Inheritance tax update…
Pre-Budget Report changes
Q: Do I need to worry about inheritance tax (IHT) even though I intend to leave everything to my spouse?
A: There is no IHT payable on assets transferred between spouses or those in a civil partnership. But this doesn’t mean you should ignore IHT completely if you have assets exceeding £600,000. Following the recent announcements made by the Chancellor in his first Pre-Budget Report, the surviving spouse will now be able to bequeath £600,000 tax-free. By 2010, this figure will increase to £700,000.
Q: If I give away my home and survive for seven years, do I have an IHT problem?
A: There is no guarantee that this will work, but you would need to pay a market rent on your home while you continued to live there. If you live there rent free, then this is considered a ‘gift with reservation’ by HM Revenue & Customs (HMRC), which will not make it exempt from IHT. In practice, even if you pay the correct rent, this is seldom a tax-saving move. Many older people are asset-rich but cash poor, so paying rent on their own home would seriously impact their standard of living.
Beneficiaries who received this rent would have to pay income tax on this money. They are also likely to be subject to capital gains tax if they sold this home after your death, as it is not their primary residence. This means they could have to pay capital gains tax (CGT) currently at 40 per cent on any gains in the property’s value from the day it was given to them to the day it was sold. So the potential tax saving for your heirs may be negligible, but the cost could be significant. The current CGT system is being scrapped from April 5, 2008. The Chancellor, Alistair Darling, has decided to move to a single rate of CGT for everyone which will be paid at 18 per cent.
Q: Do I have to declare money that I have given away?
A: HMRC has the power to prosecute and fine executors and potentially beneficiaries who fail to declare lifetime gifts on the appropriate IHT form. They intend to step up investigations and clamp down firmly on any incidents of tax evasion.
Under current rules, you can give away money or assets, and provided you live for more than seven years after making the gifts, they are not included within your estate for IHT purposes. You should make a note of any such gifts and pass them on to the executors of your Will.
If you die within the seven-year period, depending on the total value of the gifts and when your death occurred, this would determine if there was any further tax to pay, after taper relief had been taken in to consideration.
Q: Could my pension be subject to IHT?
A: There may be no immediate IHT problems, because pension funds are not subject to IHT. But this does not mean that you should ignore pensions altogether. Most people nominate their spouse to receive their pension should they die. While there is no IHT to pay at this point, the funds could be taxable when your spouse dies and leaves the remainder to the next generation.
One solution is to ensure the pension is paid into a trust on your death, with the spouse being the main beneficiary. The trustees can forward funds to the surviving spouse and also ensure that other beneficiaries, such as children, can benefit from these funds without paying IHT.
Q: What can I do to reduce an IHT liability on my property?
A: Handing the deeds of your property over to your children is not an effective means of escaping IHT. But there are steps you could take if it is simply the value of your family home that is pushing you into the IHT bracket. Taking out a debt secured against the property could reduce the value of your property.
Putting in place an IHT strategy can be very complex issue and you should always receive independent legal and financial advice before proceeding. If you require any further information about the services that we provide or would like to review your financial planning position, please email or contact us.
Levels and bases of, and reliefs from, taxation are subject to change.
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