15 July 2019
In this month’s Q&A we look at inheritance tax, charitable donations to schools and the tax implications on a loan from a company.
Q. If my wife and I give our house to our children but continue to live in it, will inheritance tax be chargeable on the property when we die?
A. The inheritance tax residence nil rate band (RNRB), which is currently being phased, is designed to help people in your position to pass on the family home to children or grandchildren, tax-free after their death.
It is to be noted that as you would be continuing to live in the home, gifting your house would be considered a Gift with a Reservation of Benefit (GROB) so if you die still living in the home it will continue to form part of your estate and that a new, higher threshold would apply to the family home at death.
Broadly, in the situation where someone dies on or after 6 April 2017 and their estate is above the basic inheritance tax threshold (currently £325,000), the estate may be entitled to an additional threshold before any inheritance tax becomes due. The extra amount for 2019/20 is up to £150,000 and this will increase to £175,000 in 2020/21.
The additional threshold can be added to the basic inheritance tax threshold of £325,000 if the person and their estate meet the qualifying conditions. This means that from 2020/21, it should be possible for a married couple or civil partners to pass on a family home worth up to £1 million to their direct descendants.
The amount of the additional threshold due for an estate will be the lower of:
- the value of the home, or share that direct descendants inherit
- the maximum additional threshold available for the estate when the person died
HMRC’s guidance Inheritance tax: additional threshold (RNRB) provides further information. Always seek professional advice before entering into any arrangement where the main purpose, or one of the main purposes, is to obtain a tax advantage.
Q. My child’s school is asking parents to make one-off donations to help with much-needed school funds. If I complete a gift aid form for my donation, will I be able to claim tax back on the payment?
A. If the school is a charity, registered either with the Charity Commission or with HMRC, you can make gift aid payments to them – both regular and one-off payments.
Under gift aid your donation is treated as being made net of basic rate tax (at 20%) and the charity claims the tax back from the government. So, if you make a donation of £100 under the Gift Aid scheme and you’re a basic rate taxpayer, the charity is able to claim back tax of £25 from the government, which means the charity receives £125, but it costs you only £100. A higher rate taxpayer can claim 20% (the difference between the higher rate of tax at 40% cent and the basic rate of tax at 20%) as a tax deduction on the total value to the charity of the donation. So, on a gift of £100, a higher rate taxpayer can reclaim £25 (20% of the gross donation of £125). The claim is usually made via the individual’s self-assessment tax return.
Q. I borrowed some money from my company to lend to my sister. She is paying it back in monthly instalments over three years. I am the sole director and shareholder of the company and I am not charging my sister interest on the loan. Are there any tax implications I should consider?
A. The tax implications for the company are that the loan is deemed to have been made to an associate of a participator in the company and as such, it will be subject to what is commonly referred to as the ‘section 455 rules’. Broadly, these rules mean that the company will have to pay tax at 32.5% on the amount of the loan outstanding nine months after the accounting year-end of the company. When the loan has subsequently been repaid to the company, HMRC will refund the tax paid.
There is an exception to this, namely where a loan does not exceed £15,000, but only when the shareholder does not own more than 5% of the shares.
If an employee or a relative of an employee receives an interest-free loan from an employer, this will be a benefit-in-kind for the employee. Interest at the ‘official rate’ (currently 2.5%) is calculated, and this deemed interest is subject to tax. However, there are exceptions to this tax charge where:
- the loan is a ‘qualifying loan’;
- a qualifying or non-qualifying loan is less than £10,000; and
- the employee can show that they received no benefit from the loan to the relative.
For further information about these topics, please call Alison Henshaw on 0191 567 8611 or e-mail firstname.lastname@example.org.
As one of the leading firms of accountants in the North East, with offices in Newcastle, Sunderland and Jarrow, we have the expertise to advise you on a wide range of tax-related issues. If you would like to speak to one of our local experts, please call 0191 567 8611 or e-mail email@example.com.