By Louise Misiewicz
What are you doing to protect your property portfolio?
Are you up-to-speed on new inheritance tax legislation?
I’m adding another article to the series of blog posts from a Wealth Planning Review meeting with a property landlord client, and the consultation on inheritance tax that followed as a result. This week I’m writing Part Six for the property tax accountancy blog readers here, as a useful IHT Toolkit resource.
Now looking at Part Six, I’m continuing with further questions which I asked my property landlord client during our meeting, to establish his level of inheritance tax liability and how to protect his portfolio assets.
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Question: Have all pension scheme lump-sum death benefits been included on form IHT409?
According to HMRC, all lump sum benefit details paid from deceased’s pension scheme should be included on form IHT409 – irrespective of whether or not they are chargeable for inheritance tax purposes.
As I informed my landlord client, this can often be overlooked, and it’s worth contacting each of the deceased’s pension scheme providers to see if a lump sum death benefit has been paid, what the amount paid was, and the beneficiary of any payment.
The pension scheme providers will be able to advise on whether any of the payments made were discretionary, and I advised my client to provide HMRC with copies of any evidence obtained.
Some lump sum death benefit payments are chargeable to inheritance tax whether or not payment is made to the estate, and if all information isn’t provided in full, this can lead to further enquiries from HMRC.
Question: Have the deceased’s pension arrangements been checked to establish if there were any transfers, disposals, contributions or changes made in the two years before death?
I informed my buy-to-let landlord client during our consultation that where the deceased hasn’t taken their full pension entitlement before they die, the unused funds may be paid as a lump sum death benefit, that isn’t chargeable to inheritance tax.
In these cases, there may be a loss to the estate if the pension scheme member is in ill health at the time of any changes made.
Changes to pension arrangements made within two years prior to death should be reported on the relevant form to HMRC. I advised my client to speak to the pension company and any relevant financial advisers, as the deceased might have also transferred their pension between schemes.
Benefits under both pension schemes may also be held on discretionary Trusts, and transferring from one scheme to another could trigger a transfer of value, especially if the deceased was in ill health.
Question: Has the actual valuation of any life policy included in the estate been confirmed?
Sometimes, the date of notification values for policies are, according to HMRC, provided in the form IHT400 rather than the required date of death open market values.
I advised my landlord client to ensure that the value requested from the life insurance company is the open market value at the date of death, to avoid any confusion or further queries being raised by HMRC.
Question: Have the ownership and terms of any joint life policies been confirmed?
I told my property investor client during our review meeting that policies are at risk of being excluded from the estate when they are held jointly. There is also a risk that the incorrect share of a policy might be included in form IHT400, or that the type of policy might be incorrectly identified, leading to HMRC queries.
My advice here is to read policies and make sure the life insurance company has been asked for full details as to beneficial ownership of the policy, as well as legal ownership. Establish who paid the premiums on any joint policy. Just because a policy is in joint names, this doesn’t mean it is in fact a joint policy.
Question: Did the deceased have any interest in a Trust set up by somebody else?
I informed my property investor client that there may be Trust events which must be taken into account, such as the trustees releasing funds which were previously held for the deceased’s benefit.
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HMRC states that this could be a transfer of value which is sometimes overlooked.
Any Trust interests need to be taken into account when arriving within the inheritance tax estate, and changes made to the taxation of Trusts following the Finance Act 2006 should also be considered.
I advised my client to ensure that he was aware of the deceased’s interests in any Trusts, and that this has been cross-checked in relation to inheritance tax and the position with any Trust held – for example, is it pre- or post-Finance Act 2006.
HMRC suggests that it’s essential to check whether any of the Trust interests have been terminated in the seven years leading up to death. The Trustees should also be able to confirm if there have been any alterations to a Trust which could be classed as transfers of value.
It is also the responsibility of the Trustees to complete and return a form IHT100 for the Trust, and it is important to remember that the release of a Trust interest may have an effect on the calculation of inheritance tax.
My advice is to obtain full details on the deceased’s interest in any Trusts, so that the inheritance tax position of the estate can be accurately calculated. The final series of questions to follow next week.
I’ve written associated blog articles around inheritance tax rules which will be helpful, including:
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