Inheritance tax receipts fall. Does this make a wealth tax more likely?

Inheritance tax (IHT) seems to worry far more people than are ever likely to pay it. The latest stats reveal why the Government and HMRC may be planning to switch to a wealth tax instead.

The most recent figures available tell us that fewer than 4% of UK deaths resulted in a charge to IHT. And that HMRC received only a little over £5 billion inheritance tax in 2019/20.

Earlier this year an all-party parliamentary group proposed the wholesale reform of IHT and intergenerational fairness. Their main recommendation was to replace IHT with a flat-rate gift tax payable both on lifetime and death transfers. As ever such proposals are easier to accept in theory than they would ever be to legislate.

And let no one assume that a wealth tax would be easy to apply and charge by reference to shares, properties and other assets whose values are ever changing.

Many of the members of our Network are expert advisers on inheritance tax and related issues. YOU’ll find their profiles by entering inheritance tax in the search bar on the home page of this site


Making Tax Digital, PAYE codes and P800s, IHT and holiday cottages

Just as we published last week’s tax tips the Government made the stunning announcement that MTD is to be delayed; we have more details below. HMRC’s PAYE computer appears to be programmed with the wrong tax law, so there will be errors in PAYE codes and P800s computations to look out for. Finally, a recent case busts the myth that you can get IHT relief on the value of furnished holiday accommodation.

Below is just an extract from last week’s tax tips email. To receive the full email when it is published each Thursday, simply follow the link on the right (or below, if you’re reading this on a mobile device)

IHT and holiday cottages

Years ago, tax advisers would say that an active holiday lettings business should qualify for IHT business property relief (BPR), if the owner died whilst running the business. This would allow the value of the holiday accommodation to be covered by the 100% BPR exemption.

However, HMRC changed their view on the availability of BPR in late 2008, and have been challenging estates where BPR is claimed for holiday lettings ever since. The first notable case since this change of approach was Pawson, which the taxpayer won at the First-tier Tribunal, but was defeated at the Upper Tribunal. Leave to appeal to a higher court was refused.

The Pawson case concerned just one let property, and although it was actively managed, the Upper Tribunal decided that the property was held mainly as an investment, so it didn’t qualify for BPR.

The latest case of Marjorie Rose, concerned 11 properties owned by a partnership, of which the deceased held a two-thirds share, valued at over £1m. Significant services were provided to the guests in the holiday cottages, by the nearby hotel (owned by the same family) such as internet, parking, administration, personal guest services, food services, ordering milk and newspapers. However, the tribunal decided that all 11 properties were held mainly to obtain rental income, and hence they were investments that do not qualify for BPR.

Where your clients run holiday lettings businesses it would be prudent to review their IHT planning in light of this case.


IHT planning, VAT payments and surcharges, Dangers for online filing

We have something to thank the politicians for; their talk about dementia tax has encouraged people to think about the value of their homes and how much they may need to pay for long-term care. This provides a good opportunity to discuss IHT planning, as we explain below. We also have tips on avoiding VAT surcharges, and a warning about cyber-attacks on your firm’s systems.

Below we share just part of one of the above 3 tax tips – see the side boxes on this page to learn how you could subscribe to receive the full 3 tax tips every week.

IHT planning

People don’t want to think about their death, or the IHT potentially payable, but they will consider the cost of the care they may need, as that is an issue that many have addressed for an older relative. The talk of “dementia tax” to pay for social care may also prompt people to think about their net wealth.

The retired population is comprised of two distinct groups; those who are active and healthy, who may be caring for an older relative, and those who have difficulties undertaking daily tasks and who need some form of care or assistance. The ageUK briefing (see below) provides an excellent summary of the issues to consider.

The dilemma for the fit and active group is that they know they may need care in the future, but they don’t know when, and for how long. They may wish to undertake IHT planning, but they also need to retain access to sufficient investments which could be used to pay for care.

The solution for this group can be to make investments which qualify for an IHT exemption using business or agricultural relief (HMRC have dropped “property” when referring to BPR and APR). Shares quoted on the AIM and shares issued under the EIS or SEIS will qualify for IHT business relief. There are a number of companies which market investments in these areas as IHT shelters.

Take the opportunity to talk to your clients about “dementia tax” (not a real tax), and introduce facts about IHT (a real tax), including planning strategies to cope with both IHT and potential care needs. You need to be registered with the FCA to recommend the purchase of any particular investment product, so be careful how you frame advice in this area.


IHT residential nil rate band, SDLT on death, Mortgage references

Perhaps it is the draining effect of the General Election campaign, but last week our thoughts turned to death and taxes. The new residential nil rate band for inheritance tax came into effect on 6 April 2017, and HMRC have released detailed guidance. Where a couple own their home as tenants in common, this can create a SDLT on a transfer following the death one owner. Finally, we had some tips on how to handle requests for mortgage references.

Below is just an extract from last week’s tax tips email. You can register to receive future copies by following the link on the right (or below, if you’re reading this on a mobile device)

SDLT on death

Stamp duty land tax (SDLT) is currently payable by purchasers of property located in England, Wales and Northern Ireland. This article does not apply to properties Scotland, which has its own property law, and the land and buildings transaction tax (LBTT).

Where freehold residential property is jointly owned, it may be held in two ways: as joint tenants, where each person holds an undivided share, or as tenants in common, where each person hold a defined share, such as 40% and 60%. “Joint tenants” is the default, which conveyancing solicitors prefer, and it has the advantage that when one of the owners dies the other owner automatically acquires ownership of the entire property.

“Tenants in common” can form part of an IHT plan, as the owners may chose to leave their share in the property to a third person. Investment properties may be held in this way, so the joint owners can be taxed on the profits in relation to their beneficial interest in the property, rather than on a 50:50 split. Although a married couple/ civil partners need to declare the split of ownership on form 17, and submit that declaration to HMRC.

The rates of SDLT were increased on 1 April 2016 to include a 3% supplement on the entire value where an additional residential property is acquired for £40,000 or more. An individual is treated as acquiring an additional property if he already holds a major interest in a residential property which is worth £40,000 or more, which is not subject to a lease which has more than 21 years to run.

Say Fred and Ginger own their home as tenants in common. Fred dies and does not leave his share in the property to Ginger. Fred’s executors agree to sell Fred’s share in the property to Ginger for £80,000. Ginger already owns a major interest in a property (her own home), so the acquisition of another interest in a residential property meets the conditions for the 3% SDLT charge to apply. It is irrelevant that the interest Ginger acquires is in the property which she already partly owns.

When reviewing IHT planning for clients consider this SDLT trap