Is the checklist of IHT questions for investors compulsory?
The checklist of questions I’ve put together isn’t compulsory for buy-to-let landlords, but it will certainly help to clarify the main considerations that property investors need to think about in line with IHT.
One of the most important things to get to grips with then it comes to getting the right level of IHT liability in place is to gather information, to ensure that you are paying the right amount of inheritance tax.
I advised my buy-to-let landlord client to collate information in a straightforward, accessible manner by answering the following general questions on a checklist:
- Has sufficient time been given to research and prepare the IHT400 form?
- Have the Will and associated documents been reviewed, with copies enclosed with the IHT400 form?
- Has the deceased’s paperwork relating to assets and liabilities been checked?
- Have any overseas assets or Trusts belonging to the deceased been taken into consideration?
- Have family and business associates been advised, and do they understand what’s happening?
- Are there any disputes or court actions affecting the estates?
- Does the deceased have a deceased spouse or civil partner who died before them?
- Has the domicile of the deceased and surviving spouse or civil partner been found?
Whilst you are reading this article you may wish to read our page on the subject of “buy to let tax for UK landlords” where we discuss all the different types of tax that you need to be aware of. Read Here for more (opens in a new tab)
How important is the form IHT400 for buy-to-let landlords?
The IHT400 form is a critical document for buy-to-let landlords and property investors to correctly complete for inheritance tax assessment purposes, and in my experience it falls largely into four areas of potential risk for investors when it comes to completing the form with a tax-efficient approach.
The first risk area property investors need to consider on an ITH400 is that of omissions.
It is common for assets or gifts to be omitted from form IHT400. I believe, as a property tax expert, that it is important to look beyond the information provided and check the details.
People outside the professional property sector often do not recognise items that need to be included in form IHT400, and in my experience, this can lead to very costly errors when it comes to tax planning.
A good example is that some people do not realise the deceased’s interests in jointly-held property form part of the estate for inheritance tax purposes – even though their share of that property may pass directly to other joint owners on death.
Another example is the need to identify Gifts made by the deceased, including assets such as interests held in Trusts. As I said to my buy-to-let landlord client during our Wealth Planning review, it’s critically important to ask the right questions, beyond the standard one of “what assets did the deceased have”.
Lifetime IHT allowance
Each person is provided with a nil rate band for IHT purposes of £325,000 as we wrote in a previous article here. If this nil rate band has not been used in upon death, it may be passed onto your spouse.
Let’s say that they didn’t use any part of their allowance – then the surviving spouse would have a revised nil rate band of £650,000.
Potentially exempt transfers (PET) – IHT planning
If someone has £500,000 worth of assets and they died, there would be an IHT bill as follows:
- £500,000 asset value
- £325,000 less the nil rate band
- £175,000 assets chargeable to IHT
- £70,000 IHT bill to be paid by the trustees
If £200,000 value of assets were transferred (ignoring Capital Gains Tax for now) and they survived for more than seven years, then the IHT liability would be revised as follows:
- £500,000 original asset value
- £200,000 assets transferred
- £300,000 assets to be passed on
- £300,000 less nil rate band
- £0 subject to IHT
- £0 IHT liability
As you can see by some effective tax planning, the person would save £70,000 in IHT alone. At the end of the day, it’s your choice who gets the £70,000: your loved ones or HMRC.
Residence Nil Rate Band (RNRB) to reduce IHT on your private residence
Inheritance tax is currently charged at the rate of 40% on estates in the UK worth more than £325,000. The government also introduced a Residence Nil Rate Band (RNRB) in April, helping to protect the main home asset by another £100,000, but I’m also advising investor clients to ensure they complete a review.
One of the main areas my investor clients speak to me about on a weekly basis is new legislation in place around inheritance tax, and the introduction in April of the Residence Nil Rate Band (RNRB).
This new piece of property and wealth management legislation, brought in to provide an extra allowance on inheritance tax liabilities of £100,000 for property investors, is causing lots of debate in our office.
But what’s the big deal around RNRB, and why should you pay attention as a property investor? Let’s take a closer look, to ensure that your wealth management is benefitting fully from this new piece of regulation.
Whilst there’s been no change to the inheritance tax threshold since 2009, the introduction in April of the new property allowance means an investor can now pass on an extra £100,000 tax-free if leaving a home to a child or grandchild.
Called the main Residence Nil Rate Band (RNRB), this allowance will rise by £25,000 a year until April 2020 – when it will be worth £175,000.
I’m also advising investors that couples can also pool their allowances, meaning they could leave a total of £1m before any inheritance tax is due.
Capital Gains Tax (CGT) and transfer of assets
We have already written a detailed article here about CGT and how it will affect you if you transferred assets to other family members other than your spouse. This is because HMRC deems the asset to have been sold at market value, and then compares the market value to the original cost of the asset.
Many people transfer assets to save on the 40% IHT tax but pay the 28% CGT, which can be avoided.
The creation of freezer shares is useful if you have a limited company that is not a trade activity based business. If you are a medic, consultant or have a service/product based business then you can claim Business Asset Rollover if your children continue to run the business. However, if you have a limited company that holds investments such as buy to let properties then the asset value of the company will be subject to IHT on your death.
You can cap the value that you own in the business if you put in freezer shares. Let us look at an example. Sarah holds no other assets but her limited company. This company is used purely to buy and hold residential investments. If the value of the business is £500,000 on her death then the same £68,000 IHT liability applies. If she creates freezer shares to cap her ownership in the business to £325,000 then no IHT liability will arise. The rest of the business value of £175,000 will be based onto her loved ones or charity.
OK, now we have identified the benefits of creating freezer-shares, how is it done on a practical level? If you follow the below steps, then you won’t go wrong:
- The articles of your Company are amended to create a new class of shares of 1p each with no rights. They will be able to benefit from the money obtained through the company disposal. These shares are pro-rata with ordinary shares, but only after ordinary shares have received a hurdle amount of say £5 per share, which is agreed up-front.
- There should be an option for the company to buy back the shares at 1p. If the family member leaves the company or if there is any falling out.
- The family member will need to pay up the 1p for each share that has been allocated.
- The family member needs to make an election in relation to section 431(1) ITEPA 2003, which requires them to pay income tax on the unrestricted market value of the growth shares within 14 days of acquisition. The family member may gain clearance from HMRC to say that the value of the growth shares does not carry an income tax liability as the market value had been paid.
You need to get valuation advice so as to set the hurdle applicable to the growth shares at such a level to avoid or minimise any income tax charges arising on acquisition.
After 6th April 2016, HMRC requires companies and participants to retain a valuation agreement. This then protects the company and individuals from any unnecessary claims of income tax and national insurance.
As HMRC shows that the open market value of any of these assets is relevant to your tax affairs, your tax office may ask SAV to consider and, if necessary, negotiate the value with you.
You may have already passed an asset to another person. You will need to enter it on your tax return. Where it’s difficult to establish market value, SAV can help. This is called a Post Transaction Valuation Check. (PTVC).
Here you can find out:
- how share and assets valuations are to be valued
- how to submit or prepare a valuation of assets
- contact details for SAV
Property investors and developers please note SAV doesn’t value UK land or buildings for tax purposes. The Valuation Office Agency does this.
There is no requirement to offer participation in such schemes to all employees and the company has discretion as to who participates.
Finally, I strongly recommend working with experienced solicitors whom will draft the share plan and associated documents including the necessary changes to the company’s Articles of association.
Three things you must get done regarding IHT
- Make a Will and ensure that it specifies people by their name(s) and the specific assets to be transferred to them
- Use your lifetime transfer allowance as stated above in ways to mitigate CGT & IHT
- Create an investment structure that pays any IHT liabilities without the need to dispose of any assets
Are you considering why you should make a Will?
One of the most popular topics of conversation with our property investor clients is always how to minimise inheritance tax, or IHT, so that the financial assets gained from property investment are passed onto the next generation as tax efficiently as possible.
Our team of property tax experts are on hand to best advise our clients on how to decrease inheritance tax on their property portfolios, as well as considering other elements of wealth planning for the future.
Intestate is a term used for people that have died and have not made a Will. This means that nobody really knows the person’s intention of how to divide up their assets.
People often leave this too late, because they think either that it is not necessary or that they are too young.
There may be other reasons such as the fear and unpleasantness of death itself.
As I say to all of my property investment clients, you can’t control death, but creating a Will to make it easier on those that are left behind is something that you can easily control.
Who will manage your property / investment estate when you die?
As a property investor, you may be creating a lot of wealth. If there has been significant capital growth, it is likely that you have amassed a lot of net worth assets.
As such you may have caused a number of issues for the people that you leave behind when you die or if you become incapacitated. Our property tax experts assist with property asset management issues.
You would have built up a property portfolio, each asset with their own insurance, mortgages/loan accounts, and utility providers. You may also have Joint Ventures or loan agreements with other people with various legal contracts in place to consider. My team of tax accountants can discuss asset planning with you.
We suggest that you build a power team to support you in the event of incapacitation or death.
Powers of Attorney
Under the Powers of Attorney Act 1971, a person can empower to another individual to act on their behalf. For example, with the operating and management of bank accounts, utilities and related matters.
For example, the operating and management of bank accounts, utilities and other related matters. You can work with your solicitor to draw up a document that specifies who the person is to become your Power of Attorney, the duration of their powers, and the specifics of their role.
The Enduring Powers of Attorney Act 1985 was introduced to enable a person to hold Power of Attorney which would continue to be in effect in the event of mental incapacity.
The Mental Capacity Act 2005 introduced Lasting Power of Attorney (LPA), which allows a person to make decisions whilst they are alive about their personal health and welfare (such as long-term care planning) and property/financial affairs.
If a person is to be given control over both matters then two separate documents are required, including Health & Welfare LPA and Property & Financial affairs LPA. Don’t worry that the person in possession of the LPA can make significant gifts to erode your valuable assets – we can advise you further on this.
Wills & executors /administration of your estate
Typically the next of kin will act as the administrator of the Will, to ensure that your wishes are carried out correctly. They are known as the executors.
Collectively, executors and administrators of a Will are called personal representatives. They will be responsible to:
- Administer the estate
- Collect unpaid debts
- Pay any tax due
Before you jump to someone’s aid as a personal representative, you need to be aware that you would be liable for any unpaid debts and tax due. Personal representatives will need to ensure that these are paid before any distributions are made in accordance
Personal representatives will need to ensure that these are paid before any distributions are made in accordance with the Will.
Grant of representation
A grant of representation needs to be obtained by the executors of the Will, which will then allow them to administer the Will if the assets left are worth more than £5,000.
This will be done after they have completed an HMRC form to show the assets and liabilities of the deceased.
Grant of letters of administration
A form needs to be obtained called ‘Grant of letters of administration’ if the deceased did not leave a Will (known as intestate). They will still need to ensure that tax and debts are paid but the remaining assets will need to be distributed.
They will still need to ensure that tax and debts are paid but the remaining assets will need to be distributed as per the laws of intestate.
You may have had tax planning support and decided to transfer assets into a Trust. We have written about Trusts in a previous article so I shall not go into detail here. A trustee also manages the Trust in regards to its financial affairs, debts and tax liabilities.
As a rule of thumb, in order for a Trust to be in place, three components must be in existence:
- The words: to show how the Trust is intended
- The subject matter: The property/asset that is being discussed in the Trust
- The objects: the beneficiaries of the Trust and how the trust will transfer both income and capital to them in a specific time period
The trustees will become legal owners of the property and will, therefore, need to take possession of the legal artifacts such as a Deed of Trust, conveyance documentation, and share certificates.
They will also need to ensure that their names appear as the legal ownership at Companies House and Land Registry.
The trustee will become legally responsible for the assets in possession and may make financial decisions to buy/sell shares, properties for the benefit of the Trust.
Interestingly, Section 31 of the Trustee Act 1925 provides the trustee with powers to apply trust income to any infant beneficiary in order to provide for their maintenance/education. More on this in a later article.
The trustees will also be responsible for ensuring that the Trust submits its tax return each year.
What other areas of risk around IHT400 can impact you?
The third area of risk for property investors when completing an IHT400 form is that of observing the correct legislation around tax liabilities. Every year, HMRC reviews IHT400 forms where the submissions does not meet current legislative requirements.
Keeping up-to-date with legislative changes is not easy, and searching through guidance is time-consuming, as I advised my buy-to-let landlord client during our wealth planning review meeting.
The fourth risk area when it comes to assessing inheritance tax liabilities that many property investors can fall foul of is around record keeping. Good record keeping is essential.
An absence of clear and concise records can mean that information provided is not accurate, and these mistakes are in turn passed on to HMRC. This will also mean an inaccurate IHT liability is in place.
I advised my client that when completing form IHT400 it is the deceased’s records which they are required to obtain and rely on. This can cause difficulties if those records are incomplete.
The type of records which I advised my buy-to-let landlord client to retain include:
- Gifts. Although it is Gifts made within seven years of the date of death which are important, it’s advisable to keep records at all times.
- Lifetime Transfers: Keeping careful and detailed notes and valuations of lifetime transfers, and having access to detailed inventories of assets makes it easier to gather the relevant information to complete form IHT400 correctly.
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