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.
Since writing the above, the government has announced plans to modernise and strengthen the Lasting Power of Attorney (“LPA”) process, by which a person can appoint attorneys to manage their affairs in the event that they lose capacity, following last year’s consultation on modernising the system.
In summary, the major reforms will be:
A Lasting Power of Attorney (“LPA”) is a legal document which allows you to choose who should help you make decisions or make decisions on your behalf when you lose mental capacity and are no longer able to do so yourself. The person making the LPA is called the ‘donor’ and the person or persons given authority under the LPA are called ‘attorneys’. There are two types of LPA: one for ‘Financial Decisions’, for example paying bills or dealing with properties; and one for ‘Health and Care Decisions’ which can cover decisions from what type of care you receive to whether life sustaining treatment is given or not.
The Government has for some time promised to introduce a register requiring overseas entities holding UK property to identify its beneficial owners, in its effort to increase transparency in UK property ownership and reduce the attraction of the UK’s property market to money launderers. Indeed, we last blogged about the potential overseas entities register in May 2019. With UK-based entities subject to strict information-sharing requirements since 2016 (in the form of the register of People with Significant Control or “PSC Register”), many have been calling for an equivalent overseas entities register to be implemented to provide a way of tracking overseas owners who ultimately own and control UK land.
Laura Harper was delighted to be invited to talk to the editor of ‘Wealthbriefing’ recently about the important topic of philanthropic giving by HNW individuals and families.
Apple officially released its ‘Digital Legacy’ feature on 13 December 2021. This permits individuals who have been nominated by the deceased to access the deceased’s accounts and data after their death. Diva Shah examines the impact of this new feature and its implications for Private Client practitioners in matters of estate planning where digital assets are involved.
The UK government introduced new legislation that will require those working in care homes to be double vaccinated against coronavirus. This has been implemented through the Health and Social Care Act 2008 (Regulated Activities) (Amendment) that came into effect on the 11th November 2021. This regulation is applied to England only.
While IHT escaped major changes in the Autumn Budget the Chancellor could be tempted to tweak the framework for IHT in future, writes James Ward. But what playbook would he use?
As non-UK tax residents, the couple will be subject to special rules for calculating the capital gains tax (“CGT”) due in relation to either the sale or transfer of their UK property.
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.
In recent years there have been calls for a change in the law to protect vulnerable adults from falling victim to what has become known as “predatory marriage”. This is due to a rise in cases where fraudsters have married vulnerable and often elderly individuals, without the knowledge of their loved ones.
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.
Deputies are typically appointed because individuals cannot make decisions for themselves due to illness, like Alzheimers or dementia, old age or perhaps as a result of a catastrophic personal injury or medical negligence.
There are several reasons why someone may need the assistance of a financial deputy, stemming from incapacity due to an accident or a consequence of old age. There is however a darker side to this type of work that Court of Protection lawyers are seeing more and more of. This relates to those who have suffered some form of financial abuse and/or undue influence.
After a spinal injury the long-term impact on your life and that of your families can be significant. You may need a care package, a new home or adaptations to their existing accommodation, therapies and specialised equipment.
The pandemic has changed the world – there is no doubt we are all “online” far more now than before. Social media now extends into every aspect of our lives, from those notorious repetitive baby pictures to those ‘should never have been posted university photos‘. We collect and share moments of our lives in the digital world.
In the latest edition of the Financial Times Money Q&A, Jemma Garside, senior associate in our private client team answers a question: "Should I set up a joint lasting power of attorney for my mother?"
Subject to any restrictions or conditions in the Lasting Power of Attorney (“LPA”), a property and affairs attorney can make gifts on the donor’s behalf to the donor’s friends, family members or acquaintances on customary occasions.
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