IHT myth-busting
Myth: I won’t pay any IHT on my business or company
Fact: Unless Business Relief is available in full, the value (or part) of a business can be charged to IHT creating a significant liability.
For example, if you have grown a £50m business that you would like to transfer either as part of retirement or estate planning and have not made use of Business Relief, this could create a 40% IHT liability of £20m.
What can you do: Business Relief allows for the transfer of businesses during your lifetime or on death without incurring a significant IHT liability. Business Relief reduces the value of a transfer for IHT purposes where there is a “relevant business property” such as a sole trade, partnership share, shares in an unquoted trading company, or certain types of land, buildings, plant, and machinery used in the partnership or company.
The reduction is either full (100% relief) or partial (50% relief) depending on the business asset in question.
Business Relief can be prohibited or restricted, for example, if the business holds or makes investments or deals in land or property. The position will be dependent on the facts of each specific business, its structure, and operations – there is no one-size-fits-all that confirms or denies the availability of the relief.
Pitfalls and issues in obtaining Business Relief that we help clients navigate include:
- Cash stockpiled in a company, which HMRC can deem to be an investment rather than a trading asset, and so can be used as a reason to restrict relief. Cash of 25% of turnover or more could jeopardise an entire Business Relief claim, subjecting the full company value to IHT.
- The business’s group structure can prevent relief from being applied to trading subsidiary companies because of how the legislation, case law, and prevailing guidance treat holding and intermediate holding companies.
It is therefore vital to check if you have a business or company (especially one which comprises a significant part of your estate), your available Business Relief is not prohibited or restricted in line with the UK’s IHT legislation, case law, and HMRC guidance and adjustments made, if needed, to maximise your claim.
Myth: Surviving the “seven-year clock” is all I have to worry about if I want to give assets to my children in my lifetime
Fact: Gifts of chargeable assets (such as shares and property) during your lifetime are also exposed to capital gains tax (CGT), risking a significant tax charge if the value of the asset has risen since you acquired it, and a double tax charge should the donor not survive seven years from making the gift.
There are also anti-avoidance provisions to prevent you from retaining benefits from gifted assets, or assets acquired via gifts of cash, so lifetime gifts can require careful thought to be an important part of IHT planning.
What can you do: Making gifts during your lifetime can be IHT-efficient as they can remove value from your estate and may become fully exempt from IHT provided you survive seven years from making the gift and retain no benefit (either from the gift itself or from an asset acquired from the gift).
However, gifts of most assets that are not cash will also have CGT considerations, as such gifts are charged to CGT at market value. This can result in a “dry” CGT charge where there is CGT payable but no cash released via a sale to pay it. There are also additional reporting requirements to HMRC on sales of certain UK property.
For example, if you wish to gift to your children a £5m property which has always been a rental property investment and which was acquired for, £2m several years ago, there would be the following tax considerations:
- CGT at 28% on the £3m gain, resulting in £840,000 CGT to pay (reducing to £720,000 from 6 April 2024 when the higher CGT rate reduces to 24%), with a specific property account required to be submitted to HMRC within 60 days of sale; and
- 40% IHT exposure of £2m should you not survive seven years from the date of death, albeit this could be gradually reduced by taper relief.
It is therefore important to consider your IHT and estate planning in the context of wider tax challenges and wealth management planning. There may be available reliefs to be utilised or alternative routes to achieving your objectives so it’s always worth speaking with an adviser.
Myth: I have to wait seven years for a gift to be outside my estate for IHT
Fact: Gifts of capital between you and another person are deemed potentially exempt transfers (PET) for IHT and do require you to survive seven years from the date of the gift, and not to reserve any benefit directly or indirectly from the gift, to become fully exempt from IHT.
However, not all gifts are PET and you may have scope to make immediately exempt gifts if that is appropriate for your situation and wishes.
What can you do: There are several exemptions from IHT that should be factored in as part of planning. While some of these are insignificant in the context of a multimillion-pound estate (for example, the annual exemption of £3,000, small gifts exemption of £250 per person per year, up to £5,000 on the marriage of a child and up to £2,500 on the marriage of a grandchild), there are two possibly less often used exemptions which can have a larger impact:
1. Gifts to charity
Gifts to UK charities or charitable trusts are immediately exempt from UK IHT and there is no limit to the exemption. Some other bodies such as political parties, housing associations, and heritage bodies can also be completely exempt from IHT. This has the added benefit of potential income tax relief too. If the gift qualifies for gift aid, you should be able to claim higher rate of income tax back through your self-assessment income tax return.
However, gifts to non-UK charities or other bodies that are not covered by the exemption are chargeable transfers for IHT, so if philanthropic giving is part of your desired legacy and estate planning, it is worth taking advice to confirm you will not end up with an unexpected IHT bill as a result.
2. Gifts out of income
Normal expenditure out of income is immediately exempt from IHT. There are several important conditions to be met for gifts to be considered “normal expenditure”, for example, that a habitual pattern is established, there is no impact to the donor’s standard of living etc.
For those with significant income levels above both necessary and discretionary expenditure, making gifts which qualify for this exemption can be extremely valuable to pass on surplus growth immediately, rather than have more capital accumulate in the estate where it can be exposed to 40% IHT.
This is an extremely valuable relief and care should be taken to ensure the correct calculation of excess income as well as documentation to evidence the position to HMRC if required.
Myth: If I have assets outside the UK they are not subject to UK IHT
Fact: UK IHT is currently charged on all UK assets, and on the worldwide assets of UK domiciled or deemed domiciled individuals.
Pending further HMRC consultation, following the Chancellor’s 2024 Spring Budget announcements, there may be changes to the scope of UK IHT but these are not expected to take effect until 6 April 2025.
What can you do: If you are domiciled or deemed domiciled in the UK, your IHT exposure may be greater than expected as worldwide assets should all be within the scope and offshore investments do not escape.
If you are unsure of your domicile or deemed domicile position, it is important to review this as a starting point to understand your potential UK IHT exposure.
Alongside this, there may be planning opportunities, available reliefs, and wider wealth management and personal tax options to help you understand and manage your UK IHT position so it is worth speaking with a tax adviser.
Myth: I don’t live in the UK so I don’t need to worry about UK IHT
Fact: UK IHT is currently charged on UK assets, and on the worldwide assets of UK domiciled or deemed domiciled individuals. It can therefore apply to individuals who have never lived in the UK, or who have left the UK to relocate overseas, depending on their circumstances and assets.
Similarly to UK-domiciled individuals, following the Chancellor’s 2024 Spring Budget announcements, there may be changes to the scope of UK IHT for individuals who reside outside of the UK but own UK assets, these are not expected to take effect until 6 April 2025.
What can you do: If you own a UK asset, for example, UK real estate, company shares etc, over the current nil rate band of £325,000 (within which IHT is charged at 0% per person) you should review your potential UK IHT exposure, the reliefs or allowances which may be available, interaction with your country of residence’s tax regime and your options for planning to reduce or manage your UK IHT exposure.
Myth: It’s really hard to become a non-UK resident for tax purposes
Fact: The UK has a Statutory Residence Test for determining individuals’ residence. While care needs to be taken to understand and navigate the rules, they do offer clarity for individuals to understand what is required when it comes to their UK residence position.
Thought also needs to be given to the interaction between maintaining non-UK residence (the practical requirements and the associated UK tax implications) and acquiring a residence in a different country with its own tax laws and compliance requirements, including whether there is a tax and social security treaty with the UK and how it would apply.
Becoming a non-UK resident does not in itself remove you from the scope of UK IHT but if a permanent move overseas is being considered, this could have an impact.
What can you do: If you are considering relocating away from the UK, you will need to understand how that will impact your residence position both in the country of departure (UK) and your new country of residence.
Obtaining knowledgeable professional advice can be important here, to avoid expensive tax pitfalls in one or more countries and to have a full understanding of your potential tax position to help you make an informed decision.
We are a truly global firm allowing us to work closely with our colleagues overseas to help clients navigate the tax legislation for their respective countries and how they interact.
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