The first rule is to not waste allowances. For a married couples/civil partnership, the nil rate band (NRB) and residence nil rate band (RNRB) give relief up to £1m and yet we see cases of property being modestly valued (especially where no formal valuation is obtained) which is only going to give a capital gains tax (CGT) liability later. There are strict guidelines for the valuation of assets on death but there is a degree of subjectivity with property and not utilising the base cost uplift for capital gains tax purposes, where there is no Inheritance Tax (IHT) liability due, is wasteful.
The same applies to business property relief (BPR) and agricultural property relief (APR). These come with a hugely attractive CGT base cost uplift. This is again wasted if left to the surviving spouse, particularly if a sale is envisaged, and so a deed of variation to skip a generation could be more beneficial.
Finally on this subject, leaving half of a very expensive house to a surviving spouse and taking the value of that estate over £2m means you start to lose the residence nil rate band worth £140,000 in tax. Far better, possibly, to just give the survivor a right to occupy. A deathbed gift is also effective in getting an estate below £2m for RNRB purposes.
Secondly, choose your tax! IHT is 40% and is fairly simple! Capital Gains Tax 10-28% is an improvement and Income Tax 19-45% you don’t want to get wrong!
In theory there is no choice. IHT of 40% is payable on the chargeable value of the estate at the date of death. However, as highlighted in our August blog, with the increase in property values, a taxable profit can arise post death and with careful planning it is not IHT but a Capital Gain. Further careful planning can then take this to a capital gain for the beneficiaries rather than the Estate.
Income tax perhaps does not come into it at all but there are things to consider in the case of a terminal illness. In particular where the soon to be deceased is in control of their income we have been able to exchange a potential considerable personal tax liability for no IHT payable.
This brief blog is in no way exhaustive on the subject of tax planning, but two other considerations should be noted.
Loss on sale relief is fairly well known. IHT is payable on the market value at the date of death and there are reliefs available where property or qualifying investments are sold within 4 years or 12 months respectively for less than their death value by an appropriate person. Although a simple concept there are complicated rules to follow to get the right answer.
Gifts to charity can sometimes be overlooked but can be a really useful exemption. Such gifts reduce the taxable estate and if they amount to 10% of the net estate (or component thereof) the IHT rate is reduced to 36%. It is possible to use a deed of variation to increase or make an effective charitable donation and this can, in certain circumstances, produce surprising results.
Of course, most estate planning should take place during lifetime, however, a probate practitioner that understands all the taxes can still make a difference, post death, to ensure the most tax efficient approach is made by the Personal Representatives.
The next step
If you have any questions or are interested in further advice, please contact your usual UHY adviser, or send a contact form through the below link.
