What is the current IHT Nil Rate Band (NRB) amount, and how will this change in the future?
£325,000, which is currently fixed until 2020 from which it will then increase in line with the Consumer Price Index (CPI) from 2021 onwards: this is all subject to future Government policy: But see new rules wef 06 April 2017 Click to view
What is the current IHT rate payable above the NRB? How could this be reduced by charitable donation(s)?
40% on the excess above the NRB. This could be reduced to 36% if at least 10% of the net estate is left to registered charities, ie those with an HMRC charity reference number
What is the IHT Residence Nil Rate Band (RNRB) amount, and how can this be used?
A RNRB of £100,000 is applicable from April 2017 and will increase by £25,000 per tax year to reach £175,000 from April 2020. It can be used in addition to the NRB if the deceased’s interest in a residential property, which has been their residence at some point and is included in their estate, is left to one of more of their direct descendants
What two things determine how much IHT is payable?
1) The value of the net estate, after deduction of debts etc
2) Where the Will or Intestacy sends the net estate above the NRB allowances
Who are exempt beneficiaries for IHT purposes?
Spouses / Registered charities and UK political parties / Humanitarian aid workers who die as a result of responding to an emergency /
There is a little known exemption from Inheritance Tax (IHT) which means that when a member or former member of the Armed Forces dies as a result of injuries or disease sustained whilst on active service, their whole estate is exempt from the payment of IHT which would normally be levied at a rate of 40%
The exemption extends to members of the emergency services responding to emergency circumstances, and additionally to cover humanitarian aid workers responding to humanitarian emergencies
An emergency responder is defined as being either: (1) Emergency Services Personnel – defined as persons employed or engaged in providing fire services; medical, ambulance or paramedic services; services for police purposes; and services for the transportation of organs, blood, medical equipment or personnel; or (2) Humanitarian Aid Workers – defined as individuals employed by a government, international organisation or charity in connection with the provision of humanitarian assistance.
It must be noted that the exemption will only be available if the individual was responding to emergency circumstances. This would be the case if the emergency responder was:
1. Travelling anywhere for the purpose of dealing with emergency circumstances occurring at the destination;
2. Dealing with emergency circumstances;
3. Preparing to deal with emergency circumstances imminently; or
4. Dealing with the immediate aftermath of emergency circumstances.
Emergency circumstances include circumstances which are present or imminent and are likely to cause:
1. The death of a person or animal;
2. Serious injury or serious illness of a person or animal;
3. Serious harm to the environment or to any building or other property; or
4. Worsening of such an injury, illness or harm.
This change greatly increases the scope of clients whose estates may be exempt from IHT. For example, the estate of a doctor who is killed in a road accident when travelling to the scene of an explosion would now be exempt. It is important to note, however, that the exemption is only available where the client is acting in the course of his or her employment or voluntary work. Surprisingly, this means that off-duty doctors or paramedics stopping at the scene of an accident and rendering assistance will not be covered.
The exemption under section 154 has also been extended to apply to members of the armed forces and civilians subject to service discipline who die whilst not on active service but instead as a result of:
1. A wound inflicted, accident occurring or disease contracted whilst responding to emergency circumstances in the course of the individual’s duties as a member of the armed forces or as a civilian subject to service discipline; or
2. A disease contracted at some previous time, the death being due to or hastened by the aggravation of the disease whilst responding to emergency circumstances in the course of the individual’s duties as a member of the armed forces or as a civilian subject to service discipline.
An individual is deemed to be responding to emergency circumstances in the same situations as outlined above. As an example, the estates of members of the armed forces and nurses who die as a result of Ebola contracted whilst assisting with the crisis in Sierra Leone would now be exempt from IHT.
Section 155A has been introduced to exempt from IHT the estate of police constables and members of the armed forces who die as a result of:
1. An injury sustained or disease contracted in circumstances where they were deliberately targeted due to their status as a constable or as a member of the armed forces; or
2. A disease contracted at some previous time, the death being due to or hastened by the aggravation of the disease by an injury sustained or a disease contracted where they were being deliberately targeted due to their status as a constable or as a member of the armed forces.
This exemption applies whether or not the member of the armed forces or the constable is on or off duty. This compares unfavourably with the situation of the off-duty paramedic or doctor highlighted above. This exemption would cover the estates of soldiers in the British army who are killed in the UK whilst off duty because of their status as a member of the armed forces.
Again, however, the estates of certain individuals who you may think should be covered are not. For instance, a police officer killed whilst working undercover on surveillance and who was not deliberately targeted due to their status as a police officer would not benefit from the exemption.
Does a married or civil partnership couple have an automatic ‘Double NRB’, and does this differ for couples who are not married / in a civil partnership ?
No, it is not automatic, as it has to be claimed by the Executors on second death of the couple so as to uplift the total NRB to the equivalent maximum of two NRB’s: this is only applicable for married and civil partnership couples, and is not possible for couples not married or civil partners
For a married couple, where on first death in September 2007 when the NRB was £300,000 and everything passed to the spouse, what is the NRB that applies now on second death, and how is this obtained?
It is a maximum of 100% of the NRB which is applicable at the time of the second death (i.e. not the NRB applicable at first death). This is obtained by the Executors acting on second death by providing appropriate evidence to HMRC that it can be claimed, and how much
For an unmarried couple with a potential IHT liability what would be recommended in their Will ?
A Nil Rate Band Discretionary Trust in each of their wills. This will effectively enable a ‘doubling up’ of the NRB by way of a loan / IOU facility via the trust which would be a debt on the estate of second to die which would reduce that estate
How much potential IHT could be saved for an unmarried couple ?
The potential IHT savings is £130,000, calculated as 40% of one NRB of £325,000
The Testator is a single person who solely owns their property, but their estate is sufficient size to be above the NRB. What can be done in their will to mitigate IHT, and what other option(s) could be suggested ?
Nothing can be done in their Will for this, thus it may be prudent to refer them to an IFA or specialist tax adviser who is able to give them advice which would relate to lifetime IHT planning
A married couple intend to give their house to their children to avoid IHT but also continue to live in it: how would this be treated by HMRC, and could this tactic work?
This would be treated as a ‘Gift with Reservation of Benefit’ (GROB,) as they would retain the enjoyment and benefit of the property, so it would be added back into their estate for IHT purposes and would therefore not ordinarily work: this may be overcome by them living in the property with the new owner and paying a true open market rent for occupation, but this would need to be a) fully evidenced, b) count as taxable rental income for the children, and c) depend on the view of HMRC
What is a ‘PET’, and how is this treated for IHT?
A ‘PET’ is a Potentially Exempt Transfer, being a gift made by the donor when alive (gift inter vivos): provided that the donor survives for at least 7 years and retains no benefit from it, the gift will not be liable to IHT: the estate including the gift must exceed the NRB for there to be any concern regarding IHT liability
Under a PET, what IHT is payable if the client dies 4-5 years after the gift was made?
IHT is payable at a rate of 24%, being 60% of the full 40% rate, known as ‘taper relief’
What is the annual gift exemption for IHT, and what period can this be claimed for ?
The annual gift exemption rate is £3,000 per tax year (6 April to 5 April): this can be claimed for both the current and one previous tax year only, if not already used, i.e. £6,000 maximum
The Testator is gifting £100,000 to his daughter at the time of making his will, and has not made any other such gifts in the last 7 years: assuming his estate is subject to IHT at the time of his death, how much IHT would be payable on the gift if he were to die during the next year ?
A total of £6,000 could be treated as current and previous tax years’ annual exemption, so IHT at 40% would effectively be payable on £94,000 of the amount i.e. £37,600
A married Testator wishes to make a gift of £130,000 capital in his will to his son, and leave everything else in his estate to his wife: what impact will this have on his NRB when he dies?
As this gift to his son is to a ‘non-exempt beneficiary’, it would use up and reduce his NRB by 40%, (£130,000 / £325,000), so that on second death his wife’s executors would only be able to claim the other 60% of his NRB as being unused
What are the two rates for Business Property Relief (BPR) allowed for IHT, and how long does the business assets have to be held to be eligible ?
The two rates are 100% and 50%, dependant on the type of business assets and subject to HMRC acceptance: they must be held for at least 2 years to become qualifying for BPR
Is there a trust that could be embedded in the wills of an unmarried couple to mitigate IHT ? If so, what type of trust would this be, and how many trustees should be appointed ? Who has a right to the funds / assets in this trust?
This would be a Nil Rate Band Discretionary Trust and at least two trustees should be appointed: as it is a discretionary trust in nature, no-one then has an absolute right to the funds / assets placed in the trust, it is ultimately intended for the chosen beneficiaries but at the discretion of the trustees
What 3 documents are required for Severance of Tenancy on a jointly – owned property ?
1) Mutual Severance of Tenancy letter; 2) Land Registry ‘SEV’ form; 3) A covering letter to send these to the Land Registry for action: this results in a ‘Form A’ restriction to be recorded in the property ‘Proprietorship’ section of the Land Registry, indicating that the property is held as Tenants in Common
How many Severance of Tenancy Forms should be provided, and how are these to be used i.e. kept, sent etc.
Four Severance of Tenancy Forms should be provided, and after signing by both owners, two copies are retained by them, the third is sent to the Land Registry and the fourth to any mortgage lender involved, in order to notify them, although the lender still has security of the whole property
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