Can I pay more tax voluntarily?

Posted on By Liz Skinner
A person makes notes in front of a laptop

Recent years have seen many people’s finances suffering as a result of the COVID-19 pandemic. However, some wealthy people have seen their wealth increase over this time. This has resulted in calls for the wealthy to pay more taxes, including from some wealthy people themselves. An example is the group, Patriotic Millionaires, who wrote an open letter to governments in January 2022, to say they were not being forced to pay their fair share towards the global recovery.

But is it already possible to pay more tax than you owe if you wish to do so? The answer is yes, there are two simple ways in which this can be done.

Voluntary payments/donations to the government

You can give a donation to the government via the form of a direct bank transfer. To do this the potential donor should write to Her Majesty’s Treasury (HMT) at accountsreceivable@hmtreasury.gov.uk specifying that they wish to make a donation towards public expenditure and lay out the value of the donation and the planned date of the donation (which must be seven calendar days in advance).

The donor must also confirm that the money is theirs to give and is not derived from crime, money laundering or other illegal activity; additionally the donor must acknowledge they cannot request a refund of the donation once it has been made. HMT will then provide details of the bank account and reference to be used for the donation. HMT also does advise that the gift cannot be ring-fenced for a specific purpose or assigned to a specific area of public spending.

Donations can also be given specifically to reduce the national debt. To do this all the donor needs to do is download, complete and submit a form to the United Kingdom Debt Management Office (DMO). More information on donating to the government is here.

Voluntarily overpaying via self-assessment tax return

Another simple method is through voluntarily overpaying during the filing of a self-assessment tax return where there are options to amend how much one pays. If HMRC deems that you have overpaid you can ask that they do not send you a refund. More information on how to voluntarily pay more self-assement tax is available here.

Pay more tax, or give to charity?

Despite these easy ways to pay more to the government, according to the UK Debt Management Office only GBP565,349 was received in donations in 2021, which was up from GBP48,957 in 2020. In contrast, the Charities Aid Foundation (CAF) recorded that GBP11.3 billion was donated to charity in 2020[1]. The CAF figures show that the number of people giving to charity has dropped but that those who are giving are donating more money and gifts.

If you are in a position to contribute money, you have a few options: you can pay more tax or support the causes that matter most to you and monitor the impact of your donation.

For more advice on how to pay more tax or on effective philanthropic giving speak to a qualified advisor:  https://advisingfamilies.org/uk/find-a-tep/

Estate tax returns on death: what do executors need to do?

Posted on By Louise Polcaro
A young biracial woman is reading a paper and looking at a laptop in a kitchen

Obtaining a Grant of Probate or Letters of Administration (the latter usually applies when a will has not been made) can involve a lot of information-gathering to find out the probate (date of death) values for completing the required HMRC forms. These forms must be completed regardless of whether there is an inheritance tax liability.

This information ideally ought to include whether there is any income tax liability due at the date of death. There may also be a refund due to the estate (depending on the date of death).  Sometimes, this can take longer to find out because it requires HMRC PAYE correspondence to confirm. An accountant can often provide a calculation, which can then be verified with HMRC later.

Tax after death

This is not, sadly, where liability necessarily ends. Many executors do not realise that tax does not end on death and the ‘estate’ as an entity in itself is possibly liable for income and capital gains tax.

During the estate’s administration period, which runs from the date of death until the conclusion of the administration (i.e., when all assets have been collected in, liabilities paid and the estate is ready to distribute), there may be income arising. This can come from bank accounts or stocks and shares (whether held individually with share registrars or within portfolios).

Unlike individuals during their lifetime, the estate does not have ‘personal allowances’ and therefore theoretically all income is potentially taxable. I say ‘potentially’ because there are some exceptions to this, where HMRC makes concessions (reviewed each tax year), which means that smaller estates may not need to pay any income tax, provided that certain conditions are met.

Otherwise, the estate will need to pay income tax and this may be by:

  1. Filing a full tax return for the estate (SA900), or
  2. The informal return process. The conditions for this should be checked, to ensure the estate qualifies for the informal basis.

Additionally, it may be necessary to provide beneficiaries with certificates to confirm the deduction of income tax (this can vary depending on beneficiaries’ circumstances and the question of costs proportionality being taken into account).

This is an often-overlooked duty. Many executors assume that getting the grant is the ‘main’ job and thereafter the main focus is on getting funds to beneficiaries as soon as possible. However, care needs to be taken to ensure that the income tax (and capital gains tax) position is checked, returns filed, and HMRC’s clearance sought, to properly safeguard the executor and beneficiaries.

Pippa Bavington TEP is an Associate Solicitor Private Client with Giles Wilson Solicitors in Leigh on Sea, Essex

I’ve been appointed as a trustee. What do I need to do?

Posted on By Joanna Pegum
man looks thoughtful

Have you been asked to take on a trustee (or executor) role for someone’s will? If so, did you understand what the role entailed, or take advice before accepting?

It’s all too common for people to agree to say yes without finding out what’s involved. Taking on an executor /trusteeship is not to be done lightly and you should take proper advice, especially if you are unfamiliar with estate and trust management.

First steps

If you’re a new trustee, you should establish the nature and extent of the trust asset(s), as this will also determine the nature of your responsibilities. For example, if it is a share in a property, is there insurance in place? Who is responsible for this and for other outgoings? Do you and the other trustees have access to the property so you can inspect it?

If the asset creates an income, have you registered the trust with HMRC and submitted regular income tax returns? Trusts do not have an allowance similar to personal income tax; but instead there is a trustee rate of income tax associated with a discretionary trust or other ‘relevant property regime’ trust. It’s worth speaking to a qualified practitioner to fully understand this and other issues.

If you fail to register with HMRC or pay income tax, you may incur penalties, so it’s better to do this at the outset. I know of one case where a man who was co-executor of his late wife’s estate, which included a nil-rate band trust and an IOU to the trust, had not registered the trust even after ten years! A very late filing to HMRC was required, and the family had to seek advice for what had become a messy and tax-inefficient situation.

Seek advice

If you’re appointed trustee, seek advice, and soon, as there are real responsibilities to fulfil both at the outset and going forward.

What about choosing trustees/executors for my own will?

If you’re making your own will and need to choose trustees/executors, you’ll need to consider whether they will agree, whether they can work well with any other named person(s), and if they are suitable for the position.

Pippa Bavington TEP is an Associate Solicitor Private Client with Giles Wilson Solicitors in Leigh on Sea, Essex 

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

Posted on By Joanna Pegum
family group

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

I’m looking after my aunt’s estate, and realise she failed to disclose rental income on her old home. What should I do?

Posted on By Joanna Pegum
man inspects paperwork

Your late aunt appointed you as the personal representative of her estate, but when sorting through her paperwork, you discovered she had rental income from letting out her old home, after moving into residential care. However, your aunt did not declare this income to HM Revenue and Customs. What should you do?

As your aunt’s personal representative, it’s your responsibility to collect details of her assets and liabilities at the date of her death, and declare them to HMRC for all taxes, not just inheritance tax.

How do I make a disclosure to HMRC?

HMRC has introduced a ‘Let Property Campaign’ to make the process simpler. This gives taxpayers the opportunity to report undeclared rental income and expenses, and pay any tax owed. You will also benefit from more favourable tax terms using this system.

To take part in the Let Property Campaign, you should:

  • Notify: tell HMRC online via the Digital Disclosure Service (DDS), that you want to take part in the Let Property Campaign on your aunt’s behalf;
  • Disclose: tell HMRC about her rental income and expenses;
  • make a formal offer; and
  • pay any tax and interest owed

When you notify HMRC, you will receive a Disclosure Reference number (DRN) and Payment Reference number (PRN). You then have 90 days from HMRC’s acknowledgment to make a full disclosure and pay any tax owed.

My aunt has incurred expenses in letting out her property.  Can I claim for these?

Yes, you can claim expenses including fees for professional services, such as a letting agent or accountant, insurance, and repairs. It is also possible to claim for loan interest, if there is a mortgage outstanding, though this is now restricted for residential properties, but not commercial properties. If in any doubt, you should seek professional advice.

Do I have to pay interest on the tax owed, and are there any penalties for late payment?

HMRC will currently charge you interest at 7.75 per cent on any tax paid late. This is not a penalty, but ‘commercial restitution,’ as your aunt had the use of money which was owed to HMRC.

As her personal representative, you won’t normally be liable for penalties for any irregularities in her tax affairs.

In theory, HMRC can go back 20 years under the Let Property Campaign. However, for a deceased taxpayer, this will probably be limited to the ‘in-date’ tax years, which will be the four previous tax years.

Katie Buckley TEP is a Director of The Tax Angel Consultancy Limited

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

Posted on By Joanna Pegum
gift in the post

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:

  1. Actual undue influence, i.e. overt acts of improper pressure or coercion.
  2. 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.

What is a deceased estates notice?

Posted on By Joanna Pegum
man reads newspaper

If you’re acting as the executor of a will, before you distribute the estate to beneficiaries, and after you have gained grant of probate (or confirmation in Scotland), you will need to consider claims from creditors against the estate of the person who has died.

How can I tell if the deceased had hidden debts?

For most estates, even if you think you’re familiar with the affairs of the deceased, you can’t be sure that all creditors have been identified.

Many people now conduct much of their financial affairs online, and this poses a growing risk for executors of a will. Even if you had a close relationship you may be unaware of the deceased’s online accounts, including shop and credit cards.

As an executor, you’re liable for debts that belonged to the deceased, so you may have to pay these once they’ve been claimed and proved. You are covered, however, if you place a deceased estates notice in The Gazette and in a newspaper that’s local to where the person lived.

You can find deceased estates notices that have been placed in the London, Belfast and Edinburgh Gazettes here, as well as the latest list of newspapers by district. You can do this via The Gazette or contact newspapers direct.

Which laws does a deceased estates notice relate to?

In the UK, this protection from creditors and potential beneficiaries comes from a statutory advertisement that is referred to within the Trustee Act 1925 in England and Wales and the Trustee Act 1958 in Northern Ireland, as well as the Confirmation of Executors (Scotland) Act 1823.

While it’s not a compulsory notice, and not every executor places one, it’s recommended as an act of due diligence, and for the executor’s peace of mind.

How does a deceased estates notice work?

Once you’ve placed the deceased estates notice in The Gazette and in a newspaper, claims can be made for a limited period, namely for two months and a day.

After this time, you’re considered to have made enough effort to locate creditors and potential beneficiaries before distributing the estate. As the executor, you will not be held liable for any unidentified debts after this time.

Is placing a deceased estates notice essential?

It’s not a legal requirement to place a deceased estates notice, but it is advisable, and most solicitors place them as a matter of course (in a 2016 Gazette survey, 80 per cent of probate professionals always placed one if acting as professional executor).

If you don’t place a notice, and a creditor subsequently comes forward after the estate has been distributed, you may have to pay an unidentified debt, for whatever that amount may be.

How much does a deceased estates notice cost?

See the latest pricing for placing a deceased estates notice in The Gazette and in a newspaper local to the deceased here.

You can recoup the cost of the notice from the estate before assets are distributed.

When should I place a notice, and how do I do so?

You can place a deceased estates notice once you have at least one of the following as proof, where applicable:

• Grant of probate
• Letter of administration
• Death certificate

To place a notice in the Gazette, you’ll first need to register and then go to Place a deceased estates notice. If you don’t want to publish your personal address for claims, you can use a PO Box forwarding address.

For more information on what to do when someone dies, see The Gazette’s probate checklist.

Do I need to declare my cryptocurrency to HMRC?

Posted on By Joanna Pegum
Attending to paperwork

There is currently widespread uncertainty about the tax treatment of cryptocurrency investments and trading activity.

If you have sold, gifted or spent cryptocurrency within the tax year, you may need to declare any profit or gains on your self-assessment tax return.

If you do not declare taxable income or gains, you may be liable to interest and penalties.

How much tax will I need to pay on my cryptocurrency?

Profits made on cryptocurrencies by individuals is generally subject to capital gains tax at a rate of up to 20% after deducting the annual allowance (£12,300 for the 2020/21 tax year). Where you have bought and sold cryptocurrencies through a UK company, any taxable profits will be subject to corporation tax at a rate of 19%. If you have regularly bought and sold cryptocurrencies, HMRC may say that you are liable to income tax at a rate of up to 45%. Most exchanges will keep a record of your transactions and let you download your history.

If I gift my cryptocurrency, am I liable to tax?

Under existing capital gains tax rules, if you gift your cryptocurrency or use it to buy other capital assets (including exchanging one cryptocurrency for another), you will have to pay tax on any increase in the value of your cryptocurrency between the date you acquired it and the date of the gift or purchase (subject to any available reliefs or allowances). Similar rules apply if you are subject to corporation tax or income tax on your profits.

How will HMRC know about my profits?

HMRC has significant powers to acquire and analyse information on UK taxpayers. If HMRC raises an enquiry into your tax returns, it is likely to question the appearance of profits in your bank account that have not been accounted for. The UK and EU are also currently consulting on new regulations that may require trading platforms to report information on certain account holders to the relevant national authorities.

What if I have made a loss?

If you have made a loss, you may be able to offset these losses against your cryptocurrency profits or other capital/trading profits. If you have bought and sold cryptocurrencies through a UK company and the company has made a loss on any individual transactions, loss relief may be available under the corporation tax loss relief rules. As mentioned above, many exchanges will keep a record of your transactions and let you download your history. It is essential to keep these records on file so that you can claim relief for any losses that you make.

What if I fail to declare any taxable profits?

HMRC has up to 20 years following the end of the relevant tax year to enquire into your tax returns. If you deliberately fail to declare taxable income or gains and tax has been underpaid, you may be liable to interest and penalties of up to 100% of the amount of tax due. In the most serious circumstances, criminal liability may apply.

Where can I get advice?

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

Helen Cox is Partner in the Private Client Department at Fladgate, and Andrew Goldstone TEP is a Partner at Mishcon de Reya, London, UK

What is the Residence Nil-Rate Band?

Posted on By Louise Polcaro
inheritance,house,

The Residence Nil-Rate Band (RNRB) is an additional allowance for inheritance tax for deaths occurring after 6 April 2017.

When does the Residence Nil-Rate Band apply?

In order to qualify, you must own a property or a share in a property that you have lived in at some stage, and that you leave to your direct descendants (including children, grandchildren or step-children). For estates over £2 million, the RNRB is reduced at the rate of £1 for every £2 over £2 million. In addition, it only applies on death and not on gifts or any other lifetime transfers.

How much is the Residence Nil-Rate Band?

The Residence Nil-Rate Band is set at £175,000 for 2021/22. These figures are per person, so a couple may benefit from double the allowance.

How does it work?

The RNRB value is limited to the lower of the value of the property left to direct descendants or the total RNRB available. The RNRB is applied to the estate first and then the nil-rate band (currently £325,000) is applied. Both the Nil-Rate Band (NRB) and the RNRB will be frozen until 5 April 2026.

If the value of the property is less than the RNRB, the balance cannot be offset against other assets in the estate. For example, if Mrs A dies and leaves her entire estate consisting of a property worth £350,000 and savings totalling £50,000, the total estate equals £400,000. From that, the RNRB of £175,000 can be deducted first, leaving £225,000, which is covered by the nil-rate band so there would be no inheritance tax to pay. However, if her assets were the other way round, i.e. a property worth £50,000 and savings worth £350,000, the situation would be different. In this case only £50,000 of the RNRB could be used, leaving £350,000 from which the nil-rate band can be deducted, with the remaining £25,000 subject to inheritance tax at 40%.

Can it be transferred?

Like the nil-rate band for inheritance tax, the RNRB can be transferred between spouses if it is not used in whole or part when the first spouse died, even if the first death occurred before 6 April 2017.

What happens if I downsize?

The RNRB is still available if you have downsized, given away or sold your home; this is known as the ‘downsizing addition’. For the downsizing addition to apply, you must have downsized to a less valuable home or ceased to own a home after 8 July 2015. Your former home would also need to have qualified for the RNRB if you had retained it and at least some of your estate must be left to your direct descendants. Calculating the downsizing addition is complicated, but it is generally the amount of the RNRB that has been lost because your former home is no longer in your estate.

Can I lose the Residence Nil-Rate Band?

The RNRB may be lost if you do not own a property at your death or if your direct descendants do not inherit on death. This means the RNRB can be lost if your property is left to some forms of trust, for example discretionary trusts or trusts for grandchildren where they cannot inherit until a specified age, for example 21. If the property is held in a trust prior to death, the RNRB will only apply if the death causes the property to pass to direct descendants, for example if a spouse has a right to live in the property during their lifetime (known as an interest in possession trust or life interest trust) and on their death it passes to their children without age restriction.

The RNRB can also be lost in whole or part if your estate exceeds £2 million. This is particularly important if you are a couple and individually your estates are less than £2 million but combined exceed this amount.

The RNRB will not be lost if a property is not specifically mentioned in a will, so long as it forms part of the estate on death. Nor will RNRB be lost if the property is sold during the estate administration by the executors.

Is there anything I should do?

It is worth speaking to a qualified advisor to review your will and any other arrangements you have made to see if any amendments should be made in light of this allowance.

Stacy Keech TEP is a Solicitor – Wills, Trusts and Probate at Coffin Mew Solicitors in Portsmouth, UK

What is my residence?

Posted on By admin
residence

Your ‘residence’ is where you spend your time for tax purposes. It is not the same as nationality, citizenship or domicile.

It’s important to know your residence status if you generate income from abroad, as it will affect how much tax you need to pay for that tax year.

The UK tax year runs from 6 April to the following 5 April. If you are not a UK resident, you will only need to pay UK tax on your UK income and not on your foreign income.

If you are UK resident, you need to pay tax on all your income, whether from UK or abroad. There are, however, special rules if your permanent home – otherwise known as your ‘domicile’ – is abroad.

Your residence is determined by the Statutory Residence Test, which is made up of four parts:

1. How much time have you spent in the UK in a tax year?

You are automatically resident in the UK if, within the tax year:

  • you spent 183 or more days in the UK; or
  • you have a home in the UK that was available for at least one consecutive period of 91 days (with at least 30 of these days falling within the tax year). If you have an overseas home, you must have spent less than 30 days there during the tax year.
  • You don’t work on a ship or plane, and you do work full time with no significant breaks for 12 months. At least one working day must fall in the tax year and more than 75% of your work days in the year are UK working days).

You are automatically non-resident in the UK if, within the tax year:

  • you were in the UK for less than 16 days; or
  • you worked abroad full time (an average of 35 hours a week) with no significant breaks, and were in the UK for less than 91 days, with fewer than 30 of those days spent working.

Make sure you keep a record of trips back to the UK, and any days in the tax year where you spend more than three hours working in the UK.

What if I move during the year?

If you move in to, or out of, the UK, the tax year is usually split into a non-resident part and a resident part. This ‘split-year treatment’ means you only pay UK tax on foreign income based on the time you were living in the UK.

2. Leaving the UK (Automatic Overseas Test)

The Automatic Overseas Test will apply if you leave the UK part way through a tax year, either to:

  • Work overseas full time
  • Accompany a partner who has started work abroad full time
  • Live abroad and cease to have a home in the UK (if you had a UK home, you need to have given it up at the start of the year) and spend less than 15 days in the UK that tax year.

3. Arriving in the UK (Automatic Residence Test)

The Automatic Residence Test will apply if you:

  • Start to have your only home in the UK
  • Start full time work in the UK
  • Return to the UK after a period of work abroad
  • Accompany a partner who has returned to the UK following work abroad

4. Sufficient Ties Test

If you’re no longer UK resident, but don’t qualify under the Statutory Residence Test, the Sufficient Ties Test may help. This looks at how many days you have spent in the UK during the year, your permanent status re your work and home, the 90-day rule and your country of residence.

Leaving – and returning

If you have left the UK and returned in less than five years, you are treated as temporary non-resident, meaning any gains realised during that period are taxable in the year you return.

Need help?

As you can see, this can all get quite complicated. If you are in any doubt about your residence, seek advice from a qualified professional

Why is HMRC investigating my deceased relative’s tax affairs?

Posted on By Louise Polcaro
tax,investigation

When a person dies, their relatives have to deal with the process of obtaining probate, filing tax returns and distributing any assets in accordance with either intestacy rules, the deceased’s wishes or any subsequent deeds of variation. At what can be a difficult time, it can sometimes come as a shock if HMRC then opens an enquiry or investigation into your deceased relative’s UK tax affairs.

Why are HMRC investigating?

Such enquiries or investigations may arise if the deceased’s assets, as disclosed on the inheritance tax form, exceed those which HMRC expected, based on its knowledge of the deceased’s income and gains. In these circumstances, HMRC is likely to check to ensure the deceased properly declared all their income and gains in their lifetime.

In addition, HMRC may already be conducting enquiries into the deceased’s personal tax position, for example if they used a tax avoidance arrangement during their lifetime.

HMRC holds lots of data on people’s income and assets in its computer system, CONNECT. If the deceased’s inheritance tax return looks incomplete then CONNECT may identify this and trigger an investigation.

What are the timescales?

Where no self-assessment enquiries are open, HMRC has four years after the end of the tax year in which the deceased passed away to assess any income tax or capital gains tax liabilities. However HMRC may assess six years’ tax if the deceased or anyone acting for them before their death made careless or deliberate errors or omissions.

HMRC may use its information powers to obtain the data necessary to quantify and assess this tax and, if necessary, any additional inheritance tax liabilities plus late payment interest.

Will there be penalties?

HMRC is unable to issue penalties for errors made by the deceased during their lifetime. However if the returns it is investigating were submitted after the deceased’s death then penalties may be due.

What to do if you notice any errors

If an executor realises that the deceased’s tax returns and/or an inheritance tax return is incorrect then it is advisable to obtain advice from a specialist so that an appropriate disclosure is made to HMRC quickly.

A disclosure will inform HMRC of the error or omission in the return(s) and quantify the tax due. Correcting issues swiftly should minimise any penalties and bring peace of mind to those due to inherit assets.

Advice should be sought on the best method to make a disclosure, particularly where it may affect the UK tax affairs of a trust or person who is still alive, as well as the deceased.

Helen Adams TEP is Tax Principal at BDO LLP in London, UK

I made a mistake on my tax return; what now?

Posted on By Louise Polcaro
mistake,tax return,hard

Mistakes are part of life. No one likes to make them and it always feels better once they are corrected. Mistakes with your tax can seem daunting, but they can always be fixed.

If you failed to submit a tax return

If you failed to submit a tax return then the first question to ask is ‘did HMRC ask you to submit tax returns for all the year(s) you are worried about’? If so, then you may be able to fill them in and submit them anyway.

The filing date for an online tax return is currently 31 January after the end of the tax year. You can submit personal tax returns for up to three years after the filing date. HMRC will charge you late payment interest and penalties as well as the tax.

Making a voluntary disclosure

If you have more years’ returns to submit, never received any communication from HMRC asking you to submit tax returns or realised that you did not include all your income, profits or gains in your tax return then you need to make a ‘voluntary disclosure’.

A voluntary disclosure is a process by which you tell HMRC what income, gains and profits need to be taxed so that they can assess what you owe before you pay the tax and any late payment interest. Depending on what went wrong, you may also need to pay some penalties.

Making a voluntary disclosure before HMRC finds out and opens an enquiry or investigation usually results in lower tax-geared penalties and minimises the risk of prosecution or having your details published. It is often a simpler process too, compared to a full investigation.

Don’t think HMRC will find out? Think again…

If you doubt HMRC will find out – think for a moment about HMRC’s new computer system called CONNECT, which holds data on everyone including details of bank interest, salaries, etc. Soon this will automatically annually receive data on bank interest and balance from banks outside the UK. The computer identifies people for HMRC to investigate.

Seek help

As soon as you realise you need to correct your tax affairs, appoint an experienced advisor who is used to helping people in situations similar to yours. They will advise you on your options for making a disclosure, depending on your specific situation and why the problem arose.

Tax rules are complicated, so please get advice rather than trying to use HMRC’s Digital Disclosure Service yourself. An advisor can also guide you as to what penalties to expect and whether you may be able to get them suspended, as well as resolving other related issues, VAT issues, for example. They should also be able to negotiate time to pay if you cannot afford to pay HMRC in full immediately.

Helen Adams TEP is Tax Principal at BDO LLP in London, UK

Coping with care costs – Northern Ireland

Posted on By admin
elderly couple

Like many people, you may be concerned about the potential impact of care costs on your finances and your children’s eventual inheritance. Many people seek advice on how their family home and any other savings and investments can be protected if they become unable to care for themselves in their own homes and require either a package of care at home or need to move into a residential or nursing home on a temporary or permanent basis.

Proposals to change care fees announced in the national press will only affect England, since health and social care varies across the UK. So what’s the position in Northern Ireland?

What are the rules around care costs?

The rules around care fees are complex. Broadly speaking, care provided in a person’s own home is not currently charged for but residential and nursing care is subject to a formal ‘means assessment’.

Put simply, if an individual has capital over £23,250 then they may be liable to pay for their care, although a limited number of exemptions do apply. For example, the main home would be disregarded if occupied by a spouse or one of a number of other relatives mentioned in the applicable regulations.

If a person’s capital falls to £14,250, then it will be fully disregarded and the relevant Health & Social Care Trust must meet any shortfall after the individual’s income has been exhausted.

It should be noted that, following a Judicial Review case in Northern Ireland, there is now some much-needed clarity on what is known as ‘Continuing Healthcare’. Put simply, if a person requires a high level of medical care, this cannot be charged for by a Health & Social Care Trust even if it is being provided for in a nursing home. This has been the position in England & Wales for some time but, until now, the position was less clear in Northern Ireland.

How does the means assessment work in Northern Ireland?

The rules governing the means test procedure are contained in the Department of Health, Social Services and Public Safety’s ‘Charging for Residential Accommodation Guide’. A resident will be required to give full details of their income and capital as part of the means test. However, it should be noted that there is no power for a Health & Social Care Trust to assess the financial resources of a person’s spouse or any other third party in calculating their liability to pay for their own care.

Get advice on care fees

Anyone facing a possible liability to pay care fees, , or who believes that they may be eligible for Continuing Healthcare, should always take advice from a qualified professional before completing any formal means assessment or dealing directly with the Health & Social Care Trusts over their finances. It is important to be familiar with the rules, especially those relating to the various exemptions that apply, before submitting any financial information.

Michael Graham TEP is Head of the Private Client Department at Cleaver Fulton Rankin, Belfast, Northern Ireland

The risks of not making a will

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Woman thinking about making a will

It’s very easy to put off making a will, as no-one likes to face up to their own mortality.

But there may be serious implications for your family if you don’t make one. Your home and property may not be distributed according to your wishes, and you risk depriving family members of their inheritance and even their home.

Possible consequences of not making a will

Some of the consequences of not preparing a will include:

  • Your estate may be distributed under the intestacy rules, which favour close family
  • Step children and unmarried partners may be overlooked
  • Your partner may be left homeless
  • Your children may be left with no legal guardian
  • Your family may face additional distress at a difficult time
  • Your money may go to the government
  • Family disputes may arise
  • Legal action may be required, which can be very expensive
  • Your family may face a higher bill for inheritance tax
  • The law is regularly changing, and it may not favour your family

Your will is an important document, so it’s worth using an experienced professional to make sure it’s drawn up properly. It will cost a few hundred pounds or so, but you’ll get an estimate first, so there’s no need to worry about fees mounting up.

The greatest advantage of using a professional is the peace of mind it will bring you. A professional will construct your will the way you want, to suit your individual needs, and will ensure all your wishes are carried out following your death.

There will be no technical mistakes, so you can rest assured there will be no expensive and upsetting disputes for your family to deal with when you’re no longer around.

Can I really use a trust to avoid inheritance tax?

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Mature couple talking to financial planner at home

Trusts are occasionally seen as devices to avoid paying tax. In reality, you would never set up a trust just to gain tax advantages.

When you set up a trust you are giving up ownership of the assets it holds. This is a dramatic move, and will normally only make sense if you have clear objectives about what you want to achieve with your assets. Tax should really be a secondary issue.

In most cases any tax advantages or exemptions given to trusts are tightly targeted at those that are seen as doing social good – such as charitable trusts, trusts for disabled or vulnerable people, etc.

In many cases the trust may avoid one type of tax, but will be caught by another.

A lot of people think that if you put your money in a trust it will be exempt from inheritance tax. However, trusts are subject to three separate inheritance taxes: an entry charge; an exit charge; and a ten-year charge.

Let’s look at these in detail.

Entry charge for a trust

The entry charge is paid when you transfer assets into a trust. These may include buildings, land or money and can be either:

  • a gift made during a person’s lifetime, or
  • a transfer that reduces the value of the person’s estate (for example an asset is sold to trustees at less than its market value). The loss to the person’s estate is considered a gift or transfer.

Exit charge for a trust

The exit charge is similar, but it takes place when a trustee pays out of the trust to another person, called a beneficiary. The charge is based on a percentage of the value of the assets being transferred. Where payments of income are distributed to beneficiaries, no inheritance tax is payable because the beneficiaries will be liable for income tax instead.

Ten-year charge

The ten-year charge, also known as the periodic charge, is payable where the trust contains relevant property, where the value is over the £325,000 inheritance tax threshold known as the nil-rate band. It is charged on the ‘net value’ of relevant property in the trust on the day before each ten-year anniversary. The net value is the value after deducting any debts and reliefs, such as Business Property Relief or Agricultural Property Relief. However, neither of these are applied if the assets have been held for less than two years. If all of the assets are transferred to one or more of the beneficiaries before the ten-year anniversary, no charge will occur, but, of course, an exit charge will apply.

Charges

Both exit charges and ten-year charges are incurred at 6%, but there are many complicating factors and exemptions regarding ‘excluded property’, which get quite technical.

These charges are time consuming and complex to calculate, and trustees generally need to consult a professional advisor to arrive at the correct figure. This can be expensive, but it is worthwhile, as delayed or incorrect payments to HMRC will result in interest charges and/or financial penalties.

Speak to an advisor

As you can see, the rules around inheritance tax and trusts are very complicated, and each person’s individual circumstances will dictate their tax position. If you are considering setting up a trust you should speak to an advisor to discuss your specific situation and find a solution that works for you.

What is a disabled person’s trust?

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Some trusts for disabled people are able to get special tax treatment from HMRC. They are more usually referred to as ‘vulnerable beneficiary trusts’.

For the trust to qualify as a vulnerable beneficiary trust, various conditions will apply.

Vulnerable beneficiary trusts for children are often set up in a parent’s will, but they are able to set up in lifetime as well.

Who qualifies for a vulnerable beneficiary trust?

The beneficiary of such a trust must be a disabled person. For this purpose a disabled person is one who:

  • by reason of ‘mental disorder’, within the meaning of the Mental Health Act 1983, is incapable of administering their property or managing their affairs, or
  • qualifies under a ‘benefits’ test, i.e.
    • is in receipt of an increased allowance, or
    • is in receipt of attendance allowance, or
    • is in receipt of the care component of disability living allowance at the highest or middle rate, or the mobility component of disability living allowance at the higher rate, or
    • is in receipt of the personal independence payment, or
    • is in receipt of an armed forced independent payment.

What classes as a ‘mental disorder’?

It should be noted that ‘mental disorder’ referred to above also has conditions attached to it. It is understood that HMRC will accept certain conditions as a ‘mental disorder’ that enable a person to qualify, and as a result of the condition they are incapable of managing their affairs. The accepted conditions are as follows:

  • Alzheimer’s or other forms of dementia;
  • bipolar disorder, schizophrenia, depression, or other mental illness;
  • Autistic Spectrum Disorder (sometimes described as a persuasive developmental disorder);
  • a learning disability, such as Down’s Syndrome.

Some brain injuries are not seen as a mental disorder if they only have physical consequences. However, if the brain injury has caused a psychological, cognitive or behavioural disorder, then these will generally be accepted as a ‘mental disorder’.

What about other beneficiaries?

If there are beneficiaries in the trust who are not vulnerable then the assets and income for the vulnerable beneficiary must be identified and kept separate. They must only be used for that person. It is only that part of the trust that would be entitled to special tax treatment.

How does the special tax treatment work?

If the trustees of the vulnerable beneficiary trust wish to claim the special tax treatment for income tax and capital gains tax purposes, they will have to complete the ‘Vulnerable Person Election Form VPE1’. A separate form will be required for each vulnerable beneficiary. The trustees and the beneficiary must both sign the form.

The election for special tax treatment is made for a tax year or part of a tax year (for example if the beneficiary has just become a vulnerable person). It has to be made within 12 months of the normal filing date for the trust tax return. It will come to an end if the beneficiary ceases to be vulnerable; the trust is terminated; or the beneficiary dies. The trustees would be required to report these circumstances to HMRC.

Income tax

For income tax purposes, the trustees are entitled to a deduction. They need to work out what tax they would be paying on the income of the trust if there was no vulnerable person. They then work out what tax the vulnerable person would have paid if the trust income had been paid directly to them as an individual. The difference between the two figures can then be claimed as a deduction from the income tax liability of the trust. There are variations on computing the relief from income tax and from capital gains tax depending on whether the beneficiary is UK resident or non-resident. Competent professional advice from a qualified advisor should be sought to assist in carrying out the various computations.

Capital gains tax

There are also special rules for capital gains tax. This is usually paid when assets are sold, given away, exchanged or transferred in some other way and their value has increased since they were put into the trust. There is an annual exempt amount allowed for the trustees to set against capital gains in the trust. As with the income tax calculations for these trusts, there is a similar calculation done for claiming a deduction in capital gains tax. The trustees work out what they would pay without any deduction. They then work out what the vulnerable person would pay if the gains had come directly to him. They are allowed to claim the difference as a reduction on what the trustees would have to pay by filling in a form.

Inheritance tax

For inheritance tax purposes there are also some special tax treatments. There is no charge if the person who sets up the trust survives for seven years from the date they set it up and there is no charge on transfers made out of a trust to the vulnerable beneficiary. It should also be noted that trusts usually have a ten-yearly inheritance tax charge, but trusts with vulnerable beneficiaries are exempt.

For inheritance tax purposes only, a ‘disabled person’ also includes a person who settles their own property into a trust for themselves at a time when they have a condition that it is reasonable to expect will lead to them becoming incapable of administering their property or managing their affairs (this can often happen for someone who may have an acquired brain injury as a result of an accident).

Get advice

If a vulnerable beneficiary trust is to be contemplated, then it is recommended that an advisor who is skilled in the law of taxation and trusts, such as a TEP, is engaged as the tax treatment, in particular, is fraught with technical difficulty.

Patricia Wass TEP