inheritance tax Archives

I want to help my child buy a house, what do I need to consider?

Posted on August 14, 2023August 14, 2023 By admin

The Bank of Mum and Dad – sometimes referred to as BOMAD – Is the UK’s ninth biggest lender. With recent cost of living pressures and property prices unachievable for many, thousands of young adults need help to get started with their first home. But before you hand over the money, there are some important legal and tax issues to consider.
For ease, in this article we refer to ‘Mum and Dad’, but similar issues apply for other family members, such as grandparents, aunts/uncles, etc.

Is it a loan, gift or something else?

Are you planning to offer a loan (that you expect to be repaid one day), a gift or buying a share of the property?

Buying a share in a property
If you were thinking about buying a share in a property with one of your family, think again. The extra 3% Stamp Duty (Land Tax) charge, which applies to purchases involving someone who already owns a home, makes this a very costly option. For example, buying a £300,000 house costs an extra £9,000.

Gifting money
If you can afford to make an outright gift, and don’t need the money repaid later (say) for your own retirement, you need to consider fairness to the rest of the family. Can you afford to give your other children a similar amount? If not, you may need to amend any wills or trusts to enable this.

You also need to consider the impact of tax if you make a gift. Such a gift may use up your inheritance tax allowance (called the nil-rate band) as lifetime gifts are considered ahead of your estate on death.

Loaning money

Research suggests one third of parents won’t give their children money as a gift because they fear it may be lost in a divorce.

You may therefore think a loan is a better option for many. Three issues need consideration:

(1) The lender’s requirements, if there is a mortgage:

Any bank or building society will want to ensure that no one else has an interest in this property, and that there is no other claim on the ‘equity’ in the property. They will normally ask the customer to sign a form confirming that any money received was a gift and not a loan.

If this is done, it is hard then to claim later, e.g. if there were a divorce, that this was really a loan. This points to the value of (2).

(2) A pre-nuptial (‘pre-nup’) or post-nuptial (‘post-nup’) agreement, before or after marriage

This is a very sensible, practical answer. It can work as the English courts effectively recognise pre-nups and post nups, and will normally consider them in the event of a divorce.

There are two provisos. Each party needs to make the agreement once they have had independent legal advice, based on full disclosure of financial facts. Secondly, fairness. No agreement can override a claim by a child of the marriage, and it cannot leave one party in a situation of real need.

Suggesting a pre-nup, ahead of the happy day, appears an un-romantic, negative comment on the relationship, whether driven by parents or the ‘other half’. It may, however, be possible to present this as a good package.

Parents can offer to give a sum towards the first home if tied in with a pre-nup or post nup. They can always blame the lawyers as the ones advising this is good practice! The ‘in-law’ can be reassured the same principle would apply to gifts to any of the children. It’s not a reflection on their specific relationship!

There are two lessons from storylines in the Radio 4 soap, The Archers. Firstly, don’t suggest this on the eve of a wedding, as (apart from bad timing) it must be signed at least 28 days ahead. It’s important an individual isn’t under duress. Secondly, don’t offer financial help and then later suggest a pre-nup. It is far better as one offer!

(3) What about using a trust?

You may wish to consider putting your gift into a trust, which then either:

• Owns the property, if the whole thing is bought, or a share in it; or
• Makes a loan.

Apart from the same issues above in making a loan, two issues need addressing. Firstly, the 3% extra Stamp Duty charge (see above) applies to most trusts, though in some cases careful planning might make a work around possible.

Secondly, divorce will create problems. The divorce court may look through the trust, assume the full value is available to the child and make an order allowing for that resource.

Trusts are increasingly vulnerable on divorce. Depending on the full circumstances and the detailed documentation, a little protection may be possible.

A simple declaration of trust, of different property shares reflecting contributions made, is of limited value. It often gets overlooked later and is essentially irrelevant as between married couples.

Other tax issues arising for these arrangements include:

• Inheritance tax: it’s good to set the ‘seven-year clock’, for surviving a lifetime gift, running, but take care on details, and

• Capital Gains Tax (CGT) and the [crucial] main residence exemption.

Conclusion: While a pre-nup (or post-nup) may be right for some, the key thing is to take specific advice (ideally from a STEP member with relevant expertise) on the details of your situation. Be clear about what you are trying to achieve, and any concerns you have, and find a solution that works for you.

John D. Bunker, TEP CTA Consultant Solicitor & Chartered Tax Advisor; and Hayley Trim, Family Law Partner.

Pensions – a simple guide

Posted on May 16, 2023May 16, 2023 By admin

A young biracial woman is reading a paper and looking at a laptop in a kitchen

Pensions are far more than a way to save for your retirement. This article aims to explain the basics of pensions and what you need to consider about your own pensions.

Types of pensions

Apart from the State Pension, there are two main types:

Defined contribution (DC) schemes, which are also known as ‘money purchase’ schemes. These include personal pension plans, self-invested personal pensions (SIPPs) and workplace pensions.
Defined benefit (DB) schemes, which are also known as ‘final salary’ schemes. These include NHS, teacher and government pension schemes.

A bit about tax

Pensions are a very tax efficient way to save. As long as you remain within the maximum limit, you receive tax relief on contributions paid into your pension.

Also, investment growth and income in your pension fund is tax free. When you take money out of your pension, you can take part of the fund as a lump sum, tax free.

How much can you pay into a pension?

You can make contributions that qualify for tax relief by whichever is the lowest amount of either:

100% of your ‘UK Relevant Earnings’ (Tool Tip: For most people, this includes salary and bonuses. They exclude dividends, rent and some other payments, such as withdrawals from investment bonds) or the
Annual allowance, which is currently £60,000 (2023/24).

If you earn more than the annual allowance, you may still be able contribute more by using unused allowances from previous years. Also, someone under 75 with no earnings can contribute £2,880 (net) or £3,600 (gross) which includes children! If a child contributes to a pension, their parent or legal guardian looks after it until they are 18.

What happens when you die?

In most cases, if you die leaving a ‘residual’ pension fund, your nominated beneficiaries receive it, inheritance tax (IHT) free. The residual fund is the amount left in the fund when the person dies.

However, it is important that you set up either a ‘nomination’ or an ‘expression of wishes’ to explain who you want to receive your pension. This can be a family member, charity, friend or a trust. You can change your nomination at any stage. It is a good idea to review it periodically.

The death benefits on most pensions are held under a discretionary trust. Find out more about what a discretionary trust is.

The people who run the trust will usually only deviate from your stated wishes if significant circumstances come to light. For example, they might do so if you had got divorced and remarried many years after setting up your nomination, but not updated it.

If you die before you turn 75, the people you choose to receive your remaining pension fund will get it without having to pay any income tax. However, if you die after reaching 75, the recipients will have to pay income tax based on their own tax rates. This applies whether they take the money as a lump sum or regular payments.

You also have the option to nominate a ‘bypass’ trust to receive your pension fund when you die. However, if you choose this option and die after 75, a 45% tax charge will be applied to the amount paid out from your pension fund. This tax charge will be deducted directly by your pension scheme administrator and paid to HMRC.

This is why it’s advisable to review your nomination as you approach 75 to avoid this tax charge. However, it’s important to note that there might be valid reasons for not changing your nomination.

The role of pensions in planning your estate

Because a pension fund is held outside of your estate, the value does not typically suffer IHT when you die, which opens up a number of opportunities to plan your estate in a tax efficient manner.

Robin Melley TEP, Founder and Director, Matrix Capital, Chartered Financial Planners

I’d like to give money to my family or charity before I die. What’s the best way to do this?

Posted on October 15, 2020February 15, 2024 By Joanna Pegum

Here are some of the most common questions from our clients about how best to donate their money and assets:

Modest gifts

You can give away £3,000 worth of gifts each tax year (6 April to 5 April). This is known as your ‘annual exemption’. You can carry any unused annual exemption forward to the next year once.

You can give as many gifts of up to £250 per person as you want during the tax year, as long as you have not used another exemption on the same person.

More people are using these allowances, often to help people out of tight situations through reduced incomes. Keeping a record of such gifts is vital for tax purposes.

It can also benefit your family to make a larger gift now if your asset may increase in value, putting any future gain in the hands of the recipient.

Deathbed Gifts

We have also seen use of so called ‘deathbed’ giving, when people are near to death and know they will not need funds.

If you die and your estate is worth more than the basic Inheritance Tax threshold, your estate may qualify for the residence nil rate band (RNRB) before any Inheritance Tax is due. The person will need to leave some property to their descendants.

The maximum available RNRB in the tax year 2024 to 2025 is £175,000. The RNRB will gradually reduce for an estate worth more than £2 million, even if a home is left to your direct descendants. The RNRB reduces by £1 for every £2 that the estate is worth more than the £2 million threshold. For those who are in a marriage or civil partnership, using the RNRB on first death may be prudent planning.

‘Deathbed giving’ is sometimes advisable in seeking to keep the value of your estate below the £2 million threshold. You need to take into account the effect of the gift on your ordinary Nil Rate Band. We recommend you seek advice on this.

Surplus Income Gifting

Unlike other forms of lifetime gifting, this has no limit. You must be able to prove that the income, expenditure and amount you are regularly giving away is a conscious decision. It must be surplus income, not eat into capital.

Gifting to good causes

People may wish to give charity, the arts, museums, universities, and community amateur sports clubs. Such gifts are exempt from inheritance tax and do not adversely affect your tax position on death as they do not eat into your estate’s ‘nil rate band’ or annual exemption. The ‘nil-rate band’, which is currently £325,000, means that it is taxed at 0% (‘nil’) unless there are lifetime gifts or trusts.

An extra benefit of gifts to charity is that you can claim Gift Aid. Charitable causes can claim an extra 25p for every £1 you give. It will not cost you any extra.

Ask your employer or pension provider if they run a Payroll Giving scheme, so you can donate straight from your wages or pension before tax is deducted.

Assets fat with gain

Valuable items which will make a large profit when sold are an excellent choice for gifting to charitable causes. They are treated as neither a gain nor a loss. For example, historical jewellery collections could be donated.

More controlled charitable gifting

Some people choose to donate on a more personal, controlled, level by creating their own trusts and foundations. This could be a charitable trust, charitable company or Charitable Incorporated Organisation. Setting up lifetime foundations and trusts enables you to set the focus of the charity and work alongside other trustees who will then be able to continue the work after your death.

Trusts

Although immediate cash gifts can be helpful, for some people, retaining a degree of control is equally important. A trust is the perfect vehicle. It is a mechanism which splits the responsibility for the management of administration of assets from the right to use or benefit from the assets. Trustees control and beneficiaries benefit.

There are many types of trust, but there is almost certainly one which will suit your wishes.

Mandy Casavant is a Partner with RWK Goodman

What are the tax implications of investing in cryptocurrency?

Posted on August 13, 2020January 9, 2024 By Joanna Pegum

Most of us lead lives that are heavily digital. We think nothing of sending emails in our personal and professional lives, reading e-books and e-newspapers, taking and sharing digital pictures and videos, and meeting our family, friends and others on social media. Investing in cryptocurrency might seem a logical next step, but what is it, and what are the tax implications?

For the last decade and more, many people have invested in blockchain with a view to creating a global accountancy system for the ownership of possessions (both tangible and non-tangible). Cryptocurrencies, including Bitcoin, Ethereum and Ripple are a type of non-tangible asset. These currencies are digital in nature, are not formally issued by any central bank, and can be traded or used as payment globally.

Cryptocurrencies take a range of forms including:

exchange tokens that can be used as payment for goods or services (similar to traditional currency);
utility tokens that provide the owner with access to certain goods or services; and
security tokens that provide the owner with security for a debt or provide the owner with profits from the security.

Legal questions arising

Cryptocurrencies have created problems from a legal perspective. It is unclear whether they are truly assets with value that can be owned, and if they are, whether they can be legally transferred to others, say, through a will or a prenuptial agreement.

If the owner of cryptocurrencies has a connection to more than one country or jurisdiction, it is not clear whose laws would govern the transfer of the cryptocurrencies and whose tax regime the currencies would be subject to.

In late December 2019, HMRC issued some guidance on its view of the law surrounding cryptocurrencies, focusing on exchange tokens.

The location of exchange tokens

Exchange tokens are considered to be situated for tax purposes in the jurisdiction in which the owner is resident. This may have a greater impact on those who are non-domiciled but resident in the UK (and paying tax on a remittance basis), as the cryptocurrencies are treated as being situated in the UK and will be subject to UK tax. See where is my domicile, if you are unsure.

Exchange tokens belonging to individuals who are not resident in the UK are not subject to the UK tax regime.

Tax treatment of exchange tokens for UK residents

Capital Gains Tax

HMRC’s view is that the majority of owners considers that the majority of owners purchase or are given exchange tokens on an infrequent basis, wait for the value to go up, and then sell them. Profits made on exchange tokens are therefore subject to capital gains tax in the normal way, and a liability is incurred every time the exchange token is disposed of (ie sold, transferred to another, or used as payment) at a profit.

It’s important to keep records of the dates on which disposals are made (and the value of the exchange token on that date) to ensure that tax returns are accurate.

Income Tax

HMRC may tax gains made on exchange tokens as income for substantial traders of exchange tokens – and note that income tax rates are generally higher than capital gains tax rates.

Equally, if an individual receives exchange tokens (or any form of cryptocurrency) as a result of employment, then that will also be subject to income tax and national insurance contributions.

Inheritance tax

The value of cryptocurrencies owned by an individual is treated as forming part of the individual’s estate, and will be subject to inheritance tax on their death. Note again, the owner’s country of residence is an important factor in deciding whether the cryptocurrencies will be subject to UK inheritance tax.

Keep proper records

If you have cryptoassets, you need to keep records of the following when disposing of them:

the type of cryptoasset;
the date of the transaction;
whether if they were bought or sold;
the number of units;
the value of the transaction in pounds sterling;
the cumulative total of the investment units held; and
bank statements and wallet addresses, if needed for an enquiry or review.

Where can I get advice?

A qualified professional can provide advice and help you to make the necessary disclosures on your tax return.

Joshua Ryan is a solicitor at Weightmans LLP, London

Probate v confirmation: a comparison of the English and Scottish procedures for executors

Posted on June 5, 2019September 20, 2022 By Joanna Pegum

If you are the executor for a friend or relative’s estate, there are some substantial differences to consider, depending whether the estate is in England or Scotland.

The differences reflect the different legal traditions in the two jurisdictions – common law in England, which originated in the Ecclesiastical courts of the Middle Ages, and civil law in Scotland.

Different terms are used

Different terms are also used. The document the court issues for the executors is called probate in England where there is a will; and confirmation in Scotland, whether or not there is a will.

In Scotland, the person who handles the estate is always called an executor. If they are appointed in a will, they are an executor nominate; where there is no will, an executor dative; but both kinds of executor need to seek a grant of confirmation.

Sometimes the Scottish and English terms are different even though they are describing essentially the same thing. The English say real and personal property, while the Scots say heritable and moveable; the English say life interest and remainder, while the Scots say liferent and fee; and the English say administration of estates, while the Scots say executry administration.

What are the real differences?

In England, probate tells the world that the executors named in it are entitled to deal with the assets of the estate because they are named in the will.

In Scotland, confirmation effectively transfers the estate assets to the executors so they can administer them, subject to the terms of the will. Scottish executors step into the shoes of the deceased person (in a legal sense), and they (and only they) can deal with the person’s assets and enforce their rights, for example calling in any debts the estate is owed.

When executors in Scotland apply for confirmation, which uses a form called C1, they must include a complete list of the deceased’s assets in the UK, together with their values. Along with the will, this becomes a public document when lodged in court.

This is not required in England, where the only information that is public is the total value of the estate, both gross and net.

In Scotland, the Sheriff Court issues confirmation, which is a copy of Form C1 with the court order attached to it. The court issues certificates of confirmation so executors can send the confirmation to all asset holders simultaneously. Unlike the office copies of probate, issued in England, these are specific to each asset, and include a description and value as stated in Form C1.

Both probate and confirmation were well established long before estate duty (or inheritance tax) was introduced, and they double up as a tax return for the estate assets.

What happens if other assets are discovered later on?

In England, a person or organisation receiving an office copy of probate has no way of knowing how the gross value of the estate was made up, or what value was given for their asset. Because of this, English executors can deal relatively easily with additional assets that may come to light later, though of course they are required to report them to HMRC where inheritance tax is payable.

In Scotland, however, executors will usually need to apply to the court for an eik (a Scots word for an addition) or supplementary confirmation, which details the additional assets. Executors need to report all applications for an eik to HMRC before the Sheriff Court will accept them, even if no tax is payable and the original Form C1 did not have to go to HMRC.

Occasionally executors can deal with additional assets of lower value without the need for an eik, but they generally have to inform HMRC, and may be required to produce written evidence that they have done so.

Will this hold things up?

If English executors omit or undervalue an asset in the probate application and the inheritance tax form, which is known as IHT400, they will still be able to deal with the assets by producing the original grant of probate or an office copy.

Scottish executors who omit details of an asset will not be able to deal with it until they have told HMRC and obtained an eik to confirmation.

The Scottish requirement to include a list of all the estate assets in Form C1 makes it simpler in cases where inheritance tax needs to be paid. In England, the IHT400 and supplementary forms request exact details of the estate assets, and English executors have to complete all the forms in full.

As Scottish executors have already set out all the assets and values in Form C1, HMRC accepts inheritance tax returns which simply show the total value for each category of asset, and can refer to Form C1 for the detail.

Your advisor will be able to help you through this process.

Ian Macdonald TEP is Head of Private Client at Wright Johnston & Mackenzie, Glasgow.

Can the gifts I made during my lifetime be challenged after my death?

Posted on June 4, 2018 By Joanna Pegum

Making lifetime gifts to reduce the value of your estate on death for inheritance tax purposes is a useful way to preserve wealth down the generations.

HMRC allows a variety of exemptions including an annual allowance of £3,000, gifts worth less than £250, wedding gifts, gifts to help with living costs, and gifts from surplus income. Gifts between spouses, gifts to charity and some gifts to political parties are also exempt. Any gifts that do not qualify for these exemptions are known as Potentially Exempt Transfers (PETs) and will affect the donor’s nil-rate-band if the donor dies within seven years. If the value of any PETs made in the last seven years of life is above the value of the nil-rate-band, then the recipient is liable for the inheritance tax due on the gift. It is therefore important to take tax and legal advice before making gifts.

Earlier gifts

When you die, the gifts that you made during your lifetime can be called into account on distribution of the estate by including a ‘hotchpot’ clause in your will. This clause will direct the executors, before distributing the estate, to take into account any gifts you made during your lifetime (from the date of the will or a specified earlier date) that are worth over a specified amount. This can often cause arguments between beneficiaries, however, particularly if you were not transparent about gifts during your lifetime.

Gifts of personal possessions can also cause conflict if you have promised someone that they will inherit certain items on death, but then give them away during your lifetime. If these items are specifically mentioned in your will, then these gifts will fail on death.

It is therefore vitally important that if you are considering making lifetime gifts, you should properly document who is to get what, preferably by deed, sign it, and get it witnessed to avoid any confusion on your death. At the very least, you should keep a record of gifts that you have made during your lifetime and sign the record. It is good practice to keep any documents about lifetime gifts with your will, so if there are any challenges, the executors will have all the information they need. It will also assist with completing the account for inheritance tax.

How can gifts be challenged?

A lifetime gift can be set aside on your death if it can be shown that you were unduly influenced into making the gift, or that you lacked the mental capacity to do so.

There are considered to be two types of undue influence:

Actual undue influence, i.e. overt acts of improper pressure or coercion.
Presumed undue influence – this arises from the relationship of trust and confidence between the donor and the recipient.

Lawyers are seeing an increasing number of challenges to gifts on the basis of undue influence, so again, it is important to clearly document your intentions when making gifts to ensure they are not challenged on your death.

If you are concerned about the tax or other implications of making lifetime gifts, you should speak to a qualified practitioner, who will be able to provide you with advice and recommendations based on your specific circumstance.

Andrea Jones TEP, senior associate, and Paula Myers, Partner and National Head of Will, Trust and Estate Disputes at Irwin Mitchell Private Wealth, Leeds.

How is Capital Gains Tax charged on death?

Posted on April 26, 2018January 24, 2024 By Joanna Pegum

When someone dies their estate is valued for probate purposes before being distributed to the person’s heirs. It is then potentially subject to Inheritance Tax (IHT), but is generally exempt from Capital Gains Tax (CGT); the rationale being that the same assets cannot be subject to both capital taxes. The beneficiary is treated as if they acquired the asset at its probate value. This is known as the CGT tax-free uplift on death.

It may be tempting for executors to down-value assets such as property, with a view to reducing the IHT bill, but this will only reduce the base cost of the asset, and potentially increase any CGT liability, so this needs to be considered.

Who should realise the capital gains – the estate or the beneficiaries?

Often the executors will sell some or all the assets, and then distribute the cash to the beneficiaries. In this case it is the executors who make any post-death gains/losses, so they will be responsible for formally registering the estate with HM Revenue & Customs and reporting any capital gains.

In respect of residential property disposals, it may also be necessary for the executors to complete an online 60-day capital gains tax return to report and pay any CGT due within 60 days of the date of completion of any property sale. The disposal will also need to be declared on any formal estate tax return which may be issued.

The executors are able to claim the full annual CGT exemption, currently £6,000 for 2023/24, reducing to £3,000 from 6 April 2024. The annual CGT exemption is available to the executors in the year of death and in the two following tax years. Any chargeable gains are subject to CGT at the higher rate, which is 28% for residential properties and 20% for all other chargeable assets.

There can however be some tax planning opportunities if assets are transferred to beneficiaries before they are sold. The beneficiaries can stagger the sales of assets over different tax years, and possibly claim multiple annual CGT exemptions. They can also utilise any personal capital losses they may have brought forward, and potentially pay tax at a lower rate than the executors, if any of the gains fall within their basic rate band, so they would pay tax at 10/18% instead of 20/28%.

What about the deceased’s CGT position in the year of death?

While CGT liabilities die with you, what about assets that the deceased has already disposed of in the tax year in which they die?

Any capital gains have to be disclosed on the deceased’s tax return for the period from 6 April to the date of their death, and they are entitled to a full annual CGT exemption.

Capital losses in the period to the date of death are automatically offset against any capital gains. Any capital losses brought forward can be offset, as long as any chargeable gains exceed the annual CGT exemption.

Any unused capital losses still remaining can be carried back and offset against any capital gains the deceased may have realised in the three tax years prior to the tax year of death. The losses must however be offset against gains in a later year, before setting them off against gains from an earlier year.

Katie Buckley is a Director of The Tax Angel Consultancy Limited

Giving to charity: what is Gift Aid and how does it work?

Posted on February 1, 2018February 9, 2024 By Joanna Pegum

Many people give to charity during their lifetime, as well as including bequests in their wills. If you are a UK taxpayer, you can donate through the Gift Aid scheme, and may be eligible for tax relief.

For charities, Gift Aid increases the charity’s donation by 25%, allowing the charity to reclaim the basic rate of tax on your gift at no extra cost to you. Provided you make a Gift Aid Declaration, this happens automatically.

For example, if you give £80, which is known as the net donation, the charity receives £100, ie the gross donation. This is the same as you making a payment of £100 from your pre-tax earnings, assuming you pay tax at the basic rate of 20%. If you pay income tax at the basic rate, there is no further tax relief available to you.

How Gift Aid works for higher and additional rate tax payers

If you are on a higher or additional rate you can claim further tax relief. This works by extending your basic and higher rate bands by the gross donation. Your relief will be equal to the difference between the basic rate, and either the higher rate of 40% or the additional rate of 45%, depending on the rate of tax you pay.

For a higher rate tax payer (40%), a further 20% of tax can be claimed on the gross donation, ie a further £20. For an additional rate payer (45%), an extra 25% can be claimed, being a further £25.

Here’s an example:

You are a higher rate taxpayer paying with earnings of £75,000 and you give an £80 donation to a relevant charity, and make a gift aid declaration. The example uses the tax rates for England and Wales; different tax bands apply in Scotland.

The charity automatically claims 25% of £80 = £20 from HMRC. The charity has received £100 (the gross donation).

2023/24 bands
Higher rate band	£37,700
Additional rate band	£125,140

You declare the £100 gross payment on your tax return and extend your higher rate band by the gross payment (the additional rate band would also be extended where the individual earns over the additional rate threshold of £125,140).

2023/24 bands after extension
Higher rate band	£37,800
Additional rate band	£150,100

Tax on your £75,000 salary, ignoring any donation
Personal allowance	£12,570	£-
Basic rate	£37,700 x 20%	£7,540
Higher rate	(£75,000-£37,700-£12,570) x 40%	£9,892
Total tax		£17,432

Tax on your £75,000 salary, taking the donation into account
Personal allowance	£12,570	£-
Basic rate	£37,800 x 20%	£7,560
Higher rate	(£75,000-£37,800-£12,570) x 40%	£9,852
Total tax		£17,412

The tax saving where the bands have been extended is £20, since an individual earning £75,000 is a higher rate tax payer. There would be a further £5 in the case of an additional rate taxpayer.

If your total tax liability in the tax year is less than the amount of tax the charity reclaims on your gift, you may have additional income tax to pay.

Inheritance tax

Legacies left to charity from your will are entirely exempt from inheritance tax. If you leave legacies equal to 10% of your total estate to charity (less the £325,000 nil-rate band, and any residence and transferable nil-rate band) then your executors pay a reduced rate of inheritance tax at 36% on your death estate, rather than 40%. Both the nil rate band and residence nil rate band will be frozen until 5 April 2028.

If you are anxious to obtain the discounted rate, you need to give careful consideration as to how this is achieved through the drafting of your will. A TEP can provide guidance on this.

Check the charity is genuine

Before you make your donation, make sure you are giving to a bona fide cause by checking with the appropriate governing body. For England and Wales this is the Charity Commission, and in Scotland, the Office of the Scottish Charity Regulator (OSCR). A legitimate charity will be registered with one of these bodies and you can search their websites.

Registered charities with over £25,000 of income are required to submit their financial statements, annual reports and annual returns to the Charity Commission or OSCR. These bodies provide charity trustees with guidance on managing their charities for the public benefit, ensuring good practice and appropriate reporting requirements are adhered to.

Toby Crooks TEP is a Partner at Rawlinson & Hunter LLP in London, UK

How can I leave my pension to the person I choose?

Posted on September 15, 2017 By Joanna Pegum

It’s easy to think that everything you own will be distributed according to your will when you die. Your pension, though, is a different matter. Pensions are not considered part of your estate, and generally not subject to inheritance tax. Most importantly, you will need to specify who will benefit, via a particular form, known as a nomination form or Expression of Wish form.

What is a nomination form?

Most pensions, aside from the state pension, will require you to complete a nomination form. This will allow you to give details of the loved ones that you would like to benefit from your pension when you die, who are known as your beneficiaries. While nomination forms usually only apply to lump sum benefits from a pension on death, and not to the transfer of a drawdown pension (i.e pension income), providers do vary. You will need to ask your provider(s) what they require.

Who can I nominate?

You can nominate anyone you like, including family, friends, charities, clubs or associations.

If I am married, will my spouse automatically get my pension?

Your pension provider may automatically nominate your spouse or civil partner to receive the lump sum in the absence of a nomination form, but you should check the details of your policy and make sure it complies with your wishes.

How many people can I nominate?

Each individual pension provider should specify their requirements on the form. Some providers state that you can nominate up to 25 beneficiaries.

What happens if I nominate my personal representatives?

If you nominate the ‘personal representatives’ or ‘executors’ of your will, or more simply your ‘estate,’ there is a good chance that your pension lump sum will form part of your estate and will become subject to inheritance tax.

Is it legally binding?

Most pension providers will state that your nominations will not be legally binding, and the distributions will be made at their discretion. In the majority of cases, they will comply with your instructions if they are clear and up to date. They may be more inclined to disregard your wishes if the information appears to be out of date or inappropriate, for example if someone has died or got divorced.

What happens if I don’t fill in the form?

Distributions are usually made at the provider’s discretion if you don’t submit a nomination form. Some pension providers have a policy that they will automatically pass the lump sum to your spouse or civil partner, but this is not guaranteed, and you should check your policy.

What information should I provide?

Each pension plan is different, but generally you will be asked to provide your pension account number or reference number, the full name of each beneficiary, their date of birth and address and their relationship to you. You will then be asked what percentage share of the lump sum you would like to leave them. You must ensure that the shares add up to 100%, otherwise your provider may be obliged to use their discretion. You can of course leave 100% to one person or organisation.

How can I update it?

The nomination form can be updated as frequently as necessary, and often online, so make sure you keep your beneficiary’s personal details current and correct. The forms can usually be revoked or amended at any time.

What is confirmation in Scotland?

Posted on July 12, 2017February 27, 2024 By Louise Polcaro

Confirmation is the Scottish equivalent of the probate procedure in England and Wales and Northern Ireland. It is granted by the Sheriff Court in the district in which the deceased was resident and provides the executors with authority to deal with the estate; whether it be closing bank accounts, selling property or transferring or selling shares.

While there are similarities with the probate procedure, there are also significant differences, principally in terms of the paperwork required.

For ‘small’ estates with a gross value of (currently) £36,000 or less, executors are entitled to free assistance with obtaining confirmation from the local Sheriff Court.

How do I apply for confirmation?

The process involves conducting a thorough examination of the deceased’s financial papers to draw together the information needed to complete the confirmation application form C1. This form accompanies the inheritance tax return and provides details about the deceased and the estate.

Where a person dies without a will, an application must first be made to the Sheriff Court to have an executor appointed and in most cases it will also be necessary to obtain an insurance document known as a Bond of Caution. Legislation sets out who may be appointed as an executor in the absence of a will and it is important that the correct individuals are identified from the start.

The Form C1 includes a declaration by the executors confirming that the contents of the form are correct, to the best of their knowledge. As the declaration is similar to swearing an oath in court, it is crucial that full enquiries be made into the assets of the estate and into the deceased’s tax affairs.

Where inheritance tax is due, a copy of the signed confirmation application must first be submitted to HMRC along with the tax return, before being sent to the Court. The tax must be paid at the same time, either in full or as a first instalment where this is permitted. Once the application is submitted the Sheriff Clerk will check it and if satisfied, submit it to the Sheriff to issue the Grant of Confirmation.

How much will it cost?

Court fees are presently £276 for estates worth between £50,000.01 and £250,000 and £554 for all estates worth over £250,000. There is no court fee for estates with a gross value of £50,000 or less.

Separate charges ranging from £8 to £20 apply where individual ‘Certificates of Confirmation’ are requested, focusing on specific assets in the estate. These certificates are often used to speed up the ingathering process after Confirmation has been granted, as an alternative to circulating the original Confirmation document to each asset holder in turn.

The same fee will be charged again, in full, where it is necessary to amend the application after Confirmation has been granted, and care should therefore be taken to ensure that no assets are missed out or reported incorrectly.

It is crucial when obtaining confirmation that the specific procedures used in Scotland are followed. To ensure that the process runs as smoothly as possible, it is recommended that advice be sought from a suitably qualified advisor.

Jaclyn E P Russell TEP is a Partner and Head of Private Client at Stronachs in Aberdeen, Scotland

Can you change a will after someone has died?

Posted on March 27, 2017May 25, 2017 By admin

Following the death of a friend or loved one, it may be necessary or beneficial to change the will. This may be in order to increase the size of a gift to someone, redirect it or even to adjust the will to take advantage of recent tax changes.

In the UK, changes can be made by a simple document called a Deed of Variation.

Common reasons for making a Deed of Variation

Some common reasons are listed below:

Someone in the family has been overlooked
A beneficiary has not been provided for adequately
Someone may have a valid claim against the estate
To reduce inheritance tax
To move assets into a trust
To resolve any discrepancies within the will
To give gifts to charity

How do I make a Deed of Variation?

Making a Deed of Variation is fairly straightforward, as long you do it within two years of death and all of the relevant beneficiaries contained within the will agree to the changes.

In theory, to vary a will you can just write a letter. It does, however, need to include a number of elements to ensure it meets the requirements of the Inheritance Tax Act and the Taxation of Chargeable Gains Act. A checklist is available here.

If the variation means there’s more inheritance tax to pay, you must send a copy to the UK’s tax authority, HM Revenue and Customs (HMRC) within six months of making the deed.

Minors who are beneficiaries cannot consent to a deed of variation so the beneficiaries may need to go to court to obtain consent on their behalf. Once the deed has been consented to and executed by the beneficiaries, they will not be able to claim their inheritance back.

If you are unsure about any aspect of varying a will, speak to a qualified advisor, who will ensure all requirements are met and prevent any disputes from arising.

The donor’s dilemma

Posted on March 27, 2017September 20, 2022 By admin

If you are thinking about transferring your house to your children during your lifetime, you should first consider the seven Ds…

Divorce

If any of your children were to divorce then there would be a risk, however remote, that any assets in their name, including your house, could be taken into account in the divorce settlement.

Debt

In the event of any of your children getting seriously into debt or becoming bankrupt then there would be a risk, however remote, that their creditors may seek to force them to sell your dwelling-house in order to discharge the liability.

Death

If any of your children were to die before you without making appropriate provision in their will in relation to your dwelling-house, then there is a risk that their share of your house would pass to an in-law. Indeed, the problem may be compounded if your son-in-law or daughter-in-law should subsequently remarry.

Disagreement

You may subsequently want to sell your house and apply the sale proceeds to buy another house. There is a risk that your children will not agree with your request. In addition, there is a risk that your children may wish to sell your house without your agreement and seek to have you put out of your own home.

Deliberate deprivation

Health Trusts/local authorities have rules against deliberate deprivation of assets. If it can be proved that you deliberately deprived yourself of an asset in order to get government help towards nursing home fees, then the value of your house could be clawed back from your children. There is no time limit on this, although the longer the period of time between your transferring ownership and going into a nursing home, the less likely it is that the transfer will be challenged.

Deprivation feeling

It is very important that you should try and envisage how you would feel if you have given away ownership of your house and other assets to your children. Will you feel deprived? Will you feel out of control? Will this feeling cause you to lose sleep and wish you had not done it?

Doubt

If you are in doubt about what you are doing, it is better to postpone any action until such time as you are sure.

A qualified advisor can talk you through your options, ensuring all angles have been considered.

Peter M Thompson TEP, Thompson Mitchell Solicitors, Portadown, Northern Ireland

What are my duties as executor?

Posted on March 17, 2017February 5, 2024 By admin

If you have been informed that you are an executor, then sadly that probably means that a friend or relative has recently died.

That person has named you as the executor in their will, either alone, or with others, to carry out their wishes and to administer their estate. This is all the money and property that they have left behind. You will be required to pool all of their assets, pay any debts and taxes, and distribute the remainder, in accordance with their will.

What should I do next?

You may be required to register the death with the Register’s Office, if the family has not already done so. You will need a death certificate from the doctor or hospital to take to the Register’s Office. You are then in a position to arrange the funeral. Check the will first, in case it includes any funeral instructions, or details of any pre-paid plans. If not, you may wish to involve family members, who will probably have a good idea about their funeral wishes.

Once the funeral has been arranged, you might want to consult a legal advisor, and find out if the deceased had other legal documents or property you were unaware of, and to find what you need to do to obtain a grant of probate.

If the estate is sizeable or complex, you might instruct the advisor to take on the probate paperwork for you; but it’s your job as executor to sign it. The cost of the legal fees will be deducted from the estate, once the legal work has been completed. You may wish to get a couple of estimates before instructing an advisor, to compare prices.

How do I obtain a grant of probate?

If you decide to obtain the grant without the help of a legal advisor, you need to prepare the paperwork first. You will need to obtain the probate application form from the probate registry or online and then check the deceased’s financial records for:

Banks and building society accounts
Investment portfolios
Other sources of income, e.g. from an employer, pensions or benefits
Insurance policies, e.g. life, car or medical
HM Revenue & Customs (HMRC) details
Debts, including from credit cards, loans or hire agreements
Utilities eg gas, water and electricity, as well as council tax
Business contracts and agreements
Arrange temporary insurance on any assets such as house and car

You will need to write to each of these organisations with the date of death, enclosing a certified copy of the death certificate, and requesting a date of death balance.

Once they have replied, include all the figures in the probate application form. Send the completed form, together with the death certificates, and the fee, to the local Probate Registry to request the grant of probate.

What about inheritance tax?

The probate application form should calculate whether any inheritance tax is due, and this should be paid as quickly as possible from the available assets. If there is not enough cash available, the probate registry will accept payment following the grant of probate, when you are in a position to close the deceased’s accounts and sell any property.

What do I do with the grant of probate?

When you receive the grant of probate, send an official copy to each organisation requesting them to close the deceased’s accounts, and send the balance to you as executor (you will need to open a temporary account on behalf of the estate).

If there might be unknown creditors that the deceased owed money to, advertise the death in the local paper and the London Gazette to give any creditors or claimants 28 days to get in touch. You have then covered yourself legally, if one pops up at a later date.

When you have accumulated all the money, you can pay the creditors and expenses such as bills, funeral expenses, taxes and probate costs, and any tax due. Next you can pay each beneficiary in accordance with the will instructions, and obtain a receipt from each one.

You will be required to draw up some estate accounts which show the money coming in and out of the estate and obtain a signature to the accounts from each residuary legatee (people receiving the residue of the estate after specific gifts have been paid out).

Finally you can close the bank account, once all payments have cleared. Keep the records safely for 12 years.

What about claiming money back from the estate?

You may need to organise a funeral and pay other costs before probate is granted and you, and anyone else who is named in the will, can inherit the estate. You can claim back some of these costs from the estate. They are:

Costs associated with the funeral
Probate Registry fees
Estate agent fees
Costs for appointing professionals such as valuers or solicitors
House clearance fees
General house or garden maintenance
Postage costs
Travel costs
Inheritance tax that becomes due before probate has been granted

You are not allowed to charge for your time. You may not be able to reclaim interest from the estate on your money that you use to pay for a funeral. Find out more by visiting the gov.uk site.

Getting help

If, at any point in the process, you need help or advice, you can talk to a qualified advisor, who will be able to talk you through what you need to do.

How can I make sure my disabled child is provided for when I die?

Posted on March 15, 2017July 29, 2022 By admin

Providing for our loved ones when we die is one of the most compelling reasons to make a will. If you have a disabled child this is even more important, as they will have specific and often costly needs that need special consideration.

The term ‘disabled’ can encompass a number of different disabilities. These could be physical and/or learning disabilities. People can be vulnerable for all sorts of reasons and careful thought should be given to the provisions that should be included to benefit them in a will.

What are the key considerations?

Where will they live?
What financial benefits are they already receiving?
What help are other family members providing?
What care plans are in place?
While it may be difficult, it is also important to think about your child’s life expectancy and medical prognosis.

When all the above factors have been thought about carefully, a will can be drawn up and a number of options can be looked at to ensure that appropriate financial provision is included.

Option 1: Making an ‘absolute gift’

The will can include what is known as an ‘absolute gift’. This means that your child will receive a financial benefit that is unrestricted and that will belong to them to do with as they wish.

Provisions are usually made for trustees to look after that money on behalf of your child until they reach the legal age of majority (18), but after that the money will belong to your child without any restriction. Before choosing this option you should think about whether your child is likely to have sufficient capacity when they reach adulthood to make decisions about how they use that money.

The gift would, in time, form part of your child’s estate, so you also need to think about whether your child is likely to have sufficient capacity at the appropriate time to make a will.

If your child is receiving means-tested benefits, you should bear in mind that by giving an absolute gift, this would be taken into consideration in calculating benefits, which may then be lost. This therefore needs careful consideration to ensure that your child isn’t disadvantaged by your decision.

Option 2: Using a life interest trust

Another possible option is to use a ‘life interest trust’. This would mean that trustees appointed in your will would look after the money you have set aside for your child during your child’s lifetime. The trustees would usually invest this money and the income produced on the investments would be available for your child for the remainder of their life. When your child passes away, the remaining money would be passed onto other individuals, who you name in your will.

Bear in mind that the income your child receives will be taken into consideration when they are assessed for any means tested benefits (the capital will not be taken into consideration).

In certain circumstances, and depending on the wording of your will, the trustees can sometimes make a ‘one-off payment’ of capital to your child, for example to pay for a holiday, or buy some equipment. The amount of capital that can be used for these purposes can be restricted by the wording used in setting up the trust.

Option 3: Using a discretionary trust

Another option to consider is a ‘discretionary trust’. The trustees would look after the assets (property, money, etc) within the trust and they are given absolute discretion to use both the income and the capital for your child’s benefit. There can also be other beneficiaries (perhaps other children and grandchildren) who will be able to benefit from the trust.

If you set up this kind of trust in your will, you would be asked to provide a letter of wishes addressed to the trustees that you have chosen, which sets out how you would wish them to make decisions about the assets in the trust.

On the death of your disabled child, any assets remaining in the trust can be distributed to the other beneficiaries.

Tax consequences

When setting up any sort of trust in a will, you should take advice on the tax consequences of the various options to ensure that you understand the advantages and disadvantages of any choice that you make.

There is a particular sort of trust that can be advantageous to use, which is called a ‘Vulnerable Beneficiary Trust’. This trust is recognised by HMRC and gets special tax treatment.

The definition of a ‘vulnerable beneficiary’ and the various tax consequences are clearly set out on the GOV.UK website.

In these trusts the vulnerable beneficiary (the disabled child) is entitled to receive the benefits from the trust during the remainder of their lifetime. Only a small amount of assets in the trust can be used for the benefit of someone else while the disabled person remains alive. The other beneficiaries would be entitled to what remains in the trust after the death of the disabled child.

When the disabled child dies it should be noted that the assets in the trust will be treated as part of their estate for inheritance tax purposes before they are distributed to the remaining beneficiaries of the trust.

Relying on your other children

You may be considering relying on your other children to look after their disabled brother or sister after you have died, so you don’t plan to leave anything to your disabled child in your will. This is a dangerous option and not one that is to be recommended.

You may feel that your disabled child already receives means-tested benefits and so doesn’t require anything else. The state may take a different view, however, and it leaves your estate open to a claim being made under the Inheritance (Provision for Family and Dependants) Act 1975 for reasonable financial provision to be made from the estate for your disabled child. This would be costly and not in the best interests of anyone. It is always best to make some provision for a disabled child, rather than to leave them out of the will altogether.

Some other considerations

When giving instructions for your will, you should give special thought to the choice of trustees and guardians for your child, as they will have onerous duties and responsibilities after you have died.

You should also think about where the child will live and what practical arrangements will need to be in place. If they are to remain at home, your other children may have to wait a long time for their inheritance until after your disabled child has died and the property has been sold.

Finally, it should be noted that you can set up a trust to benefit your disabled child in your lifetime, as well as by will. This enables grandparents and other close relatives to benefit your child either during their lifetime or by leaving gifts in their wills that can be added to the trust for your child.

This is a complicated area of law, and if financial provision needs to be considered for your disabled child then it would be strongly recommended to take specialist advice from a qualified practitioner who will be able to discuss the family circumstances to ensure the right option is chosen.

Patricia Wass TEP

How can I prepare for inheritance tax?

Posted on March 14, 2017May 21, 2021 By admin

Inheritance tax is a 40% tax on your estate (your property, money and possessions), which is charged when you die. In most cases you only have to pay it if your estate is worth more than £325,000.

If your estate is likely to exceed this, there are some steps you can take to prepare for inheritance tax, and to ensure more of what you own goes to your loved ones.

Write a will

It’s well worth writing a will for a number of reasons. A professional advisor can make sure that your will takes into consideration any tax benefits that are available to you. If any benefits are overlooked, your executors can amend the will after your death, with a deed of variation.

Work out the value of your estate

You’ll need to work out how much your estate is worth to find out if you are going to be liable for inheritance tax. No tax is payable on the first £325,000, and this is known as the nil-rate band. But if you’re married, or in a civil partnership, you can pass your whole estate to your spouse or civil partner when you die, tax free. Your ‘nil-rate band’ then transfers to your spouse or civil partner, so when he or she dies, they will be able to pass on up to £650,000 tax free.

Inheritance tax benefits

Everybody gets an additional £175,000 free of inheritance tax to use against the value of their home, if it is left to children or grandchildren (2021-22 figures). As this allowance can be transferred to the second spouse/civil partner, a married couple could leave their family a combined estate of up to £1 million tax-free.

Both the nil-rate band and residence nil-rate band will be frozen until 5 April 2026.

Other tax benefits

There are other benefits you can use, mainly by reducing the value of your estate. There is an annual exemption of £3,000 that you can give away inheritance-tax free and you can give £250 to as many different people as you like. Donations to charities are tax free, as are wedding/civil partnership gifts from parents (up to £5,000) from grandparents (up to £2,500) and from anyone else (up to £1,000). You can make cash gifts larger than this, but you will need to survive seven years for them to be free from inheritance tax. the UK’s tax authority, HM Revenue and Customs (HMRC), provides a sliding scale so you can work out how much tax is payable if you survive less than seven years.

Use a trust

If you can estimate the amount of money that you will need to pay for inheritance tax, you can arrange to hold a lump sum on trust. You can contribute the nil-rate band of up to £325,000 tax-free into a trust every seven years, and it will not be included in your taxable estate.

Take out a life insurance policy

To minimise any impact on your loved ones, you can take out a life insurance policy to cover your inheritance tax bill, which will pay out on your death. As above, the policy would be held on trust so would not be taxable.

Use excess income

If you can spare some of your income without this affecting your quality of life, this is known as excess income. You are entitled to make gifts of money from your excess income to other people free of inheritance tax. However you must keep good records of your regular expenditure as well as the gifts made so that your executors can report them to HMRC and obtain the inheritance-tax exemption.

Give to charity

All gifts to charity are exempt from inheritance tax, but if you arrange to give 10% of your estate to charity (less the £325,000 nil-rate band) then you can pay 36% inheritance tax on your death instead of the usual 40%.

Get help

A qualified advisor will be able to assess your individual circumstances and advise on what you can do to prepare for inheritance tax.

Inheritance tax explained

Posted on March 10, 2017May 21, 2021 By admin

Inheritance tax is a tax on your estate (your money, possessions and property) paid after your death. The money should be paid from your estate to the UK’s tax authority, HM Revenue and Customs (HMRC) within six months, or interest will be charged. However, everyone has a tax-free allowance, set at £325,000, and this is known as the nil-rate band. If the value of the estate is below this threshold, then no tax is due.

What are personal inheritance tax exemptions?

As well as the nil-rate band, there is an annual exemption of £3,000 that you can give away tax free, and you can distribute gifts of £250 to as many different people as you like. You can give donations to charities tax free, and wedding gifts of up to £5,000 to your children, £2,500 to grandchildren and £1,000 to anyone else.

While you can give more cash than this, in fact any amount, you will have to live for seven years for it to be tax free. If you live for less than this, there is a sliding scale for tax payable, depending on the number of years that you survive. See HMRC’s website for further information: www.gov.uk/inheritance-tax/gifts.

What are spouse inheritance tax exemptions?

If you are married or in a civil partnership, you can pass everything to your spouse or civil partner, tax free on death, if both are both UK domiciled (or transferor non-domiciled). When they die, they will be able to leave up to £650,000 tax free, which is double the nil-rate band threshold.

If it is a gift from a UK domiciled to a non-UK domiciled spouse/civil partner (the non-UK domiciled spouse/civil partner can elect to be treated as UK domiciled for IHT purposes) then it is £325,000.

Everyone gets an additional £175,000 tax free to use against the value of your home, but only if you leave it to your children or grandchildren. This allowance, which is frozen until April 2026) can be transferred to your spouse/civil partner if it hasn’t been used up, which means that a married/civil partner couple could leave their family a combined estate of up to £1 million tax free.

If you are not married, but live with your partner, he or she will not be able to benefit from these tax advantages.

What is payable?

Once you have deducted any inheritance tax exemptions that apply, including the £325,000 nil-rate band, the rest of your estate is taxed at 40%. This rate can be reduced to 36% if you leave at least 10% of your estate to charity.

What are my payment options?

You can take out a life insurance policy, which will pay out on your death and help your family pay the tax bill. The policy will be held in a trust, so it won’t be counted as part of your estate, and your family will not have to wait to obtain a formal grant of probate to access it.

Further information

There are more ways to reduce your inheritance tax bill, see ‘How can I prepare for inheritance tax?’

The above is, however, just a quick guide. If you are unsure, or would like advice on any aspect of inheritance tax, you should speak to a qualified advisor, who will be able to consider your situation and offer advice accordingly.