Tax planning for your inheritance

Planning how to deal with your assets in a tax-efficient manner is an important but potentially complex task. An increasing number of estates will be liable to inheritance tax (IHT) on the owner’s death, so it is vital to consider how your Will can be drafted to reduce the amount of tax that will be taken from your estate after you die. You can also consider whether to make gifts during your lifetime to minimise your IHT liability but this raises other tax considerations. Karen Starkey, one of our specialist Wills, trusts and estate planning solicitors, explains what you need to think about when planning for your inheritance if you wish to minimise your tax bill.

Why should I think about tax now?
The IHT threshold for an individual is £325,000 (also known as the Nil-Rate Band), so if your estate is worth more than that on your death, the value of your estate in excess of £325,000 could be taxed at 40%. Many estates in our pricey part of the world here in Surrey and the south-east will exceed this threshold, particularly given the steep rise in property prices over recent years. 

How can my Will reduce IHT?
You can utilise various available tax reliefs and exemptions in your Will to reduce the tax bill on your death, including:

  • Spouses and civil partners: Gifts made to your spouse or civil partner are exempt from IHT, so the value of any property or share in a property left to your spouse or civil partner will not be taken into account for the purposes of IHT
  • The Transferable Nil-Rate Band: If you survive your spouse or civil partner, the basic threshold available for your estate can be increased by the percentage of the threshold unused when they died. For example, John died leaving an £600,000 estate. He left £130,000 to his son and John’s wife inherits the balance. Only £130,000 out of the £325,000 threshold was utilised, so the unused 60% (£130,000 is 40% of £325,000) is transferrable to the wife’s estate. On her death, her total IHT threshold will be £520,000 (£325,000 plus £195,000)
  • The Residential Nil-Rate Band: An additional allowance is available if you leave one residential property to your direct blood descendants, such as your natural children and grandchildren. This is currently £125,000 rising £25,000 each year to £175,000 in 2020/2021. If you own more than one residential property your executors will nominate which one will qualify
  • Charities: Gifts made under your will to UK charities and political parties are also exempt from IHT; and
  • Will trusts: A carefully structured will trust can protect an inheritance from tax charges. You can leave money or property on trust for your beneficiaries in accordance with your specified wishes, for example, to fund their university education or a deposit for a property.

How else can I reduce my tax liability?
If funds allow, consider making gifts during your lifetime to reduce the value of your estate and the potential IHT liability on death. You can make as many gifts of £250 to anyone you like without them being liable for IHT. You also have an annual exemption of £3,000, so you can give up to £3,000 to someone without incurring IHT (or £1,000 each to three people). You could also consider making a gift known as a ‘chargeable transfer’. Although IHT may be payable if you die within seven years of making the gift, the potential tax decreases each year until it falls outside of your estate after seven years. 

Further reliefs and exemptions may be available via business or agricultural property relief and shared property relief.

Are there other tax implications?
Tax planning for inheritance must include consideration of other taxes, notably capital gains tax (CGT) which can be a trap for the unwary. Importantly, CGT liability dies with the individual but it may arise if you make lifetime gifts.

A gift of property (other than your main home) or an expensive work of art could, for example, give rise to CGT on the increase in value since you acquired it. This means that while a lifetime gift would reduce your IHT liability on death, it could incur an immediate CGT bill when the gift is made. You need to carefully consider whether it makes more financial sense to make a lifetime gift and pay a CGT bill now, or deal with it in your will and save IHT on your death.

Finally, there may also be income tax considerations if you create a trust, as the income from a trust fund is liable to income tax.

This is a highly complex area of law, and to find out about how best to navigate the tax implications you should see a specialist solicitor who specialises in inheritance tax planning.

Help To Buy: Everything you need to know

The Help to Buy scheme was originally introduced in April 2013. Since then, it has helped nearly 170,000 households onto the property ladder. However, as with any such scheme, over time a few issues have started to emerge which buyers need to be aware of. Here, Sarah Trickey, our head of Residential Conveyancing, considers recent research about the Help to Buy scheme, its pros and cons, and what you should look out for.

How Help to Buy works
A Help to Buy equity loan from the Government could help you fund the purchase of your new home. To qualify for the current scheme, you do not need to be a first-time buyer. The home you are buying must be for your own use. It must be a new build and it must cost less than £600,000. You provide at least a 5% deposit, and the Government lends you up to 20% of the property’s value. The balance of the purchase price is then financed with a mortgage from an approved lender. Slightly different rules apply to properties in London.

You must repay the loan when you sell your home, or after 25 years if later. However, unlike a conventional mortgage, the amount you repay is not a fixed amount. Instead, it reflects the ratio of the loan to the value of the property when you first borrowed. So, if your Help to Buy loan was for 20% of the value of your home when you bought it, you must repay 20% of the price you sell it for.

For example, if you are buying a home for £200,000, you must provide at least a £10,000 deposit yourself. The Government will provide up to £40,000 by way of an equity loan, representing 20% of the property’s value, and you fund the balance of £150,000 with a mortgage. If in five years, you sell your home for £250,000, after repaying your mortgage, you are left with £100,000. However, you also have to repay your Help to Buy loan. Instead of repaying the original £40,000, you will have to repay £50,000. This represents 20% of the value of the property when you sell.

The loan is interest-free for the first five years, although there is a monthly management fee of £1. After five years, you pay an additional fee as interest of 1.75%, which will then rise annually by the Retail Price Index plus one per cent. 

Although the principle behind the scheme is very simple, the detail and processes involved can appear complicated. For example, you will need formal confirmation of your eligibility to proceed. Choosing a solicitor like KWW Solicitors which has lots of experience in these types of equity loan will help you avoid delays and potential pitfalls. 

Pros and cons
Almost £9 billion has been advanced under Help to Buy, and the Government considers it a great success. There are certainly several benefits to the scheme:

  • If you only have limited savings and a relatively small deposit, Help to Buy can make it easier to get a mortgage and to buy your own home
  • As you will be borrowing less of the property’s value from your mortgage lender, you may also be able to get a more competitive deal
  • The initial interest-free period can ease financial pressure in the early years of home ownership, when you most need help.

However, the scheme has its critics, and it is important to consider the possible disadvantages:

  • Help to Buy applies only to selected new build homes, which tend to sell for a premium over comparable pre-owned homes. In addition, recent research suggests first time buyers using Help to Buy pay on average 8% more than those buying new homes independently.
  • The amount you must repay depends on the value of your home when you come to sell. This could be good news if property prices go down but if prices go up then you may have to repay significantly more than you borrowed. This could mean having less cash to fund your next purchase.
  • After the initial interest-free period has expired, the cost of borrowing will increase. You may end up paying more than you would under a conventional mortgage. While remortgaging remains an option, you may find fewer lenders willing to provide finance if you are buying with a Help to Buy loan.

You should also be aware that the current Help to Buy scheme ends in March 2021. A replacement scheme will be limited to first time buyers and the properties they can buy will then be subject to regional caps.

Getting the right advice
Help to Buy is not right for everyone, and it is important you consider how suitable the scheme, and any particular property, is for you. Speak to your solicitor early on, as Help to Buy involves some additional steps in the conveyancing process and they can advise you on any risks.

Benefits of a clean-break agreement on divorce

You may feel overwhelmed with the changes you are facing as you go through a divorce, and quite often going from a household with two incomes to one can be a struggle. If you do not own a house or have other assets, it can be tempting to cut costs and ignore seeking advice from a solicitor in relation to a financial agreement. Our family law expert David Anstee explains why this could be a costly mistake.

“A divorce does not stop all financial obligations between spouses. I have met people who come into money years after a divorce, only to face an unexpected claim from their former spouse. You may be on amicable terms now but relations can sour over time, especially if one of you enters a new relationship or comes into new found wealth. You can prevent an unexpected claim at a later date by obtaining a financial agreement known as a clean break order.”

A clean break order is a financial settlement between you and your former spouse that has been approved by the court.  It will severe your financial ties and protect you from a claim over any future assets you acquire.

There are a number of legal cases that highlight the importance of obtaining a clean break order. One extreme example is the case of Nigel Page who won £56 million in the Euro Millions Lottery 10 years after he had divorced. At the time of his divorce he had relatively modest assets and did not obtain a clean break order. His former wife capitalised on this omission and negotiated a reported settlement of £2m.

Another example is the case of Dale Vance. In 2015, Kathleen Wyatt successfully argued she was entitled to apply for maintenance from him even though they had been divorced for more than 20 years. He had not obtained a clean break order at the time of divorce, leaving the door open for Kathleen to bring a claim later when her husband had built up a hugely successful business and had accumulated a vast wealth. 

While the chances may seem small that you will have the luck of a windfall to the extent of Nigel’s, you could still be at risk from losing your future pension provision, future inheritance or future earnings. Nigel and Dale could not have anticipated at the time of their divorce how costly their oversight would be.

David Anstee says: “Obtaining a clean break order is a small investment in time and money now to have that piece of mind for your future. It is a relatively straightforward process and normally does not involve you having to go to court.”

For a clean break order to be made, the court must be satisfied that each person entered the agreement in full knowledge of the other’s financial position. This means  both parties to the marriage must provide a full and frank disclosure of their assets and liabilities. David Anstee has a wealth of experience in clean break orders and can represent you throughout the process, advising you on the terms that should be included to ensure your future assets are fully protected.

This article is for general information only and does not constitute legal or professional advice. Please note the law may have changed since this article was published.