Inheritance tax to be simplified

The Office of Tax Simplification (OTS) have undertaken a detailed review of Inheritance Tax (IHT), which is perceived by many as a complicated tax. The government normally takes account of OTS recommendations and their report is likely to lead to future changes to the rules. We will keep you posted as the changes may necessitate amending your will or further planning to pass on your wealth.

There are also numerous misconceptions about how the tax operates, particularly in connection with gifts during someone’s lifetime. One of the proposed changes is to shorten the period for lifetime gifts to be exempt from 7 to 5 years. The OTS also recommended replacing the current £3,000 annual allowance, marriage allowances and the exemption for regular gifts out of income with a £25,000 personal allowance each year.

NO TAX FREE CGT UPLIFT ON DEATH

Although the OTS were tasked with simplifying inheritance tax, they also considered the interaction with CGT as many asset transfers potentially have both CGT and IHT implications. Currently there is no CGT on assets transferred on death and the recipient inherits the asset at its market value.

It has been suggested that the capital gains tax uplift on death distorts decision making relating to assets that benefit from an exemption from Inheritance Tax. Where an individual holds such an asset that has risen in value, and is considering transferring it during their life, they are often advised to retain it until death rather than giving it away during lifetime, because of the tax benefits.

Where a business is retained until death, any potential capital gains are wiped out and there is no Inheritance Tax to pay. This could lead to an asset being retained rather than being transferred to the next generation at the time that is right for the business.

We will again monitor the progress of this proposed change as it is likely to have significant implications on family business succession planning.

IHT RELIEF FOR BUSINESSES AND FARMS

There is currently a very generous 100% relief from inheritance tax for passing on businesses and farm land during lifetime and on death. The rationale for Business Property Relief (BPR) and Agricultural Property Relief (APR) is to enable businesses to be passed on without the need to sell off assets to pay the IHT due on the transfer.

Currently if a business is wholly or mainly for the purpose of investment, then it will not be eligible for BPR. This is not always straightforward to determine.  Many estates include both trading and non-trading business assets, and establishing whether this test is met can be difficult to establish. The ‘wholly or mainly’ test is generally considered to be a greater than 50% test and the OTS are suggesting that the test should be aligned with the much stricter 80:20 test that applies for CGT gift of business asset holdover and entrepreneurs’ relief. If introduced many more business transfers would be liable to IHT.

On the positive side the OTS have recommended that IHT business property relief should be extended to include Furnished Holiday Lettings aligning the tax treatment with that of Income Tax and CGT where they are treated as “trading” providing that certain conditions are met.

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New inheritance tax rules for passing on the family home started on 6 April 2017

TRADING OR A CAPITAL GAIN

New inheritance tax rules for passing on the family home started on 6 April 2017. This new relief should be taken into consideration when drafting your Will and we can work with your solicitor to make sure your Will is tax efficient.

From 6 April 2017 an additional nil rate band of £100,000 is now available on death where your residence is left to direct descendants. This is in addition to the normal £325,000 nil rate band and will increase over the next 4 years to £175,000 in 2020. This additional relief is however restricted If your assets exceed £2 million.

The rules are fairly complicated.  Contact us, we can review your personal circumstances to ensure that you take advantage of all the relief that you are entitled to.

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Furnished holiday letting business is not a business for inheritance tax (IHT) relief

holiday let

A furnished holiday letting business is treated as a trade for most tax purposes. For example, capital allowances are available on furniture, and CGT entrepreneurs’ relief is available on disposal of the business.

However, a recent tax case has determined that a holiday letting business in Cornwall did not qualify for inheritance tax business property relief.

Despite the provision of a range of services to customers, the judge agreed with HMRC that the business was wholly or mainly that of making or holding of investments and as such ineligible for any relief from inheritance tax.

Note that the restricted deduction for interest that started to apply to buy-to-let businesses from 6 April 2017 does not apply to furnished holiday lets.

There are special rules for a rental business to qualify as furnished holiday lettings, in particular the property must be available for letting for 210 days a year, and actually let for 105 days.

Contact us if you need help with the tax implications of your furnished holiday letting business.

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Ten reasons why you need a specialist accountant for your hospitality business

Ten reasons why you need a specialist accountant for your hospitality business

Saint’s Tourism & Leisure (ST&L) have many years experience in advising clients who run hotels, guest houses and holiday parks. Here are ten reasons why you need ST&L as part of your professional team.

1. Time of purchase

Whether you’re buying a hotel, guest house, or holiday park, we need to be involved at an early stage of your negotiations, and certainly before you sign a purchase contract.

We can give advice on the best apportionment of the purchase price for you, the stamp duty implications of the apportionment, and claims to tax relief via capital allowances, including those on items fixed into the property such as sanitaryware in en-suite bedrooms, etc.

2. Keeping an eye on gross profit margins

Amalgamating sales and all the associated purchases to produce one overall gross profit and GP% for the business may seem simple. But such a performance indicator can be masking the financial performance of the different sides of your business.

Food and beverage sales have associated direct costs, and margins on these specific areas can be masked by room sales which carry fewer direct costs in the form of guest supplies, laundry and booking commissions.

3. Specialist format accounts

While we offer a simple set of accounts for houses, hotels and holiday parks are diverse businesses with effectively lots of different income streams.

It is essential to see how each part of the business is doing, and to this end, we provide specialist format accounts for guest houses, hotels and holiday parks which show key performance indicators and the key cost areas.

Our accounts contain lots of graphs and pie charts so you can easily understand what the figures mean for your business.

4. Departmentalised payroll reporting

In a service led industry, payroll costs are one of the largest outgoings and need to be carefully monitored and controlled. In addition to processing payroll for PAYE and national insurance, we also provide departmentalised payroll reports, showing the cost of running each operation within your business.

Auto-enrolment pension costs also need to be factored into the overall cost of your staffing costs. We can set up a scheme for you, and make the necessary payments to your pension provider on your behalf.

5. VAT issues specific to tourism businesses

Advance guest deposits, cancellation fees, and gift vouchers are all part of hospitality business transactions.

There are special VAT rules regarding these types of transactions, and getting them wrong can mean either overpaying VAT or the risk of penalties for underpayment.

6. Dealing with tips and troncs

Guests like to leave gratuities to staff for good service. You, as an employer, probably want to ensure that tips are fairly shared between your staff, and the tips are subject to as few deductions as possible.

There are various ways to legitimately deal with tips, such as using a troncmaster, whereby tips will not be subject to national insurance contributions.

7. Benefits in kind specific to hotel staff etc.

Providing living accommodation to staff and meals while working can result in a tax charge for a benefit in kind.

We can assist with understanding the rules to reduce taxes and charges where possible, and complete the necessary tax year end P11Ds.

8. Business Plans and helping to raise finance

Obtaining funding has been difficult since the credit crunch, and financial institutions now look more closely at the financials.

ST&L can assist in reviewing the required figures and, if necessary, putting together a cashflow forecast or business plan specific to a hospitality business.

9. Tax Strategy on sale

The time of sale is another critical time to get ST&L on board. We can assist in preparing accounts specifically for the purposes of presenting the business in the best light for the purposes of sale.

Thereafter, we advise on the best apportionment of the sale price, how to minimise capital gains tax liabilities, and how to deal with capital allowances.

10. Inheritance Tax (IHT)

If you have a business in your estate on death, Business Property Relief (BPR) should be available, which reduces the value of your estate for IHT.

For many years now, HMRC have argued that a Holiday Park is effectively a rental business and denied BPR. ST&L’s Park Format Accounts are key to providing the necessary evidence that Park income is derived from services as well as pitch fees.

Get in touch with us to arrange a coffee and a chat with Saint’s Tourism & Leisure

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Reducing your exposure to inheritance tax – the value of working with a tax specialist

inheritance tax

Inheritance tax (IHT) has become an increasingly thorny problem for many individuals, and especially property owners over the past few decades. So it’s a topic that many of us will benefit from understanding in more detail.

In our last blog post, I helped to explain a little around how IHT works – and to iron out some of the more common misconceptions around the impact it can have on your wealth and tax planning. You can read more on these popular IHT misunderstandings here.

In this post, I’m going to grab the bull by the horns and show you how – with proper forethought, careful planning and the expertise of a professional tax adviser – you can reduce your exposure to inheritance tax and make sure you’re doing the best for your wealth, and the wealth of future generations.

The value of working with a professional adviser 

So, what IHT tax-planning tips should you be aware of? As a Saint & Co partner and tax specialist, I deal with a wide range of clients, all of whom want to know their exposure to IHT is as low as possible.

Every person’s tax position will be unique, and that’s why a big part of my job is sitting down with you to learn about your situation, your financial background and your other business and investment interests. Based on the many years of experience we have of helping private individuals to maximise the efficiency of their tax planning, here are my ten top tips for minimising your IHT costs.

10 important ways to minimise your IHT costs

  1. Summarise your assets and liabilities to see where there are planning opportunities. No two estates are the same and what may be suitable planning for one individual may not be suitable for others. For example, there are some financial products available which can give an immediate discount once invested – with the outcome that the balance of the investment falls outside of your estate after the seven-year threshold.
  2. Review your IHT investments regularly. Wealth planning has to be constantly monitored to make sure your plan is still effective and working as hard as possible for you. For example, if you’ve invested in shares with the Alternative Investment Market (AIM) or have applied for the Enterprise Investment Scheme (EIS), you need to ensure that you’re still eligible for Business Property Relief (BPR) – companies are taken over and can be listed on another stock exchange, which can result in you losing your eligibility to relief.
  3. Review life assurances and pensions. It’s important to review any life assurance policies or pension entitlements to ensure they’re written under trust. If they’re not, this can potentially create an additional inheritance tax problem, which you’d be best to avoid.
  4. Review your wills. Once you’ve created a will (or wills), it’s vital to review this document on a regular basis to make sure the will is still tax efficient and fully meeting your needs. This is especially important following the introduction of the residence nil rate band as a trust may result in this relief being lost.
  5. Look into a trust or family investment company. Once you’ve reviewed your situation, it’s worth considering whether a trust or family investment company should be part of your planning. By putting your assets and investments into this structure, it’s possible to limit some of your tax liability and cut your final tax bill.
  6. Spend all your money above your nil-rate band (NRB). Obviously, this will be totally impractical for the majority of people as we all need some assets to produce income for us to live on a day-to-day basis. But it’s available as an option and the theory should not be forgotten. Wherever possible, it’s sensible to gift assets down a generation – or maybe two generations – where your life expectancy is more than seven years.
  7. Set up power of attorney. The future can be uncertain, so it’s advisable to have a power of attorney in place with a relative or friend. With this power of attorney, they can then deal with your financial affairs and healthcare affairs, should you become incapable of doing so yourself.
  8. Consider the implications of paying for long-term care. If you need to pay for long-term care (should you require it at any point in the future) the assets in your estate will be taken into consideration by the local council when assessing your liability to pay for care. Investments should be reviewed to ensure they’re not only tax efficient but also council efficient.
  9. Don’t look at IHT in isolation. As with most taxes, it’s very important not to look at your IHT liabilities and planning in isolation from other taxes. You will always need to consider the effects of any planning, both on capital gains tax and on your own personal income tax liabilities.
  10. Work with a professional tax adviser. This may seem obvious, but you’ll achieve the best possible tax position by working with a tax adviser that has the experience and insights needed to plan your taxes effectively. It’s not just a case of minimising tax: there’s the ever-present need to make sure tax planning achieves your personal and business goals as well – and that’s where professional advice really is invaluable.

Talk to us about your IHT planning

At Saint & Co, our aim is always to help you achieve the best possible outcomes from your tax planning and wealth management. If you think you’re likely to be affected by any of the IHT issues we’ve highlighted, please do come and talk to us.

Get in touch with us to arrange a coffee and a chat with our Tax team.

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Getting the correct view of inheritance tax – and how to reduce its impact

35757702 - a farm in the lake district national park, cumbria, england, uk.

Property prices have been on the rise in the UK for some time – although figures published in the recent Spring Budget do suggest that this stratospheric price rise is gradually beginning to slow. But the huge increases in house prices we’ve seen over recent decades have been one of the main reasons why inheritance tax has started to hit more and more ordinary people.

Inheritance tax (IHT) is the money you pay to HM Revenue & Customs on assets in your estate – and with property prices so high, a good deal more of us have been getting stung for IHT.

So, if you’re likely to be hit by inheritance tax, what will the impact be? And how can you reduce that impact as much as possible through clear tax planning?

Paying the right amount of IHT

No-one wants to pay any more tax than is necessary. But we’re all duty bound to pay the right amount of tax for our circumstances. So what I’ll be talking about in this post is focused around legitimate and wholly legal tax planning – I’m not looking at the kinds of convoluted tax schemes you may have heard about in the news, and I’m certainly not going to talk about using any offshore planning in Panama!

There’s a very clear and immovable mantra when it comes to tax:

We can plan to avoid tax but not to evade tax!

Tax planning that helps you avoid certain tax liabilities is completely legal, above board and acceptable. Tax evasion, where you knowingly make plans to evade paying taxes you’re liable for, is illegal activity.

Firstly, I just want to be clear that inheritance tax is payable by UK domiciliaries – basically, if you were born in the UK you’re likely to be domiciled in the UK. If you were born overseas it’s possible that you may have a non-UK domicile, but its possible to become domiciled based on residence within the UK.  If you are non-UK domiciled, you may still be liable for tax on UK assets.

So, with our foundations clearly outlined, what I’m going to do in this blog post is look at a few of the common IHT misunderstandings I’ve come across when dealing with clients over the last few years – and help you avoid the same challenges.

Misunderstanding 1: I’m leaving all of my estate to my family, so there won’t be any inheritance tax to pay

This is actually only true in part. If you’re a married couple or in a civil partnership, you can leave your estate to each other and there won’t be any inheritance tax on those assets.

The reason for this is that there’s a specific IHT relief for assets passing between spouses. However, where your estate exceeds the nil rate band of £325,000 and those assets are left to other family members or friends, inheritance tax will be payable at a rate of 40% – which could amount to a fairly hefty tax bill.

Misunderstanding 2: I won’t have any inheritance tax to pay on my property overseas

This is actually false – IHT is payable on any worldwide assets. In fact, you may even have tax to pay in the country in which the property is situated.

So, taking this into account, it’s essential to make sure you take legal advice in the country where your overseas assets are located. Some overseas properties are owned in a company to ensure they’ll pass to the beneficiaries you intend – and in many cases to reduce any potential overseas tax. Even so, they’re still taxable in the UK.  In addition a foreign Will should be used to ensure your assets pass in the manner that you’ve planned.

It’s probably helpful at this point to outline what makes up an estate. Here’s a quick overview of the main assets that are likely to appear in your estate:

  • All property – wherever these properties are situated in the world
  • The contents of these properties
  • Jewellery
  • Cars
  • Life assurances
  • Stocks and shares
  • Bank and building society accounts, including ISA’s
  • Current accounts in a sole trader or partnership business
  • Directors loan accounts in a personal company
  • Life interest in a trust
  • Less any liabilities such as funeral expenses, mortgages, loans etc

It’s worth noting that some of the above may have reliefs or exemptions available, so it’s always sensible to check with a professional adviser.

Misunderstanding 3: My joint estate is less than £1m, so I won’t have any inheritance tax to pay

This statement is based on the announcement in Budget 2015 that a married couple will be eligible to a new residence nil-rate band, which when added to the existing nil rate band of £325k will give each of you £500k – £1m between both of you.

But the intricacies of the new legislation mean that, in certain circumstances, the full £1m may not be available. Let’s take a quick look at this in more detail:

  • Firstly, the new relief is only being introduced from April 2017. It starts at £100k, increasing to £125k from 2018, £150k from 2019 and £175k from 2020.
  • The relief only applies where your property is left to one or more lineal descendants – so that will include your children, stepchildren, adopted children or grandchildren. If it’s left to a sibling there won’t be any relief available and those with no children won’t be able to benefit from the relief.
  • If the value of your residence is less than the resident nil-rate band (RNRB) then the relief is restricted to the value of the property.
  • Where more than one property is owned, executors can nominate which property to allocate the relief against – but only where it’s been used as a main residence. So buy-to-let properties and furnished holiday lets won’t qualify. Also, if you’ve made a capital gains tax election for principle private residence relief, this won’t apply for IHT purposes.
  • If the value of your estate exceeds £2m before any reliefs then the relief will be tapered until after £2.2m in 2017/18 no relief will be available. The figure in 2020 will be £2.35m.  This is likely to affect many business people who are likely to qualify for BPR on the value of their interests in their business – whether that be a company, sole trader or partnership, but when their estate is totalled before the relief they could end up losing it altogether.
  • If you’ve downsized the scale of your property, there are provisions to enable the relief to continue. But, again, the small print needs to be checked if you’re going to do this to make sure you don’t jeopardise the relief.

Misunderstanding 4: I’ve given away assets so I wont have IHT to pay on them

This is true in the right circumstances. Provided that you survive seven years after making a gift, the value of the asset will fall outside of your estate.

However, you need to be very careful where gifts are made which you continue to benefit from. These are known as gifts with reservation of benefit (GROBS) and will continue to form part of your estate. An example of this may be a property that you gift to a child but where you continue to occupy the residence.

This kind of scenario wouldn’t be effective for inheritance tax as the value would still be brought into your estate upon your death. That isn’t to say that you shouldn’t make such gifts as they may be useful for other reasons, but you must remember that it won’t reduce your inheritance tax liability unless you pay a market rent for the use of the asset/property.

Misunderstanding 5: I can only give away £3,000 per annum tax free

There are several inheritance tax reliefs available for gifts, and the complexity of this can end up confusing people. So let’s take a look at the main available reliefs.

  • The first one is that you can give away up to £3,000 IHT-free each year.  However, that doesn’t mean this is the maximum you can gift. It just means that if you don’t survive seven years and the gift comes back into your estate that the first £3,000 of the gift won’t be taxable.
  • If one year’s £3,000 gift allowance isn’t used, it can be carried forward for one year only. If you’re a married couple, or in a civil partnership, you can gift away £6,000 per annum.
  • There’s an IHT exemption of small gifts of £250 or less that you make to individuals.
  • Gifts that you make in connection with a marriage are also potentially exempt
  • £5000 for parents
  • £2500 for grandparents
  • £1000 for all others.
  • Gifts out of income – if you can show that you have surplus income, and that this is used to make regular gifts, then these will fall immediately outside of your estate and won’t be dependent on the seven-year rule. Examples of this include paying regular contributions towards your grandchildren’s education, or the running of cars etc.

Now you understand inheritance tax

Having ironed out the popular misconceptions around inheritance tax, I hope you’re now feeling more confident about the possible impact of this tax and the importance of long-term tax planning.

In the next part of this blog series, I’ll be running you through some of the most effective ways to plan to reduce your inheritance tax liabilities – and to make sure you’re protecting as much of yours and the next generation’s wealth.

If you’d like to talk to our Tax team about your inheritance tax, please do get in touch to arrange a chat over a coffee.

 

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Inheritance planning and giving tax-free gifts

If you’re looking to gift money or property to your family, it’s vitally important that you consider the impact of inheritance tax and capital gains tax on these gifts.

The tax implications can be complex, but with the right advice and the right inheritance planning, it’s possible to save up to 40% of your inheritance tax costs using the currently available reliefs and exemptions.

… Read more →

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4 ways to improve your farming business: 4. Plan for the future and succession

There’s a strong tradition of farming being a family affair. And when you’re running a family business, you’re no longer just managing a farm; you’re also the custodian of an ongoing farming enterprise that must provide for future generations.

So it’s hugely important to take a long-term view when making business decisions about your farming business, and to put a serious amount of consideration into the impact of any changes you put in place.

And that’s why clear, well-informed planning is such a vital part of your farm management.

… Read more →

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4 ways to improve your farming business: 2. Understand tax and capital gains

Getting a better understanding of your tax liabilities is a fundamental tool in improving the financial success of your farm or agricultural business.

As we highlighted in our previous blog, it’s vital that you have a clear focus on maintaining positive cash flow and have profitability built into your farm’s business model.  And one of the key ways to reduce your costs and increase profits is to be on top of your tax and applying a consistent tax strategy for the business.

So, what impact does tax have? And how do you plan ahead to minimise the effect of tax costs on your farm’s profits?

… Read more →

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4 ways to improve your farming business

Farming isn’t an industry for the faint-hearted. It’s tough, physical work that requires strength of spirit and real tenacity to keep the business stable and turning over enough revenue to keep the farm afloat.

Here at Saint & Co, we appreciate that it can be difficult to drag yourself away from the day-to-day running of your farm in order to look at the underlying financial and strategic elements of your farming business.

But, take it from us, finding the time in your working week to consider the effectiveness of the business elements of your farm is the best way to secure your long-term future and profitability.

So, with this in mind, we’ve highlighted four key areas that every ambitious farmer should have on their business to-do list.

… Read more →

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