as long as both are UK resident

Married couples and civil partners can gift each other assets without any IHT or capital gains tax provided the recipient is domiciled in the UK. If the recipient is non-domiciled the amount that can be gifted tax free is restricted.

Potentially Chargeable Transfers

Lifetime gifts not covered by the above exemptions are treated as either potentially chargeable transfers (PETs) or chargeable lifetime transfers (CLT’s). By way of example, gifts to family members other than a spouse will be potentially exempt and will be completely exempt if the donor survives seven years following the gift. A lifetime gift to a discretionary trust or a company will be immediately chargeable to IHT at 20% if the gift exceeds the tax threshold and also in other circumstances.

The gifts can be included in the estate of the donor if they were made less than 7 years before the date of death.

If the person making the gift gave away more than £325,000 in gifts in the last 7 years of their life, and this includes the gift to you, you may be required to pay any IHT directly attributable to the gift. Otherwise, IHT is paid by the estate. Whether you are to pay the tax will depend upon the conditions of the Will of the donor.

IHT is payable at the following rates on PETs made between the date of the inheritance tax gifts and date of death:

  • Less than 3 years – 40%
  • 3 to 4 years – 32%
  • 4 to 5 years – 24%
  • 5 to 6 years – 16%
  • 6 to 7 years – 8%

These rates may be reduced if the deceased qualified for a reduced rate of IHT.

Inheritance Tax Gifts that are not subject to Inheritance Tax

There is an annual exemption of up to £3,000 of gifts made each year. The £3,000 exemption from the previous year may also be available, if not used in that year.

The following allowances are generally in addition to this.

Wedding Gifts

There’s no Inheritance Tax on a wedding or civil partnership gift worth up to:

  • £5,000 given to a child
  • £2,500 given to a grandchild or great-grandchild
  • £1,000 given to anyone else

The gift must be given on or shortly before the date of the wedding or civil partnership ceremony.

Gifts up to £250

There’s no Inheritance Tax on individual gifts worth up to £250. You can give as many people as you like up to £250 each in any one tax year.  You can’t give someone another £250 if you’ve given them a gift using a different exemption, e.g. the £3,000 annual exemption.  If you give someone more than £250 in a tax year, the whole amount counts – the first £250 is not exempt.

Regular gifts from the giver’s income

There’s no Inheritance Tax on gifts from the deceased’s income (after they paid tax) as long as the deceased had enough money to maintain their normal lifestyle. These gifts include:

  • Christmas, birthday and anniversary presents
  • life insurance policy premiums
  • regular payments into a savings account

Payments to help with living costs

There’s no Inheritance Tax on gifts to help with other people’s living costs if they’re made to, for example:

  • an ex-husband, ex-wife or former civil partner
  • a relative who’s dependent on them because of old age, illness or disability
  • a child (including adopted and step-child) under 18 or in full-time education

Charities

There’s no Inheritance Tax on gifts to charities, museums, universities or community amateur sports clubs.

Political Parties

There’s no Inheritance Tax on gifts to political parties that have either:

  • 2 members elected to the House of Commons
  • 1 member elected to the House of Commons and received at least 150,000 votes in a general election.

Understanding Inheritance Tax Gifts

If you are concerned about inheritance tax costs being a burden for your loved ones, ensure that you have all the information you need to ease your family’s inheritance tax costs by consulting with Paul at Bourne Accountancy online or call 01883 708090.  Bourne Accountancy also provides free business advice via our website www.bourneaccountancy.co.uk, and dedicated IHT site http://inheritance-tax.bourneaccountancy.co.uk. We cover the following areas should you wish to meet in person: Addington, Ashtead, Banstead, Biggin Hill, Beckenham, Bletchingly, Bromley, Chipstead, Caterham, Carshalton, Coulsdon, Crawley, Croydon, Dorking, Godstone, Horley, Kenyley, Lingfield, Merstham, Oxted, Purley, Redhill, Reigate, Sanderstead, Selsdon, Shirley, Sutton, Tandridge, Tatfield, Warlingham, Westerham, Whyteleafe.

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Understanding Who Pays Inheritance Tax

The simple answer to the question Who Pays Inheritance Tax (IHT), is that Inheritance Tax (IHT) is due when a person’s estate (their property and possessions) is worth more than the ‘IHT Threshold’ when they die and the elected Executor of the deceased will need to make the necessary arrangement to pay the tax.

The current IHT Threshold is £325,000 per person however this is doubled to £650,000 for a married couple (on condition that the first person to die leaves their entire estate to their partner).   Anything over the IHT Threshold is then subject to Inheritance Tax which is currently 40%, although the rate may be reduced to 36% if more than 10% of the estate is left to charity.  Should the estate’s value fall below the threshold the Executor will still need to report it to HMRC.

So who pays Inheritance Tax when you die.

Usually the Executor or personal representative for the person who has died pays IHT using the funds from the estate.  If the estate has been held in Trust then the Trustees are responsible for paying the IHT .   Trusts are a tax efficient way of looking after assets (money, investments, land or buildings) for people and we will discuss Trusts in another article.
If you have received an inheritance or a gift from someone who has died then normally IHT will be deducted before you receive it, unless:

  • it states in the will that the recipient should pay Inheritance Tax
  • the deceased’s estate can’t pay it

Other factors to be aware of include:

  • Some gifts you give while you’re alive may be liable for IHT after death, depending on when the gift was given however ‘taper relief’ might mean the Inheritance Tax charged is less than 40%.
  • Other reliefs, such as Business Relief, allow some assets to be passed on free of Inheritance Tax or with a reduced bill. Contact the Inheritance Tax and probate helpline about Agricultural Relief if your estate includes a farm or woodland.

Reducing your Exposure to IHT

The use of Trusts or Gifting Assets area a couple of methods which can be employed to reduce Inheritance Tax due on death, but it’s necessary to reorganise your estate while you are alive. There are complicated rules that set out how these strategies can be used so we highly recommend you discuss the full options available to you with our staff at Bourne Accounting.

For instance; Married couples and registered civil partners are allowed to transfer assets to each other during their lifetime or when they die without incurring an Inheritance Tax charge. There is no limit to this relief as long as the receiving spouse or civil partner is UK domiciled. This relief is known as the spouse or civil partner exemption (nil rate band).  The basic tax-free threshold available when a wife, husband or civil partner dies can be increased to as much as £650,000 if none of the £325,000 threshold was used when the first of the couple died.   If the entire estate is passed to a surviving spouse or civil partner no Inheritance Tax would be payable due to the spouse or civil partner exemption, so for these couples the nil rate band used to be potentially wasted on the first death. To counter this, legislation was introduced that allowed the unused nil rate band on a first death to be passed, by claim, to the surviving spouse. This applies to second deaths on or after 9 October 2007.   This additional relief should be taken into account when you are planning your estate tax position. Evidence of the position from the first death should be retained.

Rules of intestacy/ intestate

If you die intestate (without a valid will) the rules around who pays Inheritance Tax change and your personal representatives will have to distribute the estate according to the laws of intestacy.
Many people die without making a Will. In legal terms, this means they die “intestate”. When this happens, the estate must be shared out according to certain rules. Individuals who may benefit under these rules are:

  • Married partners and civil partners at the time of death. This includes separated partners but not divorced partners or a civil partner if a civil partnership has ended.
  • Children, grandchildren and great grandchildren, if the estate is over a certain amount.
  • Parents, brothers and sisters, nieces and nephews.
  • Grandparents, uncles and aunts.

The order in which estates of those who die intestate are distributed follow strict rules. For example:

  • if there is a surviving partner, a child will only inherit from the estate if it is valued at more than £250,000.
  • Partners who are unmarried, or not in a formal civil partnership, have no claim on their deceased partner’s estate.
  • When family groups are affected by divorce, re-marriage, or co-habiting and there are children involved, the actual rights of family members to share in a deceased’s estate can be complex, and may result in assets of the estate being distributed in a way at variance with the unwritten wishes of the deceased person.
  • The estates of persons, who die intestate and have no relatives, are passed to the Crown under the “Bona Vacantia” rules.

For these reasons, everyone should prepare a Will and make their intentions known and legally enforceable.

Understanding who pays Inheritance Tax

If you are concerned about inheritance tax costs being a burden for your loved ones, ensure that you have all the information you need to ease your family’s inheritance tax costs by consulting with Paul at Bourne Accountancy online or call 01883 708090.  Bourne Accountancy also provides free business advice via our website www.bourneaccountancy.co.uk, and dedicated IHT site http://inheritance-tax.bourneaccountancy.co.uk. We cover the following areas should you wish to meet in person: Addington, Ashtead, Banstead, Biggin Hill, Beckenham, Bletchingly, Bromley, Chipstead, Caterham, Carshalton, Coulsdon, Crawley, Croydon, Dorking, Godstone, Horley, Kenyley, Lingfield, Merstham, Oxted, Purley, Redhill, Reigate, Sanderstead, Selsdon, Shirley, Sutton, Tandridge, Tatfield, Warlingham, Westerham, Whyteleafe.

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Making the most of Tax Free Inheritance Tax Relief

There are numerous ways to reduce your your exposure to tax liabilities and making sure you take advantage of Inheritance Tax Relief with the proper planning will help you minimise the amount of money from your estate that goes to the government.  Bourne Accountancy are experts in estate planning and can advise if any of the following reliefs could be applicable to your situation.

Business Property Relief (BPR) – Any ownership of a business, or share of a business will be included in your estate for Inheritance Tax purposes. However, you can get Inheritance Tax Relief of either 50% or 100% on some of an estate’s business assets such as business property, buildings and machinery. Ownership can be passed on as part of the will or while the owner is still alive subject to further rules.

Agricultural Property Relief (APR) – The government has been especially generous to farmers which is understandable given their strategic importance to the UK. The rules are that you can pass on some agricultural property free of Inheritance Tax, either during your lifetime or as part of your will. Agricultural property that qualifies for Agricultural Relief includes land or pasture that is used to grow crops or to rear animals intensively. It also includes farm buildings, farm cottages, farmhouses and stud farms, there are a few exceptions however such as farm equipment and machinery, derelict buildings, harvested crops and livestock and the rules state the property must have been in ownership for two years before.

AIM Listed Shares – The Alternative Investment Market (AIM) is a sub market of the London Stock Exchange designed to let smaller companies float shares. To encourage investment in these smaller companies the government provides a 100% Inheritance Tax Relief provided the shares have been held for a minimum of two years.

Unlisted Shares – Similar to AIM Shares there is a 100% exemption on shares held in a private company, again the shares have to be held for two years prior to death.  This can be a very useful relief for elderly and wealthy taxpayers who can still receive an income from the business without having to be concerned about the future IHT burden.

Listed Company Shares – If you have a controlling interest in a listed company then a 50% IHT relief is available.
Personal Assets – Certain personal assets which are used in a relation to business activities attract a 50% IHT relief.

Additionally, there are other, smaller inheritance tax reliefs that can be claimed:

  • An annual exemption of £3,000, Any unused allowance can be carried forward for one year.
  • Small gifts exemption of £250 per person.
  • Gifts on a marriage or civil partnership: £5,000 from a parent, £2,500 from a grandparent, £1,000 others

There is also an exemption for annual gifts made from income. Basically, a gift will not count as a gift for IHT purposes, if you can demonstrate that the donor’s annual income is at a level to make the gifts without affecting their ability to cover their usual monthly costs.

Gifts to an individual within the nil rate tax band, and with no strings attached, may still be made without any charge to IHT if the donor lives for 7 years after making the gift.

Bourne Accountancy are experts in Inheritance Tax planning and if you haven’t evaluated your estate for IHT purposes recently we strongly recommend a review. All you need to do is compile a list of your assets, let us have sight of your Will(s) and we can consider changes you might make to reduce your exposure to this tax.

Inheritance Tax Relief Information

To find out more about Bourne Accountancy please visit our main website: http://www.bourneaccountancy.co.uk or call us directly on 01293 399520.
To read more on the subject of Inheritance Tax please visit: http://inheritance-tax.bourneaccountancy.co.uk

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Inheritance Tax Simplification

Earlier this year, the Chancellor of the Exchequer and the Financial Secretary to the Treasury requested that the The Office for Tax Simplification (OTS) review key aspects of the inheritance tax (IHT) legislation and identify inheritance tax simplification opportunities within the administrative processes with which taxpayers interact with HMRC.

Inheritance Tax Simplification

According to information posted to the government’s website recently, the inheritance tax simplification review would appear to be wide ranging and issues to be examined include:

  • The process around submitting IHT returns and paying any tax, including cases where it is clear from the outset that there will be no tax to pay;
  • The various gifts rules including the annual threshold for gifts, small gifts and normal expenditure out of income as well as their interaction with each other and the wider IHT framework;
  • Other administrative and practical issues around routine estate planning, compliance and disclosure, including relevant aspects of probate procedure, in relation to situations which commonly arise;
  • Complexities arising from the reliefs and their interaction with the wider tax framework;
  • The scale and impact of any distortions to taxpayers’ decisions, investments, asset prices or the timing of transactions because of the IHT rules, relevant aspects of the taxation of trusts, or interactions with other taxes such as capital gains tax; and
  • The perception of the complexity of the IHT rules amongst taxpayers, practitioners and industry bodies.

If you have an opinion on this subject then be aware that The OTS is seeking views from those who have concerns about or personal experience of Inheritance Tax and have prepared an on-line survey which you can take part in (see link below). The survey closes on the 8th of June and will form part of the inheritance tax simplification report.

Paul Morton, OTS Tax Director, said:
This call for evidence and survey will help inform our research into Inheritance Tax and the recommendations we make in our final report. We know that there is a great deal to consider and we want to explore this with the help of individual taxpayers, as well as professional advisers and representative groups.

In a nutshell, while tax rates are for government, the role of the OTS is to challenge tax complexity and so help all users of the tax system, and so we hope to hear from as many individuals as possible. We are keen to hear both from those who have had some experience of dealing with Inheritance Tax and those who are concerned about it, but who may be unfamiliar with it.

If you wish to take part in the review or find out more about the review please access the OTS website which can be found at: https://www.gov.uk/government/organisations/office-of-tax-simplification

Bourne Accountancy are specialist IHT advisors and so will be keeping a keen eye on the outcome of these deliberations as they could turn even the most basic IHT planning on its head. We will keep readers informed when the OTS publishes its report although it may be some time before any changes are enacted and have a direct impact on estate planning. The OTS doesn’t envisage publishing its initial report until the Autumn of this year.

About The Office for Tax Simplification

The OTS is the independent adviser to government on tax simplification, challenging tax complexity to help all users of the tax system; it does not implement changes – these are a matter for government and for Parliament.
The OTS team is led by Chairman Angela Knight CBE and Tax Director Paul Morton and has a small staff drawn from HM Treasury, HM Revenue and Customs and the private sector.
The OTS works to improve the experience of all who interact with the tax system. It aims to reduce the administrative burden – which is what people encounter in practice – as well as simplifying the rules. Simplification of the technical and administrative aspects of tax are each important, both to taxpayers and HMRC.

Inheritance Tax Simplification Review by the Office of Tax Simplification

To find out more about Bourne Accountancy please visit our main website: http://www.bourneaccountancy.co.uk or call us directly on 01293 399520.
To read more on the subject of Inheritance Tax please visit: http://inheritance-tax.bourneaccountancy.co.uk