Inheritance tax (IHT) is payable at 40% on the net value of the assets you own when you die, plus (to a certain extent) on the value of the gifts you made in the seven years before you die. The first £325,000 of assets is currently exempt from IHT in all cases.
There are also exemptions from IHT for business assets, such as shares held in unquoted companies. However, you cannot escape IHT by holding all your investments and spare cash inside your personal company. The business of the company must be more than passive holding of investments, and the Taxman normally regards letting property as an investment, but this is a grey area.
Even where your company has an active trade, it doesn't follow that the full value of its shares will qualify for the IHT exemption. The Taxman wants to look inside the company and check that each asset it holds, including cash, is used for the purpose of the trading business.
This can cause difficulties for companies which hold more cash than is needed for everyday working capital. If your company is in this position, to get the IHT exemption you need to form some plans for use of the funds within the business and document those plans.
The IHT exemption applies where the shares of the trading company are held by individuals, or where a holding company holds the shares, and shares in that holding company are held by individuals. However, where the holding vehicle is a general partnership or an LLP, instead of a company, the IHT exemption does not apply.
Showing posts with label inheritance tax. Show all posts
Showing posts with label inheritance tax. Show all posts
Friday, 31 January 2014
Tuesday, 3 December 2013
Loans to Reduce IHT
Have you used a loan to reduce the inheritance tax (IHT) which may be due when you die? A common IHT planning technique has been to take out a mortgage on the family home and use those borrowed funds to invest in assets that qualify for 100% exemption from IHT, such as farmland or shares quoted on the AIM stock market. The loan reduces the value of home subject to IHT, and the assets acquired don't attract an IHT charge.
However, this plan has been undermined by a change in the law from 6 April 2013. If the mortgage was taken out, or replaced, on or after that date, the amount of the loan is first deducted from the value of the assets it was used to acquire, not the property it is secured on. This means the loan and the IHT-exempt assets cancel-out each other in the IHT calculation, and no tax is saved.
You need to be aware of this when changing the mortgage on your home. We should talk about inheritance tax planning if the net value of your assets is likely to exceed £325,000. Married couples and those in civil partnerships can hold twice that amount before IHT bites. There are still ways to reduce the potential IHT due, but any plan needs to be tailored to your specific circumstances.
However, this plan has been undermined by a change in the law from 6 April 2013. If the mortgage was taken out, or replaced, on or after that date, the amount of the loan is first deducted from the value of the assets it was used to acquire, not the property it is secured on. This means the loan and the IHT-exempt assets cancel-out each other in the IHT calculation, and no tax is saved.
You need to be aware of this when changing the mortgage on your home. We should talk about inheritance tax planning if the net value of your assets is likely to exceed £325,000. Married couples and those in civil partnerships can hold twice that amount before IHT bites. There are still ways to reduce the potential IHT due, but any plan needs to be tailored to your specific circumstances.
Friday, 31 May 2013
Inheritance Tax Loan Change
A change in the way loans are treated for inheritance tax (IHT) purposes could increase the taxable value of your estate on death, and the amount of IHT payable. This change will affect IHT calculated on deaths occurring after the Finance Act 2013 is passed, (expected mid-July 2013) but applies to loans which are already in place.
At present any debts owed by the estate are deducted from the net estate after reliefs, such as business property relief (BPR), have been given. Broadly BPR provides 100% or 50% relief from IHT of the value of your business assets and unquoted shares. After the Finance Act 2013 is passed, the value of a loan must be deducted from the asset it was used to acquire.
Say in the past you increased the loan on your home to invest in your business, and that loan is still outstanding on your death. To calculate the IHT due that business part of the loan must be deducted from the value of your business and not from the value of your home. This reduces the value of your estate exempt from IHT under business property relief, and increases the taxable value of the remaining estate.
Also if the loan owing at death is not actually repaid by the estate to the creditor after death, that loan can't be deducted from the estate at all, unless there is some commercial reason for not repaying the loan.
Remember IHT is payable at 40% on the taxable value of your estate that exceeds £325,000. A lower rate may be payable if you leave at least 10% of your net estate to charity. There are other ways of mitigating IHT, but we need to discuss you individual circumstances to formulate a plan.
At present any debts owed by the estate are deducted from the net estate after reliefs, such as business property relief (BPR), have been given. Broadly BPR provides 100% or 50% relief from IHT of the value of your business assets and unquoted shares. After the Finance Act 2013 is passed, the value of a loan must be deducted from the asset it was used to acquire.
Say in the past you increased the loan on your home to invest in your business, and that loan is still outstanding on your death. To calculate the IHT due that business part of the loan must be deducted from the value of your business and not from the value of your home. This reduces the value of your estate exempt from IHT under business property relief, and increases the taxable value of the remaining estate.
Also if the loan owing at death is not actually repaid by the estate to the creditor after death, that loan can't be deducted from the estate at all, unless there is some commercial reason for not repaying the loan.
Remember IHT is payable at 40% on the taxable value of your estate that exceeds £325,000. A lower rate may be payable if you leave at least 10% of your net estate to charity. There are other ways of mitigating IHT, but we need to discuss you individual circumstances to formulate a plan.
Letting Business Tax Reliefs
The tax treatment of businesses which involve the letting of property is not consistent across all taxes and tax reliefs. It's not logical, but just because the letting business qualifies for one tax relief it will not necessarily qualify for an apparently similar tax relief.
For example if you have a property letting enterprise which you wish to transfer into a company in return for shares in the company, a capital gain will arise in your hands when you transfer the properties to the company. This gain can be rolled into the value of shares of the company if the property enterprise is deemed to be a 'business'. This relief is known as incorporation relief, but it will only apply if the business owner is more than just a passive property investor. The courts have decided that the business must have some substance in terms of turnover, be conducted on sound business principles with a view to a profit, and be activity pursued with reasonable continuity.
The holding of let properties is considered to be a 'business' for the inheritance tax, but it is excluded from the IHT relief called business property relief (BPR), as letting is considered to be mainly the holding of investments (i.e. the let properties). In order to qualify for BPR the business owner has to offer the tenants additional services which would generally only be available in a holiday letting business, bed and breakfast, or hotel business. Even then the owners of self-catering holiday cottages have to jump through some hoops to get the letting business to qualify for BPR.
Losses made in a property letting business cannot be set against profits or income from other sources, such as other trading businesses, interest or dividends.
Check with us as to whether your property business qualifies for a particular tax relief and don't assume anything.
For example if you have a property letting enterprise which you wish to transfer into a company in return for shares in the company, a capital gain will arise in your hands when you transfer the properties to the company. This gain can be rolled into the value of shares of the company if the property enterprise is deemed to be a 'business'. This relief is known as incorporation relief, but it will only apply if the business owner is more than just a passive property investor. The courts have decided that the business must have some substance in terms of turnover, be conducted on sound business principles with a view to a profit, and be activity pursued with reasonable continuity.
The holding of let properties is considered to be a 'business' for the inheritance tax, but it is excluded from the IHT relief called business property relief (BPR), as letting is considered to be mainly the holding of investments (i.e. the let properties). In order to qualify for BPR the business owner has to offer the tenants additional services which would generally only be available in a holiday letting business, bed and breakfast, or hotel business. Even then the owners of self-catering holiday cottages have to jump through some hoops to get the letting business to qualify for BPR.
Losses made in a property letting business cannot be set against profits or income from other sources, such as other trading businesses, interest or dividends.
Check with us as to whether your property business qualifies for a particular tax relief and don't assume anything.
Wednesday, 5 September 2012
Gifting Assets or Shares
If you plan to gift assets or shares to your relatives, there are several taxes you need to consider:
Capital Gains Tax
You won't make an actual profit or gain when you give away assets or shares, so you may not expect to pay capital gains tax. However, when the gift is made to a person connected to you, such as your son or daughter, UK tax law deems you to have made a transfer of the asset at its market value. This means you could well make a paper gain on the gift, which will be subject to capital gains tax. This does not apply to a gift to your spouse or civil partner.
You need to calculate this gain to see if it needs to be reported on your tax return. Where the gain from the gift, together with any other gains you make in the year, exceeds your annual exemption of £10,600, all those gains must be reported on your tax return.
To calculate the amount of the gain you need to know the market value of the items given, at the date of the gift, and the cost or value when you acquired the items. If you acquired the assets before 31 March 1982, the value at 31 March 1982 is taken as your cost value, so you need a value at that date as well. We can help you with the calculation of the gain, but it would be wise to engage a specialist valuer to determine the value of the assets (particularly property) at the date of the gift and at 31 March 1982 if required.
Gift tax
If the asset (such as property) you plan to give away is located in another country you need to take local tax advice as to whether gift tax will apply. This is not a tax we have in the UK, so any gift tax paid in another jurisdiction will not be offset against UK tax paid on the same gift. Local transaction taxes such as VAT or stamp duty may also apply, so do your research first.
Stamp Duties
Stamp duty does not apply to shares which are transferred as a gift.
Stamp duty land tax generally applies to the transfer of land in the UK, but it will not apply if the recipient gives nothing in return for the property, i.e. it is a pure gift. However, if the recipient agrees to take on a mortgage attached to the property, the outstanding value of that mortgage will be treated as consideration for the property and stamp duty land tax will apply to that consideration.
Inheritance Tax
Most gifts of assets you make will be treated as potentially exempt transfers for inheritance tax, which means they escape inheritance tax as long as you live for at least seven years after the date of the gift. You can look to take out insurance to cover the cost of inheritance tax that will become payable in respect of the gifts made during your lifetime. Gifts made into a trust may be subject to inheritance tax immediately.
Capital Gains Tax
You won't make an actual profit or gain when you give away assets or shares, so you may not expect to pay capital gains tax. However, when the gift is made to a person connected to you, such as your son or daughter, UK tax law deems you to have made a transfer of the asset at its market value. This means you could well make a paper gain on the gift, which will be subject to capital gains tax. This does not apply to a gift to your spouse or civil partner.
You need to calculate this gain to see if it needs to be reported on your tax return. Where the gain from the gift, together with any other gains you make in the year, exceeds your annual exemption of £10,600, all those gains must be reported on your tax return.
To calculate the amount of the gain you need to know the market value of the items given, at the date of the gift, and the cost or value when you acquired the items. If you acquired the assets before 31 March 1982, the value at 31 March 1982 is taken as your cost value, so you need a value at that date as well. We can help you with the calculation of the gain, but it would be wise to engage a specialist valuer to determine the value of the assets (particularly property) at the date of the gift and at 31 March 1982 if required.
Gift tax
If the asset (such as property) you plan to give away is located in another country you need to take local tax advice as to whether gift tax will apply. This is not a tax we have in the UK, so any gift tax paid in another jurisdiction will not be offset against UK tax paid on the same gift. Local transaction taxes such as VAT or stamp duty may also apply, so do your research first.
Stamp Duties
Stamp duty does not apply to shares which are transferred as a gift.
Stamp duty land tax generally applies to the transfer of land in the UK, but it will not apply if the recipient gives nothing in return for the property, i.e. it is a pure gift. However, if the recipient agrees to take on a mortgage attached to the property, the outstanding value of that mortgage will be treated as consideration for the property and stamp duty land tax will apply to that consideration.
Inheritance Tax
Most gifts of assets you make will be treated as potentially exempt transfers for inheritance tax, which means they escape inheritance tax as long as you live for at least seven years after the date of the gift. You can look to take out insurance to cover the cost of inheritance tax that will become payable in respect of the gifts made during your lifetime. Gifts made into a trust may be subject to inheritance tax immediately.
Friday, 4 March 2011
Leaving it to Charity
If you haven't made a Will, you should do so without delay. If you don't have any relatives you want to leave your estate to, consider making a Will that leaves most of your assets to specified charities. This avoids the potential problem of intestacy (dying without a Will), and saves tax as gifts to charities are free of inheritance tax. However, there are two traps to avoid:
Identifying the charity
Many charities have merged or changed their names in the recent past, so when it comes to distributing the estate according to the Will, it may be difficult to work out exactly which charity you intended the funds to go to. To avoid this problem make sure your Will states the charity's registered office and charity number. You can also include a clause in your Will specifying that the gift should be directed to any organisation that amalgamates with the original charity.
Residue of the estate
The second problem can occur where the charity has been left an undefined amount in your Will, such as the residue of your estate. This can lead the charity's officers hassling the executors, querying deductions such as legal fees and in extreme cases challenging the distribution of your estate in Court. To avoid this problem leave specified amounts of cash or assets to your chosen charities rather than the amount left over after other gifts have been made and any tax paid.
Identifying the charity
Many charities have merged or changed their names in the recent past, so when it comes to distributing the estate according to the Will, it may be difficult to work out exactly which charity you intended the funds to go to. To avoid this problem make sure your Will states the charity's registered office and charity number. You can also include a clause in your Will specifying that the gift should be directed to any organisation that amalgamates with the original charity.
Residue of the estate
The second problem can occur where the charity has been left an undefined amount in your Will, such as the residue of your estate. This can lead the charity's officers hassling the executors, querying deductions such as legal fees and in extreme cases challenging the distribution of your estate in Court. To avoid this problem leave specified amounts of cash or assets to your chosen charities rather than the amount left over after other gifts have been made and any tax paid.
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