2014 Autumn Statement – Inheritance Tax


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1. IHT: exemption for emergency service personnel and humanitarian aid workers

The existing inheritance tax (IHT) exemption for members of the armed forces who die or whose death is caused or hastened by injury while on active service will be extended to emergency service personnel and humanitarian aid workers responding to emergencies. The extension will have effect for deaths on or after 19 March 2014.

2. IHT: exemption for medals and other awards

The existing inheritance tax (IHT) exemption for medals and other decorations for valour or gallantry will be extended to all medals and decorations awarded to the armed services or emergency service personnel, and awards made by the Crown for achievements and service in public life. The measure will have effect from 3 December 2014.

3. Trusts – settlement nil rate band shelved

The government has dropped plans to introduce a single settlement nil rate band  to be shared between all trusts set up by a settlor in lifetime or on death. The government included the original proposal in its plans to change the inheritance tax rules for relevant property trusts in a consultation published on 6 June 2014. It will still introduce measures to prevent the use of multiple trusts to avoid inheritance tax and to simplify the inheritance tax rules for relevant property trusts in Finance Bill 2015.


The settlement nil rate band proposal was heavily criticised as an overly complex, and unfairly retrospective solution to inheritance tax avoidance. However, it is something of a surprise that it has been shelved. Professional bodies have pointed out that widening the related settlements rules in section 62 of the Inheritance Tax Act 1984 would deter taxpayers from using multiple trusts. This may be the form that the new measure takes.


Why does the Tax Year end on 5th April?


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This is a question often asked of us tax advisers in pubs (usually after the person speaking to us has stopped shouting at us about having to pay too much tax).

Prior to the eighteenth century, the calendar year began on 25th March and so it was quite natural for the tax year to start on the same date.  In 1752 we moved to the Gregorian Calendar, because the old (Julian) calendar was 11 days adrift from the rest of Europe.

So 4 September 1752 was followed by 15 September 1752 and there was uproar by people wanting their 11 days back (not surprisingly since they weren’t compensated for the loss of income from a short month). At the same time we moved New Year to 1 January.  In such a climate the Inland Revenue felt that they could not start the next tax year on 25th March as usual (applying a degree of common sense), as the already irate taxpayers would effectively be paying a full year’s tax for only 354 days. The “solution” was to move the start of the following tax year back by the equivalent 11 days to April 5th.

Which almost brings us to the tax year starting on 6th April – the additional day came about because an additional day was added to take account of the skipped Leap Day in 1800.  Since then, the Revenue have left well alone and further Leap Days (missed or otherwise) have not impacted on the tax year.

This is also the reason why the “Quarter Days” that many landlords still use for rental periods are to the 25th of each calendar quarter – this dates back to the Julian calendar.

Whilst some people say that this should be tidied up to match up with Calendar years, The good reason to keep it as it is, is that it’s a real pain for lots of people in countries where the end of year holidays (Christmas and New Year) are taken over by the end of financial year chaos. It’s much better, in my opinion, to have a mad rush to finish the year in March than in December. For whatever reason it happened, I think it works.  And there is always the prospect of chocolate Easter eggs to keep us going through the busy period!

Tax changes next month: in a nutshell!


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The Media may focus on the Budget this week, but business owners should reflect on the changes announced already, that are due to come into effect from 1 April for companies and 6 April for everyone else.  Here is a roundup of the Top 5 of those changes that we anticipate will affect the most people:




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Inheritance tax is charged at 40% on your estate if you leave more than £325,000 as a single person or £650,000 as a surviving spouse or civil partner.

You can, however, reduce your liability to inheritance tax by making the most of the lifetime tax free allowances:-

  • gifts up to the value of £3,000 per year in total (if you make no gifts in the previous year, you can increase the £3,000 to £6,000); and
  • gifts of £250 cash per annum to any number of different individuals; and
  • gifts of your surplus income year on year (you need to keep a record of your income and outgoings to support this); and
  • gifts of unlimited value to another person provided you survive for 7 years from the date of the gift.  These are known as Potentially Exempt Transfers or PETs.

There are a number of additional methods of giving to reduce inheritance tax, including gifts to charities.

For those fortunate to have more wealth than they need to live on, lifetime gifts can form a key part of any inheritance tax planning and should be used as part of long term estate planning.

How is a right of occupation in a property granted by a will treated for inheritance tax purposes?


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If you give a right to occupy a property for life under a will, this will create a life interest the value of which will form part of the occupant’s estate for IHT purposes.  This is known as an Immediate Post Death Interest, or IPDI.

If the will only grants a limited right of occupation (until marriage or co-habitation for example) the position is slightly different.

Where a beneficiary of a trust has an immediate right to receive the income arising from the trust property, or have the use and enjoyment of it then they will have an interest in possession (IIP) in the trust.

Qualifying interest in possession trusts (most typically IPDI interests or older IIP interests pre-dating 2006) are treated, for inheritance tax  (IHT) purposes, as though the assets belonged to the life tenant.   A life interest that may be terminated by an event, for example the marriage of the life tenant or by the trustees exercising an overriding power of appointment may still be an IIP trust for IHT purposes until such time as that event happens.

Where an immediate post-death interest (IPDI) ends during the life tenant’s lifetime and the trust assets pass to another individual absoltely, the life tenant is treated as making a potentially exempt transfer (PET) for inheritance tax (IHT) purposes (sections 3A, 49(1) and 52(1),  Inheritance Tax Act 1984 (IHTA 1984).

Care must be taken to ensure that this is a Qualifying interest in possession trust, as the tax regime is entirely different for any other type of Trust and can give rise to an immediate tax charge on ending the interest early.

Insurance proceeds and inheritance tax


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The personal representative or Executors of a deceased individual must value the deceased’s estate at the date of his death to determine its liability to inheritance tax (IHT).

A deceased’s estate is defined (section 5, Inheritance Tax Act 1984 (IHTA 1984)) as the aggregate of all the property to which he is beneficially entitled immediately before his death. One question faced by Executors is whether any potential insurance claims that have not yet paid out before death need to be taken into account.

If the insurance claim is an asset of the estate within section 5 IHTA then the value of the claim will be liable to IHT.

Section 1(1) of the Law Reform (Miscellaneous Provisions) Act 1934 provides that any cause of action existing at the date of an individual’s death survives either for the benefit of or against his estate (subject to certain exceptions being claims for defamation, and claims for bereavement under section 1A of the Fatal Injuries Act 1976).

Of particular interest at the moment is the treatment of Flood Damage Insurance.  Many claims from 2013 are still being processed and the Executors will need to consider the value of any claim, whether this is likely to succeed and the costs to the estate of completing the claim.

For further information in relation to the valuation of a property that is damaged at the date of death see HMRC InheritanceTax ManualIHTM23015 – Investigation of form IHT405: Page 4 of form IHT405 – special factors that affect the value andIHTM23203 – Special valuation matters: property subject to damage affecting its value.


Property, Tax & Declarations of Trust


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Many rental properties are owned jointly, but only up to 4 names may be registered with the Land Registry.  It is therefore very common for joint owners of property to enter into a Declaration of Trust to document the full ownership structure.

Declarations of Trust may be used where there are fewer than 4 owners, and can be useful ways to set out who is entitled to income and gains.

A Declaration of Trust can effectively transfer a part share in a property for capital gains tax purposes, without having to transfer legal title.  However, you should note that the creation of the Trust itself can have a tax consequence.  This is because Capital gains tax (CGT) is charged on gains arising on the disposal of an asset and although there is no statutory definition of the term “disposal” it is generally accepted that a disposal occurs when beneficial ownership (as opposed to legal ownership) of an asset changes.

Therefore, a gift of part of a beneficial interest will be a CGT disposal.  Further, despite being a gift (that is, a transfer for nil consideration), the disposal will be deemed to take place at market value for CGT purposes where it is a gift (as this is not a market value disposal).

However, transfers between husband are wife are deemed to be on a no loss/no gain basis (section 58, Taxation of Chargeable Gains Act 1992 (TCGA 1992)).

A declaration of trust will also enable the parties to include any express terms that may be desirable, for example, provisions dealing with a situation where one wishes to sell or practical arrangements for day-to-day issues such as how the parties will share the maintenance costs.

Under current practice, a properly formed declaration of trust should be sufficient to satisfy HMRC, that is, a legal transfer will not also be necessary. For income tax and CGT purposes, any profits and losses arising from the property will be treated as accruing directly to the relevant co-owners according to their beneficial shares in the property, as evidenced by a declaration of trust.


What is An Asset Protection Trust?

An Asset Protection Trust is a structure that does what its name suggests – it is designed to help protect assets by holding them in trust.

Developed by English common law over hundreds of years, Asset Protection Trusts are now used in many jurisdictions the world over, including the US, Channel Islands and several offshore locations.

The main purpose of an APT is to create a structure which separates the ‘equitable title’ (for the beneficiaries) from the ‘legal title’ (which is held by the trustees).  There are several different types of APT which would be used if:

  • You have substantial assets on which IHT would be payable;
  • You have substantial assets you wish to protect against any future creditors (not any creditors you may already have);
  • You have another reason to separate legal and equitable title.

As a consequence of transferring the property into trust, the asset may have enhanced protection against future claims by creditors, as any claim made can usually only be for the extent of the beneficiary’s own interest in the trust.

Do I need an Asset Protection Trust?

If you are uncertain whether an APT is right for you, your EHL advisor can help you to understand the benefits of a trust, and decide whether to protect your assets in this way.

You may also want to look into the advantages of APTs if you would be expecting to inherit from an individual who has substantial assets of their own, as a trust could help to make sure you receive more of your planned inheritance.

Property Protection and Asset Protection Trusts

One area where trusts are often used is to protect the family home for future generations.  In years gone by, placing your home into trust would protect it from inheritance tax, but that is no longer the case now.

However, there are many other reasons why people choose to hold the family home via a trust.  Some examples are that:

  • If the person you wish to inherit the property would not be able to manage its upkeep, the Trustees could deal with that for them
  • To prevent a surviving partner re-directing inheritance in the future (for example, if they were to re-marry)
  • To enable the property ownership to be put in place during lifetime, such that the house would not be subject to a probate application in the future.
  • To help protect against challenges that may be made to a Will if one beneficiary were to be favoured over another.

When used as part of property planning, Asset Protection Trusts allow named beneficiaries (such as spouses or children) to have the right to remain in the property in the future, but also gives you the ability to set out who will inherit after their death.

For more information, or to enquire about specific circumstances that apply to you, contact your EHL advisor.