Tag: IHT | Wills Jacobsen

At the business end

Business Property Relief (BPR) is a relief that reduces the taxable value of relevant business property for Inheritance Tax (IHT) purposes on transfers made both during an individual’s lifetime and on death.

Relevant business property includes assets such as a business, an interest in a business, shares in an unquoted trading company and land, buildings, machinery or plant owned by an individual personally but used wholly or mainly for business purposes by a partnership in which they are a partner or a company which they control.

In general, in order to qualify for BPR, the business property concerned must have been owned by the individual for two continuous years before death or transfer and meet certain conditions. However, if there is a rights issue in a company under which further shares are offered to all shareholders and the deceased shareholder had taken up his or her issue then, provided the allocation is linked and proportionate to shares already held by the deceased shareholder, the new shares fall within the reorganisation of share capital rules and qualify immediately for full relief from BPR.

Relief is given at a rate of either 100% or 50% depending on the property concerned. A transfer of a business, an interest in a business or unquoted shares in a trading company would qualify for 100% BPR whilst the transfer of land, buildings, machinery or plant owned by an individual personally but used wholly or mainly for business purposes by a partnership in which they are a partner or a company they control will only qualify for 50% relief.

BPR will not be granted where a business consists, wholly or mainly, of dealing in loan notes or shares, dealing in land or buildings or making or holding investments. BPR will also be denied where the business property concerned is subject to a binding contract for sale. This can include binding agreements by co owners to buy out a deceased’s share of a business. These arrangements should be avoided and cross option agreements explored instead as these preserve the BPR available.

BPR can be claimed in a lifetime on the making of a gift of shares in a Trading Company. Gifts crystallise the BPR available but what you have to be careful of here is that if the shares are sold by the person you give them to and you die within 7 years of the gift then the BPR is lost. This is a claw-back provision under Section 113A of the Act.

Happy birthday to you

Just over ten years ago major changes were made to the way that most trusts are treated for Inheritance tax (IHT) bringing most within something called the “Relevant Property Trust Regime”. This regime seeks to impose 10 year and exit charges on money held within trusts and as a result many trusts formed in 2006 (when legislation changed) could by now have reached their tenth anniversary.

So is it a happy birthday?

Much will depend on the value of the trust assets and what planning has been undertaken up to the first 10-year anniversary. What is clear is that over the last 10 years asset values have risen (especially property) notwithstanding the crash of 2008 and subsequent recession. Given that distributions from trusts are factored back into a 10-year calculation it seems likely that HMRC are in for a stream of revenue from such trusts this year.

Some background for you

The IHT regime for relevant property trusts imposes an IHT charge on every 10-year anniversary and when capital leaves a trust.
The calculation of the tax charge is complicated and HMRC has consulted on ways to simplify the calculation whilst protecting tax revenues. Unfortunately, it now appears there will not be any major simplification.
There is only a limited range of trusts that are not relevant property trusts.
If you do not file a return for your trust 10-year anniversary, or when an exit charge arises, the trustees will face a penalty.
Even if your trust does not have an IHT liability at the 10-year anniversary point you may still need to file a return within given deadlines.

Filing dates

From 6 April 2014 the filing deadline for returns of a 10-year anniversary charge and all exit charges became 6 months after the end of the month in which the charge arose.

Given that the new regime came into being on 22nd March 2006, it is possible that your trust may be facing a 10-year anniversary as early as 23rd September 2016.

Due to the complex nature of the 10 year calculations, trustees are advised to give thought to such a return sooner rather than later.

What can you do?

If you are a trustee and you require advice about an approaching 10-year anniversary contact us for advice.

Inheritance tax reforms cause panic in sector

The Chairman of the Treasury Select Committee, has called on George Osborne to change “extremely complex” inheritance tax (IHT) reforms which are due to be implemented in April 2017.

Andrew Tyrie has criticised the reforms, saying they have “the hallmarks of unsustainability”, continuing that “Inheritance Tax Provisions were already long and extremely complex. The draft clauses… reinforce my concern that the latest Budget will make them even more complex.”

Inheritance Tax now affects a large number of people. Bizarrely many of these people are not wealthy enough to afford highly skilled tax advice which means that many of them may make ill-informed decisions about whether and when to sell their house and/or re-write their wills.

Commonly lay executors (those who are not professional) forget to claim all the IHT allowances and therefore end up paying more IHT than they need to.

It is anticipated that more than a million estates will be affected by IHT in the next few years and that this number largely represents those commonly called “strivers” – people who, after decades of hard work, have accumulated enough to pass something on to their relatives.

Revenue from IHT was around £3.8 billion in 2014-15, rising by 11.9% compared to 2013-14. Properties, household savings and securities made up the bulk of most taxpaying estates. The level of receipts was also affected by the freeze in the inheritance tax Nil Rate Band, which has been held at £325,000 since April 2009.

The new ‘main residence nil rate band’ announced last year, has added a further ten pages of legislation to the Finance Bill and an extra layer of complication to estate planning.

A far simpler approach would have been to increase the existing standard nil rate band of £325,000 in line with house price inflation.

The main residence nil rate band is available in addition to the existing nil rate band of £325,000 from 6 April 2017 at the following rates:

2017-18 £100,000

2018-19 £125,000

2019-20 £150,000

2020-21 £175,000

However, the rules for claiming it are complicated and quirky. For instance if you have a Will which provides for your estate (including your interest in the property) to pass into a Discretionary Trust (even if the only beneficiaries are your children and grandchildren), your estate is unlikely to qualify for the relief.

The amount of main residence nil rate band is also reduced if the value of your combined estate exceeds £2,000,000.

The relief can only be claimed against a freehold or leasehold residence, and therefore unless your estate includes a property which you used, or intended to occupy as your home, the main residence nil rate band cannot be claimed.

If your property value does not equal or exceed the amount of main residence nil rate band allowance then any ‘unused’ allowance’ cannot be applied against the value of other assets comprised within the estate.

We suggest that as a result of the proposed legislation, individuals and couples consider reviewing their Wills to ensure that as far as possible their estates will qualify for the new allowance.