By Louise Misiewicz
Do you know your IHT liability as a property investor?
What tax measures and planning do you need to take?
Continuing the series of articles from recent weeks around a buy-to-let landlord client consultation on inheritance tax, I’m writing Part Four this week for my property investment blog readers.
Looking at Part Four this week, I’m adding more questions in this article that the property landlord client was asked during our consultation meeting, to accurately ascertain his level of IHT liability.
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The next question I asked my landlord client regarding IHT liability was whether any disputes or court actions that may affect the estate have been identified.
This is because any court action, family dispute, or any type of challenge to the estate can make a big difference to its overall value. I informed my client that if he’s aware of a court action, claim, potential dispute then he should identify this and the details.
There could, for example, be a court action in effect before the death of the deceased, such as a claim for damages, the deceased pursuing an outstanding debt, or a claim under the Inheritance Act 1975.
HMRC needs to receive details of any ongoing disputes at the soonest opportunity, and will treat all information given in the strictest confidence, as I assured my buy-to-let landlord client.
The next question to consider around IHT liability for property investors is: Has it been identified whether the deceased had a spouse/civil partner who died before them?
If full details of a predeceased spouse or civil partner have not been identified, the transferable nil rate band may be overlooked or not applied properly, resulting in too much or too little IHT being paid.
I advised my landlord client to thoroughly research the background of any predeceased spouse or civil partner. It’s also important to consider the possibility that the deceased was widowed more than once.
I told my client during the IHT consultation that he should provide full details of any information available in a covering letter with form IHT400, as well as copies of any documentation for HMRC to review in full.
There are other considerations to bear in mind – for example, if Estate Duty, Capital Tax Transfer, or IHT was paid on the first death, I informed my client that relief cannot be claimed as the nil rate band would have been used already.
If the deceased had more than one predeceased spouse or civil partner, my client can only claim to a total of 1oo% of the nil rate band, and a separate form IHT402 needs to be filled out for each spouse or civil partner. It’s also worth checking to confirm that the spouses were legally married, or that the civil partnership was registered. It’s recommended to seek professional advice on the rules and regulations.
Question: Has the domicile of the deceased and surviving spouse/civil partner been established?
I told my client that the term domicile is often misunderstood and is sometimes confused with nationality or residence. Spouse/civil partner relief is limited if the deceased is domiciled in the UK but the spouse or civil partner is not. Find out as much as possible about the the life of the deceased from birth to death.
The law of domicile is of critical importance in the determination and application of IHT, and has an impact on the available relief or exemptions with the surviving spouse or civil partner also affected. The deceased may still be deemed UK domiciled for IHT purposes, even if they have a foreign domicile ruling from HMRC for Income and Capital Gains Tax purposes during their lifetime, as I advised my client.
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Question: Have all the assets referred to in the Will (and other documents) been included in form IHT400?
Assets referred to in the Will may be incorrectly omitted from form IHT400 – for example, where the deceased no longer owned them at the time of death.
I recommended my buy-to-let landlord client to carefully identify all items referred to in the Will, and ensure that they are referred to in form IHT400, paying special attention certain assets where HMRC will want further details, such as if the deceased no longer owned an asset at the date of death, what happened to the asset. HMRC will want to know if the asset was sold, and where the proceeds of the sale went.
Question: Have all assets that the deceased held jointly on their death been identified?
I advised my client that assets held in joint names are not always included correctly on form IHT400 – particularly joint property which passes by survivorship. This then leads to further questions from HMRC.
When looking at joint properties, complete the form IHT400 fully and check with associates of the deceased, check any records the deceased had, and identify all joint owners and their relationship to the deceased. All assets and joint assets should be included for IHT and probate purposes.
Further associated articles around IHT which will be useful for readers include:
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