What is Inheritance Tax (IHT)?
Inheritance Tax is a tax that is charged on any part of your estate, whether that be money, property, cars or anything with any value that exceeds your personal allowance called the Nil Rate Band (NRB). This is currently fixed at £325,000 until April 2021. This kind of tax is commonly paid on the transfer of the individual’s estate on death, however it can also be due on some lifetime transfers. The current charge rate is at 40% on the value of all worldwide assets.
In April 2017 the government created the Residential Nil Rate Band (RNRB) which is an additional allowance for passing down the family home to direct decedents (child, step-child, adopted child or foster child) and lineal descendants. Currently the allowance is £175,000 in 2020 to 2021. There are however some complicated rules for this Residence Nil Rate Band. For larger estates the allowance is reduced, and it cannot be used for a buy to let property. There are a range of other rules that this entails which one of our team can talk you through.
How to control how and when your money is passed on
It is greatly advised that you have a plan in place in order to ensure that you can preserve and protect the assets that you have worked so hard to make and build up. At Elite Financial Accounting we can help you review your current circumstances and come up with a plan on how to ensure you are getting the best outcome when passing on your assets. There are ways to ensure that the people you are passing your assets onto will get as much as possible and pay less tax. Our team of experts will run through what you can do to do this. There isn’t usually one solution that fits all, so we will come up with a bespoke plan for you.
a case study...
Andrew is a wealthy entrepreneur in his early fifties. He is a widower and has one daughter, Sophie, age 19, who is currently at university. Her only income is from part-time and holiday jobs, amounting to around £3,000 per annum. He is very keen to ensure that his daughter will be well provided for, in particular as he has recently been reading about the difficulties faced by her generation in obtaining a foot on the property ladder. He is also concerned that he is her only surviving parent and, although he believes he is in good health, would like to ensure that she has at least some capital in case anything happens to him (or his business interests). Andrew has a couple of residential properties in Manchester that he holds as an investment and lets out. The mortgage on one of them has been paid off, and he is considering transferring the property to his daughter. The property was acquired some years ago for £120,000 and he has recently had it valued at £300,000. It generates rental income of £8,000 - £9,000 per annum.
If Andrew was to outright gift this property to his daughter then he would be liable to capital gains tax at 28% on the difference between the market value at date of gift less the purchase price after use of his CGT annual exemption (2020/21 £12,300). This would amount to a tax bill of £46,956 that would have to be paid 30 days after transfer under the new CGT payment window rules.
Andrew could introduce the property into a life interest trust for his daughter’ benefit and non-business asset gift relief would be available to hold over any capital gains tax charge. The transfer into the trust will be a chargeable lifetime transfer for IHT purposes but,as it does not exceed the amount of the nil rate band, there will be no tax payable. At some point in the future the property could be appointed to Sophie absolutely by the trust. Again this transfer would be subject to IHT (exit charge) but again no IHT would be payable as the IHT charge would be based on the initial principal charge rate 0% as the initial value was below £325,000. If Andrew then survives seven years from the date of the gift, it will be outside of his estate for Inheritance Tax purposes. Sophie’s base cost for subsequent disposal would be Andrew’s original £120,000 but the transfer will have been achieved without a CGT liability.