Inheritance Tax – Residence Nil Rate Band
A new Inheritance Tax allowance comes into force on 6th April 2017. This will apply to property left to direct descendants. The Residence Nil Rate Band, as the new relief is called, means that from this year, a new tax free allowance will apply to a property left by a deceased person to a descendent. If there is more than one property in the estate, the executor can decide which property is to be allocated for this purpose.
This allowance starts at £100,000 and will rise in £25,000 blocks over the next 4 years until, in the tax year 2020/21, it will stand at £175,000. If the property is held in joint names of a married couple or civil partners, each of the parties enjoys this relief - and it’s transferrable from one to the other on death if it’s not been used up.
Here are the basic rules. The Residence Nil Rate Band will apply if the:
- individual dies on or after 6 April 2017
- individual owns a home, or a share of one, so that it’s included in their estate
- individual’s direct descendants such as children or grandchildren inherit the home, or a share of it, and
- The value of the estate isn’t more than £2 million
Direct descendants include, the children, grandchildren and further lineal descendants of the deceased. They also include the spouse or civil partner of a direct descendant. Also included are step children, adopted children, fostered children and children of whom the deceased was guardian. You can find an outline of what are considered to be descendants on the HMRC website. You can click here to view this information.
Direct descendants don’t include nephews, nieces, siblings and other relatives who aren’t included in the list above.
The Residence Nil Rate Band is in addition to the current Inheritance Tax (Nil Rate Band) threshold of £325,000. This is also transferrable between spouses or civil partners if it is not exhausted on death.
The total Inheritance Tax allowances available to married couples and civil partners from the tax year 2020/21, will be £1 million – and after that the allowances will increase in line with inflation (as measured by the Consumer Price Index).
There are a number of helpful case studies on the HMRC website ranging from the most simple and straight forward to the very complicated. You can view those case studies by clicking here.
Interestingly, if one spouse or civil partner dies before April 2017(whether or not they owned a share of the property or had already passed a share to children), the survivor will be able to use both of their family home allowances when he or she dies.
If you have a Will, you need to make sure it’s up to date so that you can take advantage of this tax-free allowance. If you don’t have a Will, you need to make one now to ensure you can decide who will benefit from this allowance.
Inheritance Tax planning is a complex process and we recommend this be undertaken by an expert in this field.
Get In Touch
Contact us on 0141 887 5271 (Paisley) or 0141 886 5678 (Renfrew).
Helping your children get on the property ladder
The bank of mum and dad is a cliché that’s well worked in today’s economic times, not least when it comes to helping children to get a leg up onto the property ladder. Rising property prices and lenders restricting the level of borrowing has meant that younger people have found it increasingly difficult to bridge the gap between the amount they are able to borrow and the price they have to pay for the property.
Many parents and grandparents who have the financial wherewithal to help need to consider very carefully how to go about providing any sort of assistance to their children or grandchildren.
The option of helping with the deposit without any expectation of this being repaid is straightforward – it’s a simple gift from one to the other.
However, if the plan is to provide a home for the child, then there are potential difficulties that need to be addressed before embarking on such a scheme.
If the title to the property is to be taken in the name of the child, then the child can subsequently do what he or she wants with that property. The child can borrow money and use the property as security or sell the property and keep the proceeds of that sale.
If the child were to run into financial trouble and be pursued by creditors to the point he or she becomes bankrupt, that is likely to lead to the property being sold to meet the debts the child has run up.
Should the child be married and the marriage fail, it is likely that there will be a claim by the spouse for a share in the value of the property.
You should also be aware that if the child is under the age of 16, even though they take the title in their own name, the purchase will be considered as a purchase of an additional dwelling and the rules relating to the Additional Dwelling Supplement will apply. The Additional Dwelling Supplement is a tax of 3% of the purchase price of the property (if the property is purchased for more than £40,000) that is charged when someone buys a property in addition to their current main residence - and is payable in addition to any Land & Buildings Transaction Tax (in England and Wales, Stamp Duty) that may already apply.
Parents and grandparents must think through the options very carefully before embarking on any such scheme.
So, what are the options to secure the position for the parents and grandparents?
There is always the option of buying the property either with or without a loan and then allowing the child to live in it. This would mean that the property would always belong to the parents or grandparents and when it is eventually disposed of, it is likely that Capital Gains Tax will need to be paid on any gain achieved on that sale. If the parents or grandparents already own their own home, there is also the added cost of the Additional Dwelling Supplement.
If the parent holding title to the property were to die, then the property will form part of the estate – and there may be other siblings who are entitled to share in the estate and that might mean that the property must be sold to satisfy that entitlement. Even this method of helping has its problems!
As an option, to try to at least secure the money invested in the property, the parent or grandparent might decide to secure their interest by taking a Standard Security over the property. If this is done, it’s usually backed up by an Agreement setting out in what circumstances any money secured should be repaid. That’s fine as far as it goes because even if there is a problem and the property has to be disposed of, then the money paid to buy it (and potentially any notional interest payable on that money as might be provided for in an agreement) would need to be repaid – but the parent or grandparent might not be able to share in any profit on the sale. If the property is in the child’s name, then the same problems can arise regarding bankruptcy or divorce as mentioned above, but of course, the security would go some way to protect the money invested!
One option that has been getting more attention in recent times is the creation of a trust. The basic methodology is that a trust is created with the parents or grandparents as trustees and the child as a beneficiary. The property is then purchased by the trust with money put into the trust by the parents and/or grandparents. The trust then becomes the owner of the property. The child can live in the property and be sheltered from the vagaries of divorce, separation or bankruptcy as none of these events could have an effect on the ownership of the property – it’s owned by the trust!
The trust can sell the property and buy another property and allow the child to live in it and it can ultimately transfer the property to the child or dispose of it and pass the free proceeds of that sale to the child.
There are also taxation implications that will need to be addressed. The Additional Dwelling Supplement we discussed above will apply to a purchase of this nature if the parents or grandparents who created the trust own their own homes. On disposal,
Capital Gains Tax may apply. It is beyond the scope of this article to enter into a detailed discussion of when Capital Gains Tax will apply so for further information on that we would direct you to the Government website dealing with this topic. You can access that by clicking here. One important point to note is that the money paid into the trust to enable the trust to purchase the property, no longer forms part of the parent’s estate and, as such, is sheltered from Inheritance Tax. Again, to ensure that this is done correctly, you need to take proper legal advice on this.
Contact Us
If you find yourself in such a situation or are currently considering your options, we’d be happy to speak to you about this. Please call us on 0141 887 5271 (Paisley) or 0141 886 5678 (Renfrew).
Putting Your Trust In Asset Protection
We’re sure that as you look forward, your wish is for your assets to be passed to your children, grandchildren, or other loved ones, but many of our clients often worry about how these assets will be managed should they require full time or residential care.
We recently discussed granting Power of Attorney and the possibility of someone else managing your finances, property and personal welfare, should you not be able to do so. This is particularly useful for those who experience significant life changes, leaving them somewhat incapacitated.
Another way in which you may look to protect your assets is through Asset Protection, which is something you may look to set up while you are still capable of doing so, as it allows you more individual control.
For those concerned about their assets being used to fund any form of care they may need in the future, Asset Protection may be the preferred option.
Setting up Asset Protection in the form of an Family Protection Trust, would allow you control over the management of your assets, should you go into care. Organising this at an early stage will allow for sufficient planning, in terms of protecting your main assets, such as your home.
Placing these assets within a trust protects your family’s inheritance from unscrupulous creditors, unforeseen circumstantial changes, or any liabilities that may arise, which in today’s economy are somewhat likely. It also allows you to decide if and when these assets should be transferred from the trust to certain beneficiaries.
While you are in control of this Trust, you must also appoint at least one other Trustee, who is therefore also responsible for any assets being held within it.
Here at Walker Laird we believe Future Planning is very important and we are happy to offer a free of charge future planning review, to discuss the best choices for yourself and your assets.
Get In Touch
If you would like to explore your options, please call 0141 887 5271, we will be happy to arrange a suitable time to have a chat.
Some decisions are better taken sooner rather than later...
It’s understandable that when making certain big decisions, people often stall or put it off altogether. Often a lack of information, or an information overload, can make the experience particularly daunting. However, we should consider the importance of making these decisions, and what’s more, making them at the right time.
Power Of Attorney
One such decision which is often overlooked is putting in place Power of Attorney. It’s likely that you’ve heard this term being used before, whether that be in a passing conversation or even on TV, but we would stress the importance of making this decision with regards to your personal welfare, finances and property.
For those of you who may not know much about this, a Power of Attorney is a written document that appoints a person(s) of your choice as your Attorney, who therefore has the authority to make decisions on your behalf, should you not be able to do so.
There is a common assumption that it is not as important to grant Power of Attorney until you are older, however we feel you should consider doing so at the earliest opportunity. Many people have their Will drawn up around the time they buy their first property, or when they start a family, this would also be an ideal time to grant your Power of Attorney.
Interestingly, you may prioritise drawing up a Will, in the interest of passing on your assets, but in reality, Power of Attorney is much more important as you never know when you may become incapacitated and unable to manage your day-to-day life, including your own welfare and finances. Should this happen, your Attorney would be able to make certain decisions (as established by yourself) on your behalf.
However, you will not be able to grant Power of Attorney after an accident has occurred and applying to do so at this time is an extremely laborious and potentially expensive exercise through the courts. All of this is avoidable if you have chosen your Attorney beforehand.
Not only are there potentially extensive costs, but this process is not quick or easy and therefore could take months to have someone officially granted Power of Attorney, all happening at a time you really need someone you trust looking after your interests.
Responsibilities of Attorneys vary, as they can manage day-to-day finances such as bills or larger decisions such as investments. Nevertheless, we suggest granting Power of Attorney to one or more person, as soon as possible to ensure that your affairs continued to be managed as you, would manage them.