Transferring IHT unused nil rate band

The Inheritance Tax residence nil rate band (RNRB) is a transferable allowance for married couples and civil partners (per person) when their main residence is passed down to a direct descendent, such as children or grandchildren, after their death. 

The allowance increased to the present maximum level of £175,000 from 6 April 2020. Any unused portion of the RNRB can be transferred to a surviving spouse or partner. The RNRB is in addition to the existing £325,000 Inheritance Tax nil-rate band.

Taken together with the current Inheritance Tax limit of £325,000, this means that married couples and civil partners can pass on property worth up to £1 million free of Inheritance Tax to their direct descendants. 

The transfer does not happen automatically and must be claimed from HMRC when the second spouse or civil partner dies. This is usually done by the executor making a claim to transfer the unused RNRB from the estate of the spouse or civil partner that died first. This transfer can also happen even if the first spouse or civil partner died before the RNRB was introduced on 6 April 2017.

There is a tapering of the RNRB for estates worth more than £2 million even where the family home is left to direct descendants. The additional threshold will be reduced by £1 for every £2 that the estate is worth more than the £2 million taper threshold. This can result in the full amount of the RNRB being tapered away. 

The RNRB maximum rate of £175,000 and the taper threshold are currently frozen until at least April 2028.

Source:HM Revenue & Customs| 02-10-2023

What is a trust?

A trust is an obligation that binds a trustee, an individual or a company, to deal with assets such as land, money and shares which form part of the trust. The person who places assets into a trust is known as a settlor and the trust is for the benefit of one or more 'beneficiaries'. The act of transferring an asset – such as money, land or buildings – into a trust is often known as ‘making a settlement’ or ‘settling property’. For Inheritance Tax (IHT) purposes, each asset has its own separate identity. 

HMRC’s manuals states the following when describing what is a trust:

The law of trusts is based upon the concept of English law that property rights can be split into:

  • the legal ownership, and
  • the beneficial interest.

A person who is the absolute owner of property has both the legal and beneficial interest in it. This means that the owner will show up as legal owner, for example, on a land register or on a company register, and will also enjoy any benefit produced by the property.

The absolute owner may split the legal interest from the beneficial enjoyment. This can be done by giving the legal ownership to trustees and the beneficial interest to a named beneficiary (or beneficiaries). Alternatively the owner can keep the legal title and make themselves a trustee.

The rules are complex and there are different types of trusts that need to be considered, such as a joint property or bare trust.

Source:HM Revenue & Customs| 11-09-2023

Giving money to charity in your Will

A reduced rate of Inheritance Tax (IHT) of 36% (reduced from 40%) applies where 10% or more of a deceased’s net estate is left to charity. The lower rate applies where 10% or more of the ‘net value’ of the estate is left to charity.

The current IHT nil rate band is £325,000 per person, below which no Inheritance Tax is payable. Any unused nil rate band can usually be transferred to a surviving spouse or civil partner.

HMRC also have a calculator tool that will help work out the charity donation required to qualify for the reduced rate and will check whether an existing bequest is sufficient to qualify for the reduced rate. The calculator can be found at www.hmrc.gov.uk/tools/iht-reduced-rate/calculator.htm

In order to use the calculator, you will need to know:

  • the value of the assets in the estate;
  • how the assets are owned;
  • the total value of the assets in each part of the estate (‘component’);
  • the value of any debts and liabilities that must be paid out of the estate;
  • the amount of any Inheritance Tax relief and exemptions;
  • the amount of any charitable donations already made;
  • the value of the threshold (‘nil rate band’); and
  • the value of gifts the deceased made in the 7 years before death.

A gift smaller than 10% can also be left to charity in your Will. If this is the case, the charitable donation will be taken off the value of your estate before IHT is calculated.

The donation to charity can be a fixed amount, an item or the balance of what’s left after other gifts have been distributed.

Source:HM Revenue & Customs| 21-08-2023

Characteristics of a valid Will

It is important to make a Will to ensure that your estate is divided amongst your beneficiaries in accordance with your wishes. If you do not leave a Will the law decides who inherits the estate. This can result in a distribution of assets that would not have been in line with your wishes and can be especially problematic for cohabitees (a couple who live together but are not married and have not entered into a civil partnership).

HMRC’s internal manual lists the following characteristics of a valid Will:

  • must be in prescribed form that satisfies all the formalities;
  • operates only as declaration of intention and does not prevent a testator or testatrix from disposing during their lifetime of assets which may have been allocated to someone in the will;
  • takes effect only on death and until that time the beneficiaries have no interest in the assets;
  • may not only deal with dispositions of assets, for example, it may appoint a guardian of minors or give directions on burial or cremation arrangements;
  • can be revoked or altered at any time before the testator/testatrix dies; and
  • is ambulatory, that is to say it is capable of dealing with property acquired after it was made (provided the property is still owned by the testator at death).

It should be noted that even when a valid Will is in place, arguments between family members, beneficiaries or personal representatives can arise. Any disagreements must be sorted out before the affairs of the person who died can be settled. This can sometimes be so contentious that it has been left to the Courts to decide if a Will made by a deceased person was valid or invalid.

A Will can also be changed after death. This can be done by what is known as a Deed of Variation for up to two years from the date of death and is most often contemplated to reduce Inheritance Tax liability. A Deed of Variation can only be executed with the agreement of all the beneficiaries. It is more complicated if children are involved as they cannot themselves consent to changes.

Source:HM Revenue & Customs| 31-07-2023

Tax on property you inherit

Tax implications when inheriting property

Inheriting property can be an emotionally charged and complex process. Not only do you have to deal with the emotional turmoil that comes with losing a loved one, but you also need to navigate the complicated world of tax laws associated with your inheritance. In this comprehensive guide, we will shed light on the UK Inheritance Tax (IHT), Stamp Duty, Income Tax, and Capital Gains Tax related to inherited property, and we will discuss your responsibilities in these matters.

Understanding Inheritance Tax (IHT)

The first tax-related aspect you need to consider when you inherit property is the Inheritance Tax. According to HM Revenue and Customs (HMRC), the estate of the deceased individual is usually liable to pay any IHT due. This means that as a beneficiary, you’re not generally expected to pay tax on the inheritance you receive. The IHT is deducted from the estate before the distribution of any cash or assets to the beneficiaries.

IHT is currently payable at a rate of 40% on death and 20% on lifetime gifts. However, there’s a potential reduction on some assets if the deceased leaves 10% or more of the ‘net value’ of their estate to a charity. It’s a testament to the UK’s commitment to charitable giving and can be a worthwhile consideration when estate planning.

Stamp Duty, Income Tax, and Capital Gains Tax

You’ll be relieved to know that when you inherit a property, you are generally not liable for Stamp Duty. Likewise, Income Tax or Capital Gains Tax are not immediately applicable upon receiving your inheritance.

That said, there are situations where you may need to pay Income Tax or Capital Gains Tax. For instance, you would need to pay Capital Gains Tax on any profit earned from an increase in property value if you decide to sell the property after the date of inheritance. Additionally, you would also be liable to Income Tax on any rental income generated from the inherited property.

If you inherit a property and this means you now own two properties, it’s crucial to inform HMRC which property is your primary residence within two years. This information is significant as it influences the tax implications if and when you decide to sell one of the properties.

Navigating Through The Inheritance Process

HMRC would usually make contact if there were any IHT due from you. However, if the property is held in a trust, special rules apply.

Inherited property can indeed raise many questions concerning tax liabilities. This complexity underscores the importance of getting expert advice to ensure you navigate the process appropriately, understand your tax obligations, and avoid any unwelcome surprises.

At CIGMA Accounting, we are dedicated to helping our clients understand and manage the potential tax implications that come with inheriting property. Our team of experienced tax advisors is here to guide you every step of the way.

Contact us today to learn more about our services and how we can support you in understanding and navigating the tax implications of inherited property. Our mission is to make your tax matters as straightforward as possible, providing you with peace of mind in what may be a challenging time.


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Transfer of unused IHT nil rate band

The Inheritance Tax residence nil rate band (RNRB) is a transferable allowance for married couples and civil partners (per person) when their main residence is passed down to a direct descendent such as children or grandchildren after their death. 

The allowance increased to the present maximum level of £175,000 from 6 April 2020. The allowance is available to the deceased person’s children or grandchildren. Any unused portion of the RNRB can be transferred to a surviving spouse or partner. The RNRB is in addition to the existing £325,000 Inheritance Tax nil-rate band.

The allowance is available to the deceased person's children or grandchildren. Taken together with the current Inheritance Tax limit of £325,000 this means that married couples and civil partners can pass on property worth up to £1 million free of Inheritance Tax to their direct descendants. 

The transfer does not happen automatically and must be claimed from HMRC when the second spouse or civil partner dies. This is usually done by the executor making a claim to transfer the unused RNRB from the estate of the spouse or civil partner that died first. This transfer can also happen even if the first spouse or civil partner died before the RNRB was introduced on 6 April 2017.

There is a tapering of the RNRB for estates worth more than £2 million even where the family home is left to direct descendants. The additional threshold will be reduced by £1 for every £2 that the estate is worth more than the £2 million taper threshold. This can result in the full amount of the RNRB being tapered away. 

The RNRB maximum rate of £175,000 and the taper threshold are currently frozen until at least April 2026.

Source:HM Revenue & Customs| 26-06-2023

Overview of IHT agricultural relief

There are a number of reliefs available that can reduce liability to IHT. Of most interest to farmers is the Agricultural Property Relief (APR). Relief is available at a rate of 100% or 50% depending on who farms the land and how long the land has been owned.

The APR can be claimed on assets including farming land or pasture that is used to grow crops or to rear animals intensively, working farmhouses, farm workers’ cottages, barns and stud farms. There is no agricultural relief for farm equipment but the equipment itself may qualify for another relief known as business relief.

The APR is available for working farms in the UK, Channel Islands, the Isle of Man or the European Economic area. It is important to note that the relief is based on the agricultural value if the land. For example, a farmhouse is valued as if it could only be used for agricultural purposes rather than open market value. The valuations of farmhouses in particular is often the subject of debate.

It is important to ensure that any claim for APR is realistic as HMRC’s refusal to accept an APR claim could result in a significant amount of IHT being due together with the possibility of penalties being levied. There can also be issues where the faming business has diversified into non-farming activities such as wind farms, holiday lettings and farm shops.

There are special conditions to prevent exploitation of the relief by a person switching their assets into agricultural property shortly before death or making a transfer. 

Source:HM Revenue & Customs| 04-06-2023
top 5 reasons to register trusts with HMRC; london accountant; farringdon accountant

The Top 5 Reasons to Register Trusts for Your Assets

If you are looking to protect your assets and minimise your tax liability, you will likely want to register trusts to hold them. In some cases, you may have to register trusts with HMRC. Trusts offer a range of benefits, from shielding your assets from creditors to providing a clear plan for distributing your wealth after you pass away. In this post, we’ll explore the top 5 benefits of registering trusts and why they may be a wise investment for your financial future.

 

1. Protect Your Assets from Creditors and Lawsuits

One of the biggest benefits of registering trusts for your assets is the protection they offer from creditors and lawsuits. When your assets are held in a trust, they are no longer considered your personal property and are therefore shielded from any legal action taken against you.

This can be especially important for business owners or individuals in high-risk professions, as it provides an added layer of protection for their hard-earned assets. Additionally, trusts can also protect your assets from being seized by the government in the event of a lawsuit or bankruptcy.

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2. Register trusts with HMRC to Minimize Estate Taxes and Probate Costs

Another major benefit of registering trusts for your assets is the potential to minimize estate taxes and probate costs. When assets are transferred through a trust, they are not subject to the same taxes and fees as assets transferred through a will. This can save your beneficiaries a significant amount of money and hassle in the long run.

Additionally, trusts can help ensure that your assets are distributed according to your wishes, without the need for lengthy and costly probate proceedings.

3. Register trusts to Maintain Control Over Your Assets

Registering trusts for your assets allows you to maintain control over them even after you pass away. With a trust, you can specify exactly how and when your assets will be distributed to your beneficiaries. This can be particularly important if you have minor children or beneficiaries with special needs who may not be able to manage their inheritance on their own.

By setting up a trust, you can ensure that your assets are used in the way you intended and that your beneficiaries are taken care of according to your wishes.

 

4. Ensure Privacy and Confidentiality

Registering trusts for your assets can also provide privacy and confidentiality. Unlike wills, which become public record after your death, trusts are private documents that are not subject to public scrutiny. This means that your personal and financial information will remain confidential and only be shared with your chosen beneficiaries and trustees.

Additionally, trusts can protect your assets from potential creditors or legal disputes, providing an added layer of privacy and security.

 

5. register trusts to Provide for Your Loved Ones After You're Gone

One of the top reasons to register trusts for your assets is to ensure that your loved ones are provided for after you pass away. By setting up a trust, you can designate specific beneficiaries to receive your assets and ensure that they are distributed according to your wishes. This can be especially important if you have minor children or family members with special needs who may require ongoing financial support.

A trust can provide for their needs and ensure that they are taken care of even after you’re gone.

 

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Business Relief for IHT

There are a number of reliefs available that can reduce liability to Inheritance Tax (IHT).

One of these reliefs is known as IHT Business Relief and is a valuable tax relief for taxpayers with business interests, offering either 50% or 100% relief from IHT on the value of the business assets if certain conditions are met. For example:

  • 100% Business Relief can be claimed on a business or interest in a business or on shares held in an unlisted company.
  • 50% Business Relief can be claimed on:
    • shares controlling more than 50% of the voting rights in a listed company;
    • land, buildings or machinery owned by the deceased and used in a business they were a partner in or controlled; and
    • land, buildings or machinery used in the business and held in a trust that it has the right to benefit from.

Relief is only available if the deceased owned the business or asset for at least 2 years before they died. There are a number of restrictions to the relief, for example if the company in question mainly deals with securities, stocks or shares, land or buildings, or in making or holding investments. In some cases, partial Business Relief may be available.

Source:HM Revenue & Customs| 08-05-2023

Exempt gifts paid out of income

There is a flexible exemption from IHT for taxpayers who make tax exempt gifts and payments that are paid as normal expenditure out of income. With proper planning this can be a useful tool to enable grandparents, for example, to help pay school fees for their grandchildren.

However, careful consideration has to be given to ensure that these payments form part of the transferor’s normal expenditure and is made out of income and not out of capital. The person gifting the money must also ensure that they are left with enough money after making the gift to maintain their normal standard of living.

HMRC’s internal manual states that "…although the normal expenditure gifts must have left the transferor with ‘sufficient income’ to maintain their usual standard of living, they do not need to have actually used this for living expenses. The transferor may in fact choose to use capital to meet their living expenses and use the income remaining, after making the gifts, for some other purpose. It is enough, for the exemption to apply, that the income was enough to meet both the normal expenditure gifts and the usual living expenses".

If the income that is left after making the gifts is not enough to meet the usual living expenses, the exemption is not available in full, but part of the gifts may still qualify for the exemption.

Source:HM Treasury| 10-04-2023

Transferring nil rate band for Inheritance Tax

The Inheritance Tax residence nil rate band (RNRB) is a transferable allowance for married couples and civil partners (per person) when their main residence is passed down to a direct descendent such as children or grandchildren after their death. 

The allowance increased to the present maximum level of £175,000 from 6 April 2020. The allowance is available to the deceased person’s children or grandchildren. Any unused portion of the RNRB can be transferred to a surviving spouse or partner. The RNRB is on top of the existing £325,000 Inheritance Tax nil-rate band.

The allowance is available to the deceased person's children or grandchildren. Taken together with the current Inheritance Tax limit of £325,000 this means that married couples and civil partners can pass on property worth up to £1 million free of Inheritance Tax to their direct descendants. 

The transfer does not happen automatically and must be claimed from HMRC when the second spouse or civil partner dies. This is usually done by the executor making a claim to transfer the unused RNRB from the estate of the spouse or civil partner that died first. This transfer can also happen even if the first spouse or civil partner died before the RNRB was introduced on 6 April 2017.

There is a tapering of the RNRB for estates worth more than £2 million even where the family home is left to direct descendants. The additional threshold will be reduced by £1 for every £2 that the estate is worth more than the £2 million taper threshold. This can result in the full amount of the RNRB being tapered away. 

The RNRB maximum rate of £175,000 and the taper threshold are currently frozen until at least April 2026.

Source:HM Government| 20-03-2023
What is a Declaration of Trust and why do you need one?

What is a Declaration of Trust for property?

A Declaration of Trust, also known as a Deed of Trust, is a legal document that outlines the ownership and distribution of assets between two or more parties. Alongside companies and partnerships, trusts are a common way for multiple individuals to jointly own assets.

What is a Declaration of Trust?

A Declaration of Trust is a legal document that sets out the rights and responsibilities of each party, and how the asset will be managed. It can also specify rules for the use of a property, how to divide profits or losses when the asset is sold, and how to proceed in certain situations, such as the death of one of the property owners.

There are several types of trust acknowledged by HMRC. These differ in the specifics of how control of the trust is passed on, and how any income is divided. Knowing how HMRC labels your trust is important for making sure you pay the correct rate of tax on any income from the trust.

What is a Declaration of Trust?

A Declaration of Trust is essential for anyone who jointly owns property or assets with another person. There are several reasons why multiple parties would want to invest in / jointly own a property or asset. These include unmarried couples, investment partners, and family members who help make payments but whose names are not on the mortgage.

Without a Declaration of Trust, there is no clear legal agreement in place to determine how the property will be managed or how money will be repaid. This can lead to disputes and misunderstandings in the future, which can be costly and time-consuming to resolve.

A Declaration of Trust provides clarity and peace of mind for all parties involved, ensuring that everyone understands their rights and responsibilities.

What should be included in a Declaration of Trust?

A Declaration of Trust should include the names and contact information of all parties involved, a description of the property or assets being managed, and the terms of the agreement. These will depend on the individual situation, but often include:

  • How much money each person has contributed towards the property purchase and other costs, such as maintenance and mortgage repayments.

     

  • How and when each person will get their money back.

     

  • What will happen to each person’s financial contribution if the current relationship breaks down.

     

  • What will happen to each person’s financial contribution if the homeowner fails to keep up with mortgage repayments.

     

  • What will happen to each person’s financial contribution if the homeowner sells the property and buys another.

     

  • Outline any restrictions or conditions on the use of the property or assets.

How do you create a Declaration of Trust?

Creating a Declaration of Trust is a relatively straightforward process. The first step is to decide on the terms of the agreement, including how the property or assets will be managed and how any profits or losses will be shared. Once you have agreed on the terms, you will need to draft the document and have it signed by all parties involved.

 

It is important to seek legal advice when creating a Declaration of Trust to ensure that it is legally binding and enforceable. We at CIGMA Accounting are always ready to assist you, no matter where you are in the UK.

Reach out to us by completing this form and one of our staff members will get in touch within one business day. 


Valuing an estate for IHT purposes

Inheritance Tax (IHT) is levied on a person’s estate when they die and can also be payable during a person’s lifetime on certain trusts and gifts. The rate of Inheritance Tax payable is 40% on death and 20% on lifetime gifts.

The current IHT nil rate band is £325,000 per person, below which no IHT is payable. This is the amount that can be passed on free of IHT. A reduced IHT rate of 36% (reduced from 40%) applies where 10% or more of a deceased’s net estate after deducting IHT exemptions, reliefs and the nil-rate band is left to charity.

In order to ascertain whether or not IHT is due, the executor or personal representative of the deceased must value the deceased’s estate. This is done by calculating the total value of the assets and gifts of the deceased and deducting any debts. An initial estimate of the value of the estate’s value should be undertaken to help determine if there is IHT to pay. This includes ascertaining the value of any assets owned by the deceased on the day they died, an analysis of any gifts made in the 7 years prior to death and the value of trusts where the deceased had a beneficial interest.

If the estate is likely to owe tax, then accurate valuations will be required. IHT is usually due six months after the end of the month in which the deceased died. In certain cases, it is possible to pay by instalments or to make payments later with the addition of interest.

Source:HM Revenue & Customs| 06-03-2023

Making a claim on an unclaimed estate

There are special intestacy rules that govern how assets are divided if you die without making a will. If this happens your assets are passed on to family members in accordance with a set legal formula. This can result in a distribution of assets that would not be in keeping with your final wishes and can be especially problematic for cohabitees (a couple who live together but are not married and have not entered into a civil partnership).

However, if someone dies without a will or any known family their property passes to the Crown as ownerless property. This is known as 'bona vacantia' which literally means vacant goods and by law this property (including money and other personal possessions) passes to the Crown. The bodies that deal with bona vacantia claims vary across the United Kingdom, but they all ultimately represent the Crown.

It is possible to make a claim on the estate but only if you are an 'entitled relative'. The general rules are:

  • If there is no will, the person’s spouse or civil partner and then any children have first claim to the estate.
  • If there is no spouse or child, anyone descended from a grandparent of the person is entitled to a share in the estate.
  • If you are related by marriage, you have no entitlement.

It is also possible for someone who lived together with the deceased (such as a partner) to apply for a grant from the deceased person's estate. The rules are complex and serve as an important reminder to make a will thereby ensuring that your assets are divided amongst family, friends and charities in accordance with your wishes.

Source:HM Revenue & Customs| 13-02-2023

Have you utilised 2022-23 IHT allowances and reliefs?

We wanted to remind you of the Inheritance Tax (IHT) implications of making cash gifts during the current tax 2022-23 tax year that will end on 5 April 2023.

You can give away up to £3,000 worth of gifts each tax year. This is known as your annual exemption. Any unused part of the annual exemption can be carried forward, but only for one year. So, if you didn’t make any cash gifts in 2021-22, you could gift up to £6,000 this tax year.

There are also generous exemptions for normal gifts made out of your income, but you must be able to maintain your standard of living after making the gift. There are also reliefs available for wedding or civil ceremony gifts. You can gift up to £1,000 per person with higher limits of £2,500 for a grandchild or great-grandchild, £5,000 for a child.

You can also give as many small gifts of up to £250 per person as you want during the tax year but only if you haven’t used another exemption on the same person. There is no IHT to pay on lifetime gifts between you and your spouse or civil partner as long as you both live permanently in the UK.

Other gifts, outside these limits, count towards the value of your estate and should be carefully considered.

Source:HM Revenue & Customs| 30-01-2023

Exempt transfers between siblings

Inheritance Tax (IHT) is levied on a person’s estate when they die and can also be payable during a person’s lifetime on certain trusts and gifts. The current IHT nil rate band is £325,000 per person, below which no IHT is payable. This is the amount that can be passed on free of IHT as a tax-free threshold.

In most cases, an exemption from IHT is available on assets that are passed on death to a surviving spouse or civil partner. Unlike some countries, there is no similar provisions in the UK for exempt transfers between siblings, who have lived together for many years. A new Bill that would amend the existing rules and provide relief for siblings under specific scenarios is currently making its way through the House of Lords.

This Bill, upon receiving Royal Assent, will allow a surviving sibling to benefit from an IHT exemption. The surviving sibling would need to be over the age of 30 and have lived with their sibling for more than 7 years before the date of death. For the purposes of this Bill, siblings are defined as sisters, brothers, half-sisters and half-brothers.

These changes, whilst not having an impact on many people, will offer significant benefits for those that do qualify and could help elderly surviving siblings stay in homes that they have lived in for many years. Until these changes become law, there are certain estate planning actions that should be explored if you are in a similar position. 

Source:HM Government| 16-01-2023

IHT – estimating an estate’s value

Inheritance Tax (IHT) is levied on a person’s estate when they die and can also be payable during a person’s lifetime on certain trusts and gifts. The rate of Inheritance Tax payable is 40% on death and 20% on lifetime gifts.

The current IHT nil rate band is £325,000 per person, below which no IHT is payable. This is the amount that can be passed on free of IHT as a tax-free threshold. A reduced rate of IHT of 36% (reduced from 40%) applies where 10% or more of a deceased’s net estate after deducting IHT exemptions, reliefs and the nil rate band is left to charity.

In order to ascertain whether or not IHT is due, the executor or personal representative of the deceased must value the deceased's estate. This is done by calculating the total value of the assets and gifts of the deceased and deducting any debts. An initial estimate of the value of the estate’s value should be undertaken to help determine if there is IHT to pay. This includes ascertaining the value of any assets owned by the deceased on the day they died, an analysis of any gifts made in the seven years prior to death and the value of trusts where the deceased had a beneficial interest.

If the estate is likely to owe tax, then full accurate valuations will be required. IHT is usually due six-months after the end of the month in which the deceased died. In certain cases, it is possible to pay by instalments or to make payments later with the addition of interest.

Source:HM Revenue & Customs| 09-01-2023
Tax Exemptions UK

Save on Taxes: Exemptions in the UK

Tax exemptions, also referred to as Tax allowance or tax relief in the UK, is the amount of money you can claim without having to pay tax on it. There are a few different benefits and expenses that will allow you to claim tax exemption. These are mainly divided into two sections namely: private tax exemptions and work exemptions.  Let’s look at these in more detail:

Private Tax Relief

Pension contributions

You may be able to claim tax relief on pension contributions if:

  • You pay Income Tax at a rate above 20% (Higher rate of 40% and Additional Rate at 45%) and your pension provider claims the first 20% for you (relief at source).
  • Your pension scheme is not set up for automatic tax relief. Note that you cannot claim UK tax relief if your pension scheme is not registered with the HMRC.
  • Someone else (for example your partner) pays into your pension. 

You can claim up to 100% tax relief on private pension contributions. 

You can read about Defined Contribution Pensions on our blog. 

Charity Donations

Donations to charity from individuals are tax free. You can get tax relief if you donate:

If you are paying an income tax rate of over 20%, you need to declare this on your Self Assessment. If you do not complete a self assessment, you need to call the HMRC to inform them of your situation.

You are also entitled to “Married Couples Allowance”. If your income is below your personal allowance (£12,570), and your partner pays income tax at the basic rate (their income is between ( £12,571 and £50,270). This tax free allowance allows you to pay up to  £1,260 of your personal allowance to your spouse (married or civil partnership). 

Maintenance Payments

If you and your partner or spouse separate ways and you are required to pay maintenance, you can claim for maintenance tax exemption. Maintenance Payments Relief is worth 10% of the maintenance you pay to your ex-spouse or civil partner, up to a maximum of £364 a year (or 10% of £3,640).

 

 

Time spent working on a ship outside the UK

To get up to 100% tax relief on earnings you must have:

  • Worked on a ship
  • Worked outside of the UK long enough to qualify for the deduction – usually a minimum of 365 days
  • Been resident in the UK or resident for tax purposes in a European Economic Area (European countries, Iceland, Liechtenstein and Norway) State (other than the UK)

You can’t get the deduction if you were:

  • a Crown employee (for example, a Royal Navy sailor)
  • not a UK resident
  • not a resident of an EEA State (other than the UK)
Personal Tax Relief London

Tax Relief for Employed and Self Employed Individuals

As a self employed, or employed individual, you have a whole list of additional expenses that you can claim tax relief on. In this section we will look at most of these expenses. 

Self Employed Tax Exemptions

The HMRC provides various opportunities to claim for the running costs of your UK based sole proprietorship. You can look at the following categories to see if you qualify for any tax exemptions: 

Office, property and equipment

Car, van and travel expenses

Clothing expenses

Staff expenses

Reselling goods

Legal and financial costs

Marketing, entertainment and subscriptions

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Furthermore, it is important to know that your have a standard personal allowance of up to £12,570. This means that anything under £12,570 you are not required to pay tax returns. However, as a sole proprietor you still need to submit a self assessment even if you are not required to pay taxes to the HMRC.

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Employed / Job Tax Relief Expenses

You do not have to be a sole proprietor or company owner to make use of tax exemptions. Some of the expenses you can still claim even if you are employed are as follows: 

However, it is important to note that if your employer has reimbursed you for the expenses or if you request to make use of an alternative service or equipment as given by the employer (for example, if you are travelling and the company pays for public transport however you prefer to rent a vehicle).

Additionally, it’s important that you keep receipts or records on what you have spent. You have four years to claim the tax reliefs on this. If you would like to see if you are eligible to claim, you can visit the HMRC website and answer a few simple questions to see what is allowable.

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Tax on property you inherit

If you inherit property, you are usually not liable to pay tax on the inheritance. This is because any Inheritance Tax (IHT) due should be paid out of the deceased’s estate before any cash or assets are distributed. 

The rate of IHT currently payable is 40% on death and 20% on lifetime gifts. IHT is payable at a reduced rate on some assets if 10% or more of the 'net value' of the estate is left to charities.

If you inherit a property, you are not immediately liable for Stamp Duty, Income Tax or Capital Gains Tax. HMRC would contact you if any IHT was payable.

If you receive an inheritance, you will be liable to Income Tax on any profit earned after the inheritance, for example, Capital Gains Tax (CGT) on the increase in property value after the date of inheritance or tax on rental income. If inheriting a property means you own two properties, you must tell HMRC which property is your main home within two years. There are special rules if the property is held in trust.

Source:HM Revenue & Customs| 12-12-2022

Gifts paid out of disposable income

It is possible for wealthier taxpayers to make tax exempt gifts and payments that are funded as normal expenditure out of income. This is a very flexible exemption from IHT as there are no specific requirements, for example by making fixed regular gifts to the same person. With proper planning this can be a very useful tool including enabling grandparents to help pay school fees for their grandchildren.

However, careful consideration has to be given to ensure that these payments form part of the transferor’s normal expenditure and is made out of income and not out of capital. The person gifting the money must also ensure that they are left with enough money for them to maintain their normal standard of living out of their regular income after making the gift.

HMRC’s internal manual states that although the normal expenditure gifts must have left the transferor with ‘sufficient income’ to maintain their usual standard of living, they do not need to have actually used this for living expenses. The transferor may in fact choose to use capital to meet their living expenses and use the income remaining, after making the gifts, for some other purpose. It is enough, for the exemption to apply, that the income was enough to meet both the normal expenditure gifts and the usual living expenses.

If the income that is left after making the gifts is not enough to meet the usual living expenses, the exemption is not available in full, but part of the gifts may still qualify for the exemption.

Source:HM Revenue & Customs| 14-11-2022

Gifts paid out of disposable income

It is possible for wealthier taxpayers to make tax exempt gifts and payments that are funded as normal expenditure out of income. This is a very flexible exemption from IHT as there are no specific requirements, for example, by making fixed regular gifts to the same person. With proper planning this can be a very useful tool including enabling grandparents to help pay school fees for their grandchildren.

However, careful consideration has to be given to ensure that these payments form part of the transferor’s normal expenditure and is made out of income and not out of capital. The person gifting the money must also ensure that they are left with enough money for them to maintain their normal standard of living out of their regular income after making the gift.

HMRC’s internal manual states that although the normal expenditure gifts must have left the transferor with ‘sufficient income’ to maintain their usual standard of living, they do not need to have actually used this for living expenses. The transferor may in fact choose to use capital to meet their living expenses and use the income remaining, after making the gifts, for some other purpose. It is enough, for the exemption to apply, that the income was enough to meet both the normal expenditure gifts and the usual living expenses.

If the income that is left after making the gifts is not enough to meet the usual living expenses, the exemption is not available in full, but part of the gifts may still qualify for the exemption.

Source:HM Revenue & Customs| 14-11-2022
IHT claiming business relief

IHT claiming business relief

There are a number of reliefs available that can reduce liability to Inheritance Tax (IHT) if you inherit the estate of someone who had died. 

One of these reliefs is known as IHT Business Relief and is a valuable tax relief for taxpayers with business interests, offering either 50% or 100% relief from IHT on the value of the business assets if certain conditions are met.

  • 100% Business Relief can be claimed on a business or interest in a business or on shares held in an unlisted company.
  • 50% Business Relief can be claimed on:
    • shares controlling more than 50% of the voting rights in a listed company;
    • land, buildings or machinery owned by the deceased and used in a business they were a partner in or controlled; and
    • land, buildings or machinery used in the business and held in a trust that it has the right to benefit from.

Relief is only available if the deceased owned the business or asset for at least 2 years before they died. There are a number of restrictions to the relief, for example if the company in question mainly deals with securities, stocks or shares, land or buildings, or in making or holding investments. In some cases, partial Business Relief may be available.

Source:HM Revenue & Customs| 31-10-2022
Inheritance Tax UK

IHT gifts with reservation of title

The majority of gifts made during a person's life are not subject to tax at the time of the gift. These lifetime transfers are known as 'potentially exempt transfers' or 'PETs'. These gifts or transfers achieve their potential of becoming exempt from Inheritance Tax if the taxpayer survives for more than seven years after making the gift. There is a tapered relief available if the donor dies between three and seven years after the gift is made.

The effective rates of tax on the excess over the nil rate band for PETs is:

  • 0 to 3 years before death 40%
  • 3 to 4 years before death 32%
  • 4 to 5 years before death 24%
  • 5 to 6 years before death 16%
  • 6 to 7 years before death 8%

However, the rules are different if the person making the gift retains some 'enjoyment' of the gift made. This is usually the case where the donor does not want to give up control over the assets concerned and the gift is made with reservation of title. These gifts fall under the heading of 'Gifts With Reservation of Benefits rules' or 'GWROBs'.

A common example is a person giving their house away to their children but continuing to live in it rent-free. Under these circumstances, the taxman would contend that the basic position of the donor remained unchanged and that this is a GWROB. In this is the case, HMRC will not accept that a true gift has been made and the 'gift' would remain subject to Inheritance Tax even if the taxpayer dies more than 7 years after the transfer.

A GWROB can usually be avoided in this type of situation if the donor pays full market rent for the use of the asset gifted.

Source:HM Revenue & Customs| 24-10-2022
Changing Will UK

Changing a will after death

In certain circumstances, a will can be changed after death. This can be done by using what is known as a Deed of Variation. Any changes to the will must be done within two years from the date of death. However, beneficiaries who would be left worse off by the change must give their agreement before any changes can be made.

This is most often done to reduce the amount of Inheritance Tax or Capital Gains Tax payable, to help someone who was left out of the Will, to move the deceased’s assets into a trust or to clear-up uncertainties relating to the will. For example, a grandparent may have left assets to a grandchild but did not update his / her will when another grandchild was born.

As we mentioned, a Deed of Variation can only be executed upon the agreement of all the beneficiaries and executors. It is more complicated if children are involved as they cannot themselves consent to changes.

For some readers, this might be a timely reminder not just of the importance of having a will but also of ensuring it is updated as circumstances change over time.

Source:HM Revenue & Customs| 24-09-2022