Inheritance and Capital Gains Tax Strategies

Inheritance and Capital Gains Tax Strategies

This client came to us following a recommendation by their accountant for strategic inheritance tax and capital gains tax planning. The client had accumulated a number of properties over time and wished to pass these onto their children. There is usually friction between inheritance tax and capital gains tax whereby if the assets are transferred during a lifetime, there is a capital gains tax charge. In contrast, if the assets are left in the estate until death, there is an inheritance tax charge at 40%. The other main issue with leaving assets (especially property) within the estate is that the increase in value over time meaning the inheritance tax liability increases over time. We were able to propose a unique tax planning structure which reduced our client’s estate and therefore the inheritance tax liability. At the same time, the tax planning allowed for no capital gains tax to be paid.

Our analysis: Before coming to see us this client had taken advice on setting up a number of trusts which in our view over complicated matters and ultimately ended with a high tax liability than was required. 

Tax implications on gifting property before death

Tax implications on gifting property before death

This unusual case came to us following the clients’ father passing away. The deceased father had gifted some properties to the children two years before death following advice on signing a retrospective deed of trust. We were asked to check whether the retrospective deed of trust stood for tax law purposes. Having reviewed the case we concluded that advice received was incorrect and the transfers to children were chargeable transfers for capital gains tax purposes. There was a substantial capital gains tax liability on the transfers that had not been reported but was now due on the estate of the deceased father. Unfortunately the father passed away within two years of gifting the properties which meant that these would be included in his estate for inheritance tax purposes at full value and that taper relief would not be available. To make matters even worse, if the children were to sell a property to pay for the late father’s capital gains and inheritance tax, they would first pay capital gains tax on the disposal of the property. A disclosure needed to be made by the executors of the late father’s estate in relation to the unpaid capital gains tax liabilities. There were easy steps that could have been taken to avoid all the tax charges had advice been taken from a specialist tax firm.

Our analysis: This was one of the worst cases of bad tax advice we have seen and we felt very sorry for our clients who were having to suffer the implications. When transferring properties to children or relatives, it is imperative that tax advice is taken from a firm that specializes in tax law and in writing to avoid small and easy to handle issues becoming out of control.

Inheritance Tax Advice during Covid-19

Claim for overpaid inheritance tax due to fall in stock market or property prices 

a. Drop in property prices following death 

If someone passes away leaving behind properties, the inheritance tax is normally payable on the market value of the properties within six months after the date of death. If the property prices have fallen since the date of death, and the properties are sold by the beneficiaries at a loss within three years following the date of death, then a relief/ refund for any excess inheritance tax paid can be claimed. HMRC require the claim to be made within within four year of the end of the four year period during which the sale was made. Specialist advice should be taken before a claim for refund is made as the relief may be restricted.

 b. Drop in stock market prices 

If someone passes away leaving behind shares in the stock market, the inheritance tax is normally payable on the market value of the shares is normally payable within six months after the date of death. If the share prices have fallen since the date of death, and the share are sold by the beneficiaries at a loss within 12 months following the date of death, then a relief/ refund for any excess inheritance tax paid can be claimed. HMRC require the claim to be made within within four years of the end of the four year period during which the sale was made. Specialist advice should be taken before a claim for refund is made as the relief may be restricted. 

Review of family assets and wills by a tax specialist 

It is important to carry out an urgent review of the family assets including properties, shares, savings etc and the wills of the main heads of the of the family that own the assets. Whilst it is common to have a mirror will in place, this could be a time bomb for when the surviving spouse passes away and result in a much larger tax liability. This can be avoided as there are more effective tax planning structures available that could be applied to mitigate the overall tax liability of the family. Please contact us if you would like a tax specialist to review your family’s assets and advise on the best possible tax planning strategy that is tailored to your personal circumstances. 

Deed of Variation 

Where someone has passed away recently leaving behind some assets and there is inheritance tax payable. If the deceased left a will, it is worthwhile speaking to a tax specialist and check if there are any options for mitigating the inheritance tax payable through a Deed of Variation of the will. In our experience, the Deed of Variation if applied correctly can save significant amounts of inheritance tax. Please contact us if you have recently lost a loved one and wish for us to consider any tax mitigation options through a Deed of Variation. 

Bereaved Minors Trust 

A Bereaved Minors Trust (BMT) can be set up in a will where if a parent dies leaving behind minor children (under the age of 18 years). The benefit of the BMT is that the assets are taken by the Bereaved Minors Trust and there is no inheritance tax payable by the deceased’s estate. The assets need to be transferred to the children when they reach the age of 18 years. Until then, the income or capital of the trust can be used for maintenance of the children. Please contact us if you are worried about leaving behind young children and would like advice on setting up a Bereaved Minors Trust as part of your will

Churchill Tax Advisers Help IHT Planning For Indian Born Clients

This query related to inheritance tax planning and came from an Indian born high net worth individual living in the UK for over 30 years. The client had a substantial estate in India and the inheritance tax position from UK perspective was not clear on these assets. Having researched the issue, we were able to advise that the deemed domiciled rules do not apply for individuals born in India and three other countries. This meant that provided certain conditions are met, there would not be any UK inheritance tax on assets based in India. The interesting part is that there is no inheritance tax in India so effectively (with careful planning), the Indian based assets can be passed to the next generation without any inheritance tax. This particular law is not covered by UK’s tax legislation and the source had to be verified to a double tax treaty with India from almost 60 years ago! This can open doors for tax planning for many wealthy Indian born individuals that have been living in the UK for some time. There are some traps for capital gains tax but once again with careful planning, this can also be avoided.

Inheritance tax advice for wealthy landlords

This client was referred to us by another firm of accountants in London. The client is a retired medical professional with a large portfolio of properties that had been acquired over the past 20-25 years at considerably low value but are now worth significantly higher. The client’s estate was in excess of £6 million which meant there was a potential inheritance tax liability at 40%. Our tax specialists were able to suggest tax planning structure that allowed for the properties to be effectively passed onto the children via a partnership without having to pay capital gains or inheritance tax as well as stamp duty. The tax planning structure is complex and not effective overnight. Instead in line with the legislation and HMRC guidance, the structure takes several years to take full effect but the end result is that the inheritance tax liability is either eliminated or substantially reduced.

Capital gains tax planning for properties

This client came to us seeking advice on mitigating capital gains tax on a property. We considered the client’s personal and professional circumstances in detail and explored various options allowing for the potential tax liability to be mitigated. We finally developed a strategy using legislation, HMRC’s guidance and extra statutory concessions which if carefully implemented would allow for the majority of the capital gains tax liability to be eliminated.

Our analysis: This was a complex case and required specialist knowledge of the legislation and HMRC guidance on various reliefs and exemptions. Seeking tax advice from a specialist firm may cost a little but the tax savings are very much worth it.