ACCA share top tips around IHT
IHT is a tax on the value of the estate at death but also on chargeable transfers made with various reliefs available. When reviewing matters care is required both during the lifetime and after death. Consider using these six tips.
Be clear on the assets in an estate – some are exempt from inheritance tax
For example, Mr A has net assets of £1m when he dies on 30 June 2019. If all these assets are subject to inheritance tax then the inheritance tax due will be as follows:
£
Value of estate at date of death of Mr A 1,000,000
Less exempt amount 325,000
Value of estate subject to IHT 675,000
Tax due at 40% 270,000
However, if included in the estate of Mr A, there are some exempt assets which would not be included in the value of the estate when IHT was calculated (for example Mr A has exempt assets of £200,000 and other assets of £800,000 when he dies on 30 June 2019) then:
£
Value of estate at date of death of Mr A 1,000,000
Less exempt assets 200,000
800,000
Less exempt amount 325,000
Value of estate subject to IHT 475,000
Tax due at 40% 190,000
Therefore, by holding these exempt assets the inheritance tax payable has been reduced by £80,000. For assets to qualify for this exemption two conditions need to be satisfied:
- the exemption only applies for certain types of assets
- these assets need to be held for a minimum period before date of death.
Some of these exempt assets are as follows:
- shares quoted on the Alternative Investment Market (min period: two years)
- shares in other unquoted trading companies (min period: two years)
- agricultural land farmed by the owner (min period: two years)
- agricultural land if let under a farm business tenancy (min period: seven years).
Consider options that are available for gifts, for example equity release
The home owner may take out a commercially available equity release loan and make a cash gift which would be treated as a potentially exempt transfer. The loan does not have to be with an external commercial organisation – if there is a wealthy family member, it may be that the loan could be arranged with that person, provided the borrower has not previously made substantial gifts to him or her. The potentially exempt transfer would become exempt if the transferor survives seven years and the loan would be a liability which reduces the value of the estate of the transferor.
Make pension contributions to a qualifying non-UK pension scheme
A qualifying non-UK pension scheme (QNUPS) is an overseas pension scheme. The main features of a QNUPS are as follows:
- contributions into the scheme do not attract tax relief
- there is no maximum level of contributions, although HMRC may see large contributions as tax avoidance if they affected the individual’s standard of living
- the member can make withdrawals during his/her lifetime (although these withdrawals would be taxable in the UK as normal pension income) with the remaining balance being passed to their chosen heirs on the member’s death
- income and gains made by the QNUPS would be subject to tax in the local country where the QNUPS is located
- the funds in a QNUPS will not be subject to UK inheritance tax unless there is evidence of deliberate tax avoidance
- QNUPS need to meet the conditions in Statutory Instrument 2010/0051 (Inheritance Tax (Qualifying Non-UK Pension Schemes) Regulations 2010).
Consider property transfer options
If children live with their parents – and where this is likely to continue for some time – the parents would gift a share of the property to the children. For capital gains this would be a gift to connected parties and so would be deemed to occur at market value for capital gains tax purposes; it may be exempt if covered by the private residence relief of the parents. The children’s acquisition cost would be deemed as the market value at the date of transfer. For inheritance tax purposes this would be a potentially exempt transfer made by the parents.
It would give rise to the potential reservation of benefits provisions, which would occur if the parents receive any benefits, other than a negligible one, which is provided by or at the expense of the children connected with the gift. The risk of reservation of benefits provisions can be minimised if the children do not bear more than a fair share of the running costs of the home (for example the parents could continue to meet all the running costs). The risks can also be reduced by not giving too large a share of the home to the children: to this end an equal ownership by all involved may be advisable.
Payment by instalments
Payment of inheritance tax by instalments is possible if an IHT liability arises on the transfer of land and buildings; this applies to any kind of land and property wherever it is situated. An election in writing to the board of HMRC may be made to pay the tax due by ten equal yearly instalments where the first instalment is payable on the due date on which the whole tax would otherwise be due. Where the transfer is on death, the first instalment is due six months after the end of the month in which death occurs, even if the personal representatives must otherwise pay tax before that date.
Substitution for the value of death
Where land or buildings in a deceased person’s estate is sold within three years (sometimes within four years) after death a claim (on Form 38) may be made for the sale value to be substituted for the value on death. Various conditions are required for this relief to be available as explained in Inheritance Tax Act 1984 sections 190 to 198. The claim should be made not more than four years from the date of death.
Transfer to nominated beneficiaries
Funds held in a Self-Investment Pension Plan (SIPP) on the death of the member may be transferred to the ‘nominated beneficiaries’. The member should complete an ‘expression of wish’ form for each pension plan to state to whom they wish the benefit to be paid. The pension plan trustees will usually follow the instructions unless there are exceptional circumstances. An expression of wish form guides the scheme administrators/trustees to exercise at their discretion the stated wishes in the way that the policyholder would have wished. They refer to the most recent form when making a decision.
If a policyholder dies before the age of 75, either before or after they start to withdraw benefits, the funds held in the SIPP can be transferred to any nominated beneficiary tax free (before April 2015 this was only possible before the member started to make withdrawals).
If death occurs after the age of 75, either before or after they start to withdraw benefits, beneficiaries will be taxed at their marginal rate of tax if funds are taken as a lump sum or income (although it can be transferred to their own SIPP instead).
Irrespective of whether the policyholder dies before or after the age of 75 the funds in the pension plan will not form part of the estate for inheritance tax purposes therefore there should be no inheritance tax to pay on the funds in the SIPP.
Article from ACCA In Practice