Inheritance tax planning

Published: 29 Aug 2013

 

Written by Ray Coman

 

Inheritance tax is the largest single payment of tax that some individuals will ever have to settle. The topics below outline some of the opportunities for planning ahead to reduce the burden of inheritance tax.

 

Transfers between husband and wife

 

Transfers between spouses are not subject to inheritance tax. There is no concession made to unmarried couples living together.

 

As explained in the introduction, each taxpayer is entitled to make transfers in life and on death which are not subject to tax. The lifetime allowance is referred to as the 'nil rate band.'

 

In addition to any nil rate band available on the estate of the deceased, it is possible to transfer the nil rate band allowance that was not used on the previous death of the deceased's spouse. The nil rate band transferred will the proportion that was not used on the first death. It is possible that double the nil rate band will therefore be available. For the transfer to apply, the second death must have occurred after 9 October 2007, although the first death can have occurred any time before.

 

Transfers more than seven years before death

 

Lifetime gifts will not be liable to inheritance tax if made more than seven years before death. From the third year after the gift, the value of the gift for inheritance tax purposes reduces by 20% per year.

 

Gifts with reservation

 

Unfortunately, inheritance tax will not be avoided on a lifetime gift where the donor continues to enjoy the benefit of the asset gifted. For instance, where a donor gifts a property, and continues to live in the property free of rent, the property would be included in the estate for inheritance tax purposes. A transfer described above is known as a gift with reservation.

 

In a similar scenario, where a donor provides the finance for purchasing his or her home, that donor could be subject to income tax on the rent that could have been obtained from the property. This is called the pre-owned asset rule. Professional advice is recommended in this complex area.

 

Trusts

 

A trust allows a donor to transfer assets out of the estate for inheritance tax purposes and, by becoming a trustee, to have some decision over the destination of the income and capital. Trust property will not be removed from the estate if the donor keeps some interest, or is still able to enjoy some benefit from the asset. In recent years, laws have been introduced which have reduced the attractiveness of trusts as a tax saving means. Even where there is no tax benefit, trusts still merit consideration as a way of protecting family wealth. We can advise on the suitability of setting up a trust depending on your circumstances.

 

Deed of variation

 

It is possible that the will of a deceased person can be rewritten so that it is more tax efficient. A so called, deed of variation can be made within two years of the death, where all people who benefit under a will agree and are over 18.

 

Inheritance tax planning can be a key feature of preserving capital, but it is only one consideration. We can advise on arrangements that will help reduce tax across the family. Please contact us to discuss your arrangements.

Comments  

#4 Ray Coman, FCCA, CTA 2018-10-11 13:12
Dear Sarah,

Death creates a capital gains tax free uplift in value. Her estate is value and if in excess of the inheritance tax threshold would be liable to inheritance tax instead. If she was married she may be able to transfer any nil rate band from her husband.
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#3 Ray Coman, FCCA, CTA 2018-10-11 12:52
Dear Jay, it is beneficial ownership rather than legal ownership which determines how rent is taxed. However, simply receiving rent may not be sufficient to prove that your wife is beneficially entitled to the property. I advise that you seek separate legal advice about formalising her beneficial entitlement.

There are too many implications about the second part of your question to cover in a brief reply. However, one implication is that property held as joint tenants usually passes to the surviving spouse on death, whereas property held as tenants in common can be passed to a different beneficiary. A gift on your death to a spouse is free of IHT. Spousal transfers are also free from capital gains tax.

In practice, joint tenancy is the usual arrangement, tenants in common is used where you own with someone who is not a spouse or for divisions that are not 50:50. Your question would be better directed towards a solicitor.
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#2 Jay 2018-10-11 12:48
Hi Ray,
I have a buy to let property which is in my sole name. There is a mortgage on the property.at the movement I am declaring all the rental income under my self assessment However my wife is not working so her personal allowance is not utilised .Can I split rental income to say 50/50 and do her self assessment or do I have legally put her name on deeds before I can split the income? If I have to change names on the deeds, should I ask my lender to name us as Joint Tenant or Tenant in Common? Also, how will this effect for the purpose Capital Gain Tax and IHT. We also have house were we live together but the this house is under her sole name now,but was in joint names before I bought Buy to let.
Thanks
Jay
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#1 Sarah Bruce 2018-10-11 12:44
Hi there, my mum went into care 18 months ago and we have let out her house in the meantime. Mum died while still in care and we are now selling the house. Will PPR apply or will we have to pay CGT? Thanks!
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