HomeWills & ProbateInheritance Tax - Reducing Your Liability

Inheritance Tax - Reducing Your Liability

When property prices are increasing, more people are finding themselves in the position of being liable for Inheritance Tax.  Inheritance Tax is imposed, at present, at a rate up to 40% on any part of your estate that exceeds £325,000.00 in value.

 

Often the potential liability for Inheritance Tax can be removed or substantially reduced by ensuring that any property they own with another is held on a ‘Tenants in Common’ basis.  This in effect means that each of the owners owns a specific share of the property.  Often this is on a 50/50 basis.

Most people in the conveyancing process opt to have their property held on a ‘Joint Tenants’ basis.  Where the property is held jointly and one of the owners dies, his or her interest will automatically vest in the survivor.  That can have the effect of giving rise to an Inheritance Tax liability which would not have otherwise have arisen if both estates were dealt with independently.  This is best illustrated by way of an example:

EXAMPLE

The Inheritance Tax threshold is £325,000.00.  Anything above that amount is taxed at 40%, except in respect of transfers between spouses.

An un-married couple own a property that is worth £425,000.00.

The property is held on a ‘Tenants in Common’ basis, both parties having a 50% interest in the property.  That equates to a £212,000.00 interest each.

The couple have similar Wills which provide that in the event of their death the property would pass to the other on the basis that the spouse outlives them by a specified period of say 3 months (“the Survivorship Period”).  That requirement is documented in what is referred to as a ‘Survivorship Clause’ in the Will.

A properly drafted Will would also provide that if the other party does not live beyond the Survivorship Period specified that party would not obtain a vested interest and then the interest in the property would pass to the next named beneficiary – perhaps the children.

The couple are involved in a car accident in which both of them die.  There is a general presumption that the eldest died first and in this example it is the male partner.

In this example the property is held as ‘Tenants in Common’.  There was a Will which contained a Survivorship Clause which made the gift conditional on the beneficiary outliving the deceased for the Survivorship Period prior to the gift vesting, failing which any gift would pass to their children.

The gift to the children would pass free of any Inheritance Tax as the respective estates of the parents were £212,500.00 each which is less than the current Inheritance Tax threshold of £325,000.00.

If the property was held on a ‘Joint Tenants’ basis the male partner’s interest would have automatically vested in the surviving female partner.

In that event her estate is then worth £425,000.00 which is £100,000.00 above the Inheritance Tax threshold.  On the presumption that the property was the only asset her estate would attract Inheritance Tax at 40% on the £100,000.00.  £40,000.00 would be lost in Inheritance Tax.

As the example demonstrates it is prudent for Inheritance Tax purposes to ensure that the property is held on a ‘Tenants in Common’ basis and also that there is a Will for unmarried couples whose combined assets are likely to exceed the Inheritance Tax Threshold.  The Will should contain a Survivorship Clause to (in so far as is possible) remove some of the risk of the estate rolling up into one and then suffering an Inheritance Tax liability that would not have otherwise arisen.

If your property is held on a ‘Joint Tenants’ basis and it was decided to pursue the severance of the joint holding arrangement, that would necessitate an application to the Land Registry. The practice’s costs for dealing with the application, including the preparation of the application and submission of the application would be £75 plus VAT.

The position is different for married couples. When one spouse dies if they have not used their allowance or some of their allowance that has not been used this is passed to the survivor.  The survivor could have the benefit of two complete allowances. This rule only applies, at present, to married couples.

POTENTIAL EXEMPT TRANSFERS

Potentially exempt transfers are gifts which are exempt and excluded from a persons Estate for calculating inheritance tax if the person making the gift outlives that gift by 7 years or more.  In order for the gift to be treated as a true potentially exempt transfer it needs to be free of contingencies/conditions.  Accordingly, any gifts that are subject to rights of occupation, or someone having a continuing right to rent would be unlikely to be construed as a true potentially exempt transfer for inheritance tax purposes.

If the person making the gift does not outlive the gift by 7 years the value of the gift is taken into account for inheritance tax purposes on a sliding scale.  The value of the gift for inheritance tax purposes reduces by 20% for each year after the third year.  The value of the gift for inheritance tax purposes is valued as at the date of the gift, as opposed to the date of death.  That can be particularly relevant where property prices have increased since the date of the gift.

When considering potential exempt transfers the potential liability for capital gains tax also needs to be considered given that the gift would be treated by the tax man as a deemed disposal at full market value and if at the time of the gift the gift was worth more than the initial acquisition cost the gain would potentially be liable to Capital Gains Tax.

 

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