Hampstead Homeowners and Landlords- Inheritance Tax Part 2 - Your questions answered

Last week we spoke about the thorny issue of Inheritance Tax which will affect most, if not all Hampstead homeowners and landlords. Looking through the details, however, the revised 2015 rules are not as generous as they may appear at face value.

I’ve recently received a number of calls and emails from local landlords and home owners concerned about how the changes affect them. Below are some answers to the frequently asked questions, which I’d like to share with you.

How do I know if I'm eligible for the exemption?

To qualify for the Residence Nil Rate Band (RNRB), you must declare a property as part of your Estate. This must have been occupied by you as your main residence at some point in your lifetime. If the property was always let out, then it will not qualify under the new rules.

Who can’t inherit?

As mentioned in last week’s article, it’s only the direct descendants of the owner, i.e., children, grandchildren and step children. Other relatives such as brothers, sisters, nieces or nephews, for example will not benefit from the RNIB. Likewise, single persons without children will also fall into this category.

What if the property was left in a trust?  

Under the revised rules, property that has been left in trust will not qualify RNIB. In essence, the beneficiary will be the trust, not the direct decedents.

Can part of the allowance be used by me or my spouse?

In short, yes. Either spouse can pass on any unused allowance on their passing. This unused amount can be added to the surviving spouses Estate and on his or her death will be calculated against the current rate and used to lower any liability.

Can I reduce my tax liability on my death?

During your lifetime, you are allowed to give away your wealth in the form of small gifts of up to £3000 before you are liable for tax.  However, there is something known as Potentially Exempt Transfers or (PET’s) in the event that you give away a big asset, like your house. Provided that you are still living within 7 years of making the gift, the asset will be exempted from tax and be removed from your estate.

I inherited my husband’s estate tax free some years ago, the combined value with mine is now worth over £2m; can I avoid the claw back?   

In cases where the surviving spouse has an Estate that will essentially exceed his/her and the deceased spouse allowances, the remedy is to use the Potentially Exempt Transfer Rule. In other words, by making gifts during your lifetime, will help to reduce your liabilities as these will be removed from your Estate completely.  

How Are Business Owners Affected By The Inheritance Tax Rules?

As a business owner you will qualify for what is known as Business Property Relief, whereby your enterprise can be passed down to your family members, free of Inheritance Tax. However, even when this is the case, its value will be included in the value of estates for RNRB purposes; this often exceeds the £2m mark, placing you outside of the exemption.

Conclusion: The revised rules can be a minefield and some of the traditional tax planning arrangements may now be redundant. With the revisions already in play as of April and further changes being phased in over the next 3 years, now is the right time to set about some financial engineering to protect your wealth. Your main residence is now more tax efficient and doesn’t attract any Capital Gain and your pension can also be passed on Tax free. If you have stocks and shares that are wrapped in an ISA for example, although these are not liable to Income tax, they can be included in your Estate and liable to Inheritance Tax it’s well worth using these up first before your pension.