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INHERITANCE TAX

A Look at Inheritance Tax

 

 

They say that only two things in life are certain – death and taxes. But by knowing the basics of Inheritance Tax (IHT) it is possible to reduce your exposure to tax when you die.

 

On someone’s death, the calculation of IHT starts with the value of all the deceased’s assets, from which are deducted the amount of the deceased’s liabilities at the date of death and various exemptions – the most important of which are the spouse exemption and business property relief (BPR).

 

The part of the estate left to the deceased’s spouse is exempt from IHT, although if the spouse is non-UK domiciled the amount of the spouse exemption is restricted to £55,000.

 

Business property in the deceased’s estate – such as the value of a business, shares in the deceased’s company and assets used in a business – will attract business property relief (BPR) at either 100% or 50% depending on the type of asset, so the IHT on these will be either reduced or eliminated altogether.

 

The first, currently, £325,000 of the estate is then charged to IHT at 0%; this is called the nil-rate band and is set to remain at this level for the next couple of years at least. The excess of the estate over the nil-rate band is taxed at 40%.

 

For many people, there will be no IHT liability on death as the whole of their estate will be left to the surviving spouse; in that case, the nil-rate band is effectively unused, so on the death of the second spouse, the nil-rate band applicable to the estate of the surviving spouse will be increased by the percentage of the nil-rate band unused on the first spouse’s death. At present therefore, where the nil-rate band is unused on the first death, the nil-rate band on the second death is £650,000.

 

However this is not the end of the story. Where an individual makes a gift to another individual it is called a “potentially exempt transfer” or PET. If the donor survives for 7 years from the date of the gift, the value of the gift ceases to be part of his estate; however if the donor dies within 7 years then the value of the gift is added to his estate – where the gift was made more than 3 but less than 7 years before death and that gift is taxable, the rate of IHT is reduced.

 

So what can you do to reduce your exposure to IHT? Clearly reducing the value of your estate will minimise the amount of IHT you, or your spouse, will eventually pay.

 

While larger gifts are treated as PETs as above, it is worth noting that certain smaller gifts are entirely free from IHT so will reduce your estate regardless of when made – a single gift of up to £3,000 each year will be covered by the IHT annual exemption and will immediately fall out of your estate; the exemption can be carried forward for one tax year, so if you did not utilise it in 2010/11, you can made a gift of up to £6,000 in 2011/12. Each spouse has their own exempt amount, and each £3,000 gift is an IHT saving of £1,200 – a significant saving when taken over a period of years.

 

Similarly, any number of gifts of up to £250 per recipient can be made and are not treated as PETs.

 

Another very useful exemption is the exemption for “normal expenditure out of income” – where a series of gifts is made which can be demonstrated to be part of the donor’s habitual expenditure, to have come out of the donor’s after-tax income and to have left the donor with sufficient income to maintain his usual standard of living, then those gifts are not treated as PETs and will not be included in the donor’s estate regardless of when made. This can be particularly useful for, say, parents giving regular sums to children, as long as it can be shown that the above conditions are met.

 

Where possible, early IHT planning is of course advisable; insurance policies for IHT are available and your Financial Adviser can assist. Finally do ensure you have a valid and up-to-date Will to ensure that your estate is dealt with according to your wishes.

 

 

Disclaimer

Umesh Modi BA ACA, is a Chartered Accountant and Tax Advisor, and a partner at Silver Levene (Incorporating Modiplus+). He can be contacted on 020 7383 3200 or This e-mail address is being protected from spambots. You need JavaScript enabled to view it  

 

 
Year End Tax Planning

As the end of the 2011/12 tax year draws nearer, this is a good time to review your tax position and take advantage of tax planning opportunities.

 

Tax Rates

 

For 2011/12, the 20% tax rate applies to taxable income of up to £35,000; income from £35,000 to £150,000 is taxed at 40% and income above £150,000 is taxed at 50% (dividend income is taxed at slightly different rates – 32.5% instead of 40% and 42.5% instead of 50%).

 

If you have a limited company and are considering drawing additional remuneration or dividends from the company, then you may want to base the decision as to whether to draw that income either before or after the end of the current tax year depending on the amount of income you have already drawn and therefore on what tax rate will apply to any further income. Determining the best timing – before or after 5 April 2012 – may enable you to utilise your basic rate band or avoid the 50% tax band.

 

Capital expenditure

 

The Annual Investment Allowance (AIA) currently stands at £100,000 per annum but will fall to £25,000 with effect from 1 April 2012 (for companies) or 5 April 2012 (for individuals and partnerships). The AIA provides 100% tax relief for capital expenditure qualifying for plant and machinery capital allowances up to the stated limit.

 

The timing of capital expenditure may therefore have a significant impact on your tax position so if you are considering further capital expenditure in the next couple of months, points to bear in mind are:

 

  • Have you already utilised your £100,000 AIA for 2011/12? If so, consider delaying the expenditure until after 5 April 2012, if the expenditure is £25,000 or less
  • If you have not utilised your AIA in 2011/12 and are planning significant capital expenditure, incurring the expenditure before 5 April 2012 (or 1 April 2012 as appropriate) will ensure the higher level of AIA

 

Pension contributions

 

There is no limit on the contributions that can be made by or on behalf of an individual into a pension scheme, although the amount of contributions on which tax relief can be obtained is restricted to the higher of 100% of relevant earnings and £3,600 (gross). Relief is available at the higher and top rates of income tax - the planned withdrawal of higher-rate income tax relief on pension contributions with effect from 6 April 2011 having been scrapped.  However, if total contributions (made by the individual, the employer and anyone else on the individual’s behalf) exceed the “annual allowance”, £50,000 for 2011/12, a tax charge arises on the individual at 40% on the excess contributions.

 

Other year-end thoughts

 

ISAs: no income tax is payable on any income from the ISA investments. The maximum amount you can invest in 2011/12 is £10,680, of which up to £5,340 can be in a Cash ISA with the rest in a Stocks and Shares ISA. If you have not already done so, therefore, you may want to consider opening an ISA before 5 April 2012 to utilise this year’s maximum.

 

Enterprise Investment Scheme (EIS): income tax relief at 20% is available for investment of up to £500,000 in shares which qualify under the EIS; the conditions for the relief are complex, both for the investor and for the issuing company. Gains made on the disposal of EIS shares are tax-free as long as various conditions are met.

 

Similar reliefs to the EIS are available for investment in a Venture Capital Trust (VCT).

 

The Chancellor’s Autumn Statement announced plans to increase the maximum annual investment under the EIS to £1m from 2012/13 and to relax some of the conditions that have to be met by companies wishing to qualify under the EIS...

 

Annual exemption for capital gains tax: the annual exemption for CGT stands at £10,600 for 2011/12, so gains of up to this amount are exempt from CGT. If you have not made gains to utilise your exemption, you may wish to consider if you are able to do so before 5 April 2012.

 

Annual exemption for inheritance tax: a gift of up to £3,000 per year is exempt from IHT, thus reducing your estate and potentially saving IHT of £1,200. The exemption can be carried forward for one year, so if you did not use your exemption in 2010/11 you can make a gift of up to £6,000 in 2011/12, a potential IHT saving of £2,400.

 

Disclaimer

Umesh Modi BA ACA, is a Chartered Accountant and Tax Advisor, and a partner at Silver Levene (Incorporating Modiplus+). He can be contacted on 020 7383 3200 or This e-mail address is being protected from spambots. You need JavaScript enabled to view it  

 

 
Self assessment – it’s time!

If you have not already done so, now is the time to think about the deadlines for filing your 2011 tax return and paying your tax.

 

Preparing your return

 

Whether you are filing your return yourself or compiling information for your accountant, the paragraphs below set out some of the more common information that you (or your accountant) will need to complete your 2011 return, which covers the tax year ended 5th April 2011 (6th April 2010 – 5th April 2011):

 

Business income:

 

If you are a sole trader or in a partnership you will need the accounts which ended during the tax year 2010/11, for instance accounts for the year ended 31 December 2010 or for the year 31 March 2011.

 

If your business started recently or ceased during the tax year the position will be more complex and your accountant will be able to advise you further.

 

If you trade through your own limited company, or are someone’s employee, then you will need your P60 and P11D for 2010/11, showing your earnings and any benefits/expenses. Company dividends paid to you in the year ended 5 April 2011 will also be included in your 2011 return.

 

Unearned income:

 

Unearned income received between 6th April 2010 and 5th April 2011 will be shown on your 2011 return, whether from UK or overseas sources – e.g. interest, dividends, rental income (less associated expenses) and pension income, so you will need statements, tax certificates and dividend vouchers. Where an investment is held jointly, your share of the income is shown.

 

If you are non-UK domiciled then the new regime for non-domiciled individuals will be relevant to you – you chose whether to pay UK tax on your worldwide income or whether to be taxed on the remittance basis (i.e. only on that overseas income which you have brought to the UK) in which case you may be required to pay a £30k “remittance basis charge”. This is a complex area and your accountant will be able to provide more details.

 

Capital gains:

 

Details of the sale of capital assets – e.g. property, investments – during the tax year will be needed for your return i.e.: the cost and sale proceeds, and any associated expenses.

 

The sale of your home will generally be exempt from capital gains tax as long as the property was used as your main residence throughout the time you owned it, so any gain (or loss) will not be included on your return.

 

Other matters:

 

Tax relief is given for charitable payments under gift aid or covenants made in the tax year and for pension contributions paid by you; investments qualifying under the Enterprise Investment Scheme will also reduce your tax liability.

 

Filing your return

 

The deadline for the submission of paper returns has already passed, but for online filing of returns the deadline for the 2011 tax return is 31 January 2012.

 

If you are filing your return online yourself, the first step is to register at www.hmrc.gov.uk for online services. You will then receive, by post, confirmation of your User ID and an activation PIN needed to get started. Once you have activated your account you will be able to prepare and submit your return online.

 

Paying your tax

 

As well as being the deadline for the submission of your 2011 return, 31 January 2012 is also the deadline for payment of your tax liability for 2010/11 – if you have already made payments on account towards the year, you may have to pay a balancing payment; if your payments on account exceed your actual liability the overpayment will either be refunded to you or set against future payments. If you are required to make payments on account towards your 2011/2012 liability, the first of these will also be due on 31 January 2012.

 

It is worth considering at this stage whether the funds you will need to pay the tax will be readily available, in case it is necessary to give notice on an account or otherwise make funds available for the payment date.

 

Interest and penalties

 

If your return is submitted after 31 January 2012, you will be charged a £100 penalty; where a partnership return is submitted late, the penalty is £100 per partner. Penalties increase steeply if the return is more than 3 months late.

 

Interest will also be charged from 1 February 2012 on any unpaid tax (the current rate is 3%, but could change before this date). If any part of your balancing payment remains unpaid as at 28 February 2012, a surcharge of 5% of the unpaid tax will be added to your liability, with a further 5% surcharge added on 31 July 2012 on any tax remaining unpaid at that date.

 

HMRC enquiries

 

If you submit your return before the deadline, H M Revenue & Customs have 12 months from the date after your return was submitted to raise an enquiry into it. However, if your return is submitted late, HMRC’s period for raising an enquiry is extended.

 

Disclaimer

Umesh Modi BA ACA, is a Chartered Accountant and Tax Advisor, and a partner at Silver Levene (Incorporating Modiplus+). He can be contacted on 020 7383 3200 or This e-mail address is being protected from spambots. You need JavaScript enabled to view it  

 
How Long Should You Keep Books & Records?

There is no simple answer to this question because different types of record are covered by different types of legislation, as shown by the following summary:

 

Value added tax

 

By law, VAT records have to be kept for six years unless HM Revenue & Customs allows a shorter period. Any request you make to keep records for a shorter period must be accompanied by a full explanation of why it is considered impractical to keep the records.

Read more...
 


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