Proposed inheritance tax reforms and pre-Budget planning
The status of the deceased’s house/flat as “family home “attracts little special tax treatment beyond the additional “residence nil rate band” for IHT purposes if it’s left to “direct descendants”. But a house within an estate does illustrate well the main issues of valuation for IHT on death and Capital Gains Tax (CGT) implications when the property is sold by the Executors.
A home does not have a fixed value. Where IHT is chargeable on death, the market value will need to be agreed with HMRC so the liability can be calculated. Executors should not be lazy or penny pinching. A formal valuation should be obtained from a suitably qualified surveyor – so doing will win 75% of the valuation battle. The District Valuer (D.V.) engaged by HMRC is more likely to accept a value returned on the back of a professional valuation, even if they consider it a little on the low side. Nothing is gained by plucking a low figure out of the air and hoping for the best. All you will do is prompt protracted negotiations with the D.V. on value. It’s a myth that “Probate” Value is something less than “Market” Value.
A sale shortly after death will prompt HMRC to argue that the sale price, if higher, should be substituted for the value returned; the price achieved on a sale to third party is real evidence of true market value. It may be possible to successfully argue that the price achieved is the product of a marked recent increase in house prices in the area where the property is situated and that the returned value should stand. The increase in value would then, instead, be charged to Capital Gains Tax (CGT). As CGT is charged at 28% ( and on the net proceeds rather than the gross value) with the benefit a £12, 300 annual exemption for Executors, there’s a saving if the increase in value is charged to CGT rather than to IHT (at 40%).
Conversely, if the Executors sell the property at less than the value returned for IHT within 4 years of death, then they can claim to substitute the sale price for the returned value and reclaim IHT. No allowance is given for disposal costs (estate agents/solicitors).
IHT attributable to a property can be paid by annual instalments over 10 years with interest (currently 2.6%). When the property is sold, the remaining instalments become immediately due.
Any property value agreed for IHT purposes will then also be fixed as the “base value” for CGT purposes on subsequent sale by executors, by the person to whom the property was specifically left in the will, or to a residuary beneficiary to whom the property was “appropriated” on account of their residuary share.
Appropriation can result in substantial tax savings. If my father leaves his estate to me and my two sisters equally and his house is to be sold, we and the executors may resolve not simply to sell the house as part of the estate but to appropriate the property to the three of us as part of our entitlement to residue. It will be put into our names – and if the three of us are also the executors (as is likely) then we’ll need to formally transfer the title of property (as executors) to ourselves (as beneficiaries).
For CGT purposes, our “base value” will similarly be the date of death value (not the value at the date of appropriation). When we sell, not only do we each have a £12,300 annual exemption (as opposed to just one for the executors), but, if we’re lower rate taxpayers, part of the gain might be charged to CGT at 18%. Further, if any one or more of us has been living in the property as our main residence since father’s death, the whole gain may be tax free under Private Residence Relief (PPR). PPR is not available to executors on a sale from the estate- even if, individually, one or more of them is in occupation- there needs to be a formal appropriation and transfer if PPR is to be claimed by such occupier.
In considering whether the deceased’s property should be sold or appropriated to residuary beneficiaries, the impact of ownership of that property needs to be considered if the beneficiary is currently thinking of buying a property – he/she may find themselves liable for the additional 3% surcharge on buying what will be a second property. Though there’s an exemption from the additional 3% on buying within 3 years of inheriting a less-than-50% share in a deceased’s property , that still won’t allow the buyer to benefit from any “first time buyer” rates.
A final point on CGT:
On any chargeable disposal of residential property (including a disposal by executors) after 6th April 2020, a CGT return needs to be made and tax paid within 30 days of completion of the sale.
Jim Sawer is a partner in our private client team. He has a broad private client practice and has advised families in the UK and overseas, including those with commercial and landed interests, for over 30 years. Clients appreciate his ability to identify the true crux of a matter promptly and his results-orientated approach to resolving private client issues in the family context.
Our well regarded French contact* has warned us that a new law just passed in France is going to cause problems for Anglo / French succession planning. Under the laws of England and Wales, all individuals have testamentary freedom and can leave their estate to whomever they choose under the terms of their will.
Trans adults with full decision-making capacity have the freedom to secure hormonal and surgical interventions to align their bodies with the physical attributes typical of the gender with which they identify (a process known as “transitioning”). However, for those who lack capacity, the involvement of others who are responsible for making decisions on their behalf is required, and the position can be complex as a result. This blog explores the approach to making decisions relating to transitioning on behalf of protected trans people, applying the best interests test and guidance from case law, and discussing the practicalities for decision-makers.
With the price of crypto assets generally making a good recovery from the Covid-19 related decline of 2019 contrasted with the very recent volatility following issues with the adoption of the cryptocurrency as legal tender in El Salvador, investors in cryptocurrencies might be considering realising some of their gains to try to help minimise any further instability.
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The Office of the Public Guardian (OPG) and the Ministry of Justice are working together to modernise the process of making and registering Lasting Powers of Attorney (LPAs). The consultation is open to the public and will remain open until 13 October 2021.
Good news – The “secret” specialist HMRC unit set up in 2019 to examine the tax avoidance risks has been wound up after finding no evidence of correlation between the use of FICs and non-compliant behaviour.
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Lasting Powers of Attorney (LPAs) are vitally important documents. Our previous blogs have touched upon what LPAs are and top tips for anyone planning on putting an LPA in place. Most individuals should at least put in place a financial LPA to cover their home and personal finances. It is however a good idea in some cases to have a second financial LPA.
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Partner and head of our Private Client team, James Ward, writes about the importance of entrepreneur's putting in place a succession plan to safe guard their reputation.
LPAs are important, and are steadily growing in popularity as individuals realise how necessary they are to support friends and family in the event that they lose mental capacity. Our previous blog gave an overview of how LPAs work and the requirements for making them. This time, we focus on our ten top tips for LPAs.
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