Everfair Tax

Specialists in UK, US and Expatriate Tax.

2024 Autumn Budget – Inheritance Tax

by

Summary of Changes for IHT; Individuals and Offshore trusts

The current non-domicile tax regime, including the remittance basis of taxation, will be abolished from 6 April 2025.  It will be replaced by a new “residence based” approach.  This note focuses on how the changes affect inheritance tax (“IHT”).  Separate notes consider the impact on income tax and capital gains tax for individuals and offshore trusts.

Inheritance tax – Individuals

It has been confirmed that the basis for IHT on non-UK assets will change from domicile-based to residence-based from 6 April 2025.  The impact for individuals is summarised below:

  • The term domicile will be replaced by long-term residence.
  • The basic premise will be that an individual will be a long-term resident for a tax year if they have been UK resident for 10 out of the previous 20 UK tax years.
  • Long-term residence will end after a run of consecutive tax years of non-UK residence varying from three to 10 tax years depending on the number of years of prior UK residence.
  • The test resets after 10 consecutive years of non-UK residence.
  • There is transitional protection for non-domiciles who would otherwise be long-term resident but left the UK before 30 October 2024 and who remain non-UK resident.
  • Residence for a tax year is based on being resident for all or part of the year under the Statutory Residence Test.
  • Lifetime gifts of non-UK assets by long-tern non-residents remain outside the scope of IHT even if long-term resident on death within seven years.

Inheritance tax – Offshore trusts

It is with regard to IHT and offshore trusts, particularly so-called excluded property trusts, where there was thought to be the biggest divergence between Labour and the Conservatives and the budget confirmed this was the case.

Under current rules an excluded property trust is a trust set up by a non-UK domiciliary which only holds non-UK assets so that it is outside the scope of IHT.  This treatment generally continues regardless of changes in the settlor’s domicile so can be used as a long term IHT mitigation tool.

The position for offshore trusts from 6 April 2025 builds on the changes for individuals:

  • Rather than being fixed at creation, the scope of a trust’s exposure to IHT on non-UK assets will change with the settlor’s personal IHT status before being finally fixed based on their status at death.
  • Broadly speaking, a trust’s non-UK assets will be within the scope of IHT for periods where the settlor is a long-term resident with charges arising when relevant events occur.

UK Spring Budget 2022

by

The Chancellor Rishi Sunak delivered todays Spring budget under the backdrop of inflation being revealed to have risen to 6.2%. The highest rate of inflation for 30 years. This had been made worse by rising fuel prices and will result in significant increases to the cost of living. There is also recognition of the situation in the Ukraine. The impact the ongoing conflict may have, as well as the relatively slow growth being seen in our own economy. In addition to the need to reduce the level of debt built up during the last two years to fund COVID measures.

Inflation, Growth and Debt Repayments

To make his point, during his statement the Chancellor referenced these cumbersome estimates from the Office for Budget Responsibility on inflation, growth and debt repayments.

  • Inflation forecast to average 7.4% this year
  • UK growth expectation downgraded to 3.8% this year
  • UK to spend £83bn on debt interest in the next year

In line with the relatively low expectations of change ahead of today’s announcement, there were relatively small immediately effective measures to ease the burden of the cost of living were set out. There was however the promise of a 1% cut in income tax rates before the end of the current parliament in 2024 first cut to the basic rate of income tax in 16 years – from 20% to 19% – by the end of Parliament in 2024

Despite the economic picture painted and other indications given in advance as to the limited ability to make sweeping cuts that would have an immediate impact a shout of ‘is that it?!’ could clearly be heard from the Labour benches and there has been disappointment expressed at the fact that the proposed heath and social care level and subsequent NI rate increase were not scrapped as had been hoped for.

What you need to know

Here therefore are the key take aways from today’s Statement:

  • A cut to the basic rate of income tax. From 20% to 19% – by the end of Parliament in 2024
  • Fuel duty will be cut by 5p a litre from 18:00 GMT until March 2023
  • The National Insurance threshold will be raised by £3,000. Meaning people must earn £12,570 per year before paying income tax or NI. It’s a tax cut for 30 million people worth over £330 a year, says Sunak
  • VAT will be scrapped on home energy-saving measures such as insulation, solar panels and heat pumps
  • The Household Support Fund for local councils to help the most vulnerable will be doubled to £1bn from April
  • Retail hospitality and leisure sectors will have a 50% discount in business rates up to £110,000
  • Employment Allowance will increase to £5,000. Claiming it is a tax cut worth up to £1,000 for half a million small businesses.

What to think about when considering estate planning in the UK

by Leave a Comment

What to think about when considering estate planning? Whilst tax is important, it should not be the driver for any estate planning. Instead, the starting point is how you would like to see your assets pass on your death and then the estate plan can achieve this as tax effectively as possible. Here, we’ll share the key considerations and what you should have prepared.

So, you’re thinking of your estate and planning to be as tax efficient as possible. What are the key considerations and steps?

Consideration 1: Estate Planning, Wills & Power of Attorney

Firstly, it’s key to have up to date wills and powers of attorney to make matters smooth and to ensure that all assets pass the way you would like. The last thing you want are for complications to arise around the intestacy rules. You want to feel assured in the knowledge that things are as straight-forward as possible for those administering the estate on your death.

Consideration 2: Estate Planning and Inheritance Tax

From a tax perspective, when thinking of an estate plan it’s important to establish the extent of the Inheritance Tax (IHT) liability. Most UK resident individuals (and even UK domiciled individuals who are resident outside the UK) are subject to IHT on their worldwide assets. However, those who are non UK domiciled and not deemed domiciled are only subject to IHT on their UK assets.

Consideration 3: Gifting during your lifetime

An estate plan can include gifts to be made during lifetime where this is appropriate and something you are comfortable with. This is particularly important as gifts during lifetime require giving up the assets and the right to receive any income that they generate. You would have to be comfortable that the beneficiaries are ready to receive the assets and that you are happy you would have enough remaining to meet your own needs.

Option: Estate Planning gifting to individuals

Where lifetime gifts are made to individuals, these fall outside the estate for IHT seven years after the gift is made. So, in other words… if you gift to an individual seven years prior to your death, the value of the gift given is not subject to IHT.

Why? Well, these are referred to as potentially exempt transfers or PETs. If the person who makes the gift passes within the seven years then the value of the gift forms part of their taxable estate on death, with the tax reducing if the gift has been survived by three years.

Option: Estate Planning with Trusts

Gifts to trusts during lifetime are known as chargeable lifetime transfers (CLT’s) and attract a potential 20% immediate IHT charge if over the tax exempt allowance for IHT known as the nil rate band, currently £325,000.

If you’re a non UK domiciled person, you’re able to make gifts from non UK assets without this being a potentially exempt transfer (subject to the seven year rule). So essentially, if you’re non UK domiciled and you gift £325,000+ in UK assets to a trust while you’re alive, the value of that gift will be subject to 20% IHT charge. Whereas if you’re non UK domiciled and were to gift to that trust from non UK assets, you can potentially avoid these gifts/assets being subject to tax.

What is being deemed Domiciled, and are exemptions available?

An individual becomes deemed domiciled after living in the UK for 15 years of the last 20. So, before an individual becomes deemed domiciled, it would be worth considering planning to minimise the IHT on non UK assets. This can include a trust, or other structures.

More generally, there are also a number of exemptions which it is worth being aware of and ensuring that you’ve edit from where possible.

Most people are quite familiar with the spousal exemption for example – this allows assets to pass between a married couple without IHT implications.

For a couple, where one is non UK domiciled and the other is UK domiciled, the spousal exemption would allow assets to pass from the UK domiciled spouse to the non UK domiciled spouse. This is limited to £325,000.

There is also a small annual gift exemption of £3,000, and gifts to a person when they are getting married.

Perhaps the other most valuable exemption, is gifts out of surplus income. You have surplus income if you have more income annually that you need in order to pay your usual living costs. So, gifts out of surplus income allows people to give away the remaining surplus balance, without it being a gift subject to the seven year rule. Such gifts must be made regularly, ideally at least every year.

We can support you with estate planning strategies and solutions

We’ve shared a few tax efficient strategies and there are far more, especially given the complex nature of your unique financial situation, personal circumstances. If you have any questions you require support with, or you’d like to have a one-to-one consultation, please do get in touch with us.

Inheritance Tax Rate and Capital Gains Tax UK Rate 2021 | Actions you can take:

by Leave a Comment

Following on from our recent blog, as promised, we’re sharing some actionable next steps for you regarding the potential changes to the Inheritance Tax Rate and also, Capital Gains Tax UK rate.

If you’d like to read this article later, download the PDF here:

We previously published an article regarding the potential changes to the Inheritance Tax Rate and also, Capital Gains Tax UK rate in 2021. This will be announced in the March budget. In preparation for that, this is a practical guide to what actions you can take to minimise the impact of any changes.

Of course, these changes are at present rumours and recommendations, and there is no confirmation about what will happen in March, but it never hurts to be prepared.

So, what are the next steps?

Capital Gains Tax Rate UK 2021

It has been suggested that income tax rates will be raised to as much as 45% and it is likely the CGT will increase to match it. To reduce your Capital Gains Tax bill here are some practical steps.

  1. Use your £12,300 allowance which cannot be carried forward to future years. A married couple can therefore raise £24,6000 a year with no CGT liabilities.
  2. Use your annual ISA allowance which currently sits at £20,000. All personal CG are tax-free if on ISA investments.
  3. Don’t sell assets later in life as this could mean that Capital Gains Tax will be due as well as Inheritance Tax.
  4. Consider setting up an all-in-one fund for multi-assets as the fund can sell holdings and therefore won’t be liable for CGT.
  5. Ensure any losses are offset against gains which can reduce the amount of CGT owed.
  6. Manage taxable income through pension contributions or charitable donations.

Inheritance Tax Rate 2021

The nil-rate band of £325k is likely to change in the March budget as well as changes to rules regarding unused pension pots. However, these practical steps could help you lower the amount of Inheritance Tax your beneficiaries will be liable for.

  1. You can leave everything to your spouse, or civil partner in your will without there being any Inheritance Tax. You are also able to pass on unused tax allowance to them.
  2. Give gifts whilst you are alive to loved ones. There are of course some caveats and if you’re not certain, give Everfair a call. But each person can give away £3000 of gifts each year without it being added to your estate. If you don’t use your allowance one year it carries over the next.
    1. Additionally, you can give £1,000 as marriage or civil partnership gifts which increases for grandchildren, great-grandchildren or your own children.
    2. You are also able to give random gifts of £250 to individuals as long as you have not gifted them something else in the same tax year.
  3. Leave part of your estate to charity as this means it will be exempt from Inheritance Tax. If this in turn brings your estate value to less than £325k then that will also be exempt.
  4. Write pensions and life insurance policies in trust. If this is the case then any pay-outs are not considered as part of your estate. Instead they will be passed to your beneficiaries and won’t be liable for Inheritance Tax.
  5. Bequeath your house to your children, stepchildren or grandchildren which will include an additional allowance of £175,000.

If you want help in regard to identifying which of these steps will be relevant to you and your situation as well as implementing any of them, please give us a call or email and one of our advisors will be very happy to share some practical, unbiased and professional advice.

How to prepare for potential changes to Inheritance Tax UK:

by Leave a Comment

Preparing for potential changes to Inheritance Tax UK

2020 has been an expensive year for the UK government; seeing a debt so far of nearly £215bn which is expected to rise to £394bn before the end of the financial year. Compared to the £55bn which the government expected to borrow this is substantial to say the least.

At some point this will need to be paid back, and needless to say, the government will be looking for easy ‘quick-wins’ in regard to recouping some of that money in the spring budget.

Of course, at this stage it is all speculation but it is better to be forewarned so you are able to protect yourself and make informed decisions regarding inheritance and gifts to loved ones.

So what UK Inheritance Tax Threshold changes are likely?

A number of changes in UK Inheritance Tax have been suggested by the All-Party Parliamentary Group (APPG).

  • End of the freeze on the basic nil-rate band. At present there is no tax to pay on estates worth £325,000 or less regardless of whether this is bequeathed to a spouse, civil partner or charity.
  • Abolition of the additional residence nil rate band which currently allows married couples to pass assets of £1 million between them free from IHT in certain circumstances.

These proposals, if enacted, would on their own have a real impact on an individual’s IHT liability as asset values are affected by inflation and the value of the property inevitably increases and therefore so does the IHT due. This is likely to be the case even for many US citizens who are also liable to US estate tax given the current $11.6 million threshold per person there.

It is however also suggested that the UK Inheritance Tax Threshold rate is reduced to 10% on estates of up to £2 million and 20% on amounts over that threshold.

What about Lifetime Gifts and Changes to Inheritance Tax UK?

The rules regarding lifetime gifts, also known as Potentially Exempt Transfers (PETs) are also under review. At present you are able to give a gift to a loved one free of IHT if you live for another seven years.

Instead in 2021 this is likely to be replaced with a lifetime inheritance tax charge of 10% when a gift is made where the gift exceeds £30,000.

Another relief often used in estate planning is gifts out of surplus income. This allows individuals to pass on amounts from their annual income that they do not need to meet their living costs, free from IHT. This relief has also been identified by the APPG as one which should be removed

Perhaps more controversially, the APPG have recommended the abolition of both Business Property Relief (BPR) and Agricultural Property Relief (APR) which at present are both means of passing on assets without the risk of inheritance tax. On top of recent changes and further proposals regarding CGT reliefs available in connection with business assets, entrepreneurs may feel that 2020 has not been a good year from a tax perspective and question if Britain is “open for business”. US citizen business owners will be more familiar with this situation given no relief is available for US estate tax purposes on such assets.

According to the All-Party Parliamentary Group (APPG) Inheritance Tax and Intergenerational Fairness who made the suggestions, removing the reliefs and introducing the flat rates makes inheritance tax easier to understand. However, these changes are likely to bring in a lot of extra revenue for the government but may not be quite so beneficial for you and your family following your death.

So, what next?

Although none of these changes are certain yet, it doesn’t hurt to actually start the conversation to see what can be done to ensure you pay appropriate tax which is still beneficial to you and your estate. It could be that if you are considering a substantial gift to a loved one, you decide to do this sooner rather than later before the tax changes come in.

Some of these changes, if taken forward by the Government, would result in a very different type of estate planning than has traditionally been the case.

For US citizens in UK, this will be equally important, especially whilst the US estate tax exemption remains at its current high level.

To discuss all the available options, give our team at Everfair a call today and we will offer advice on how these changes could affect you if they do come into place in the spring of 2021.