Wills and Taxation (Part 2)

Business Property

Since 1992 there has been 100% relief for the following categories of business property:

Sole proprietor or partner

Life tenants or interest in a business

A holding of shares or securities which by itself, or in conjunction with other holdings owned by the transferor gives control of the company (whether quoted or unquoted)

Unquoted shares which by themselves or in conjunction with other shares or securities owned by the transferor give control of more than 25% of the votes

There is 50% relief for the following:

Shares in a company which do not qualify under 3 above and which are not quoted on a recognised stock exchange.

Land, buildings, plant or machinery owned by a partner or controlling shareholder and used wholly or mainly in the business of the partnership or company immediately before the transfer, provided that the partnership interest or shareholding would itself, if it were transferred, qualify for business relief.

Any land or building, plant or machinery which, immediately before the transfer was used wholly for the purposes of a business carried on by the transferor, was settled property in which he or she was then beneficially entitled to an interest in possession and was transferred while the business itself was being retained.

Potentially Exempt Transfers

Any gift outside the exemptions mentioned above which is made within seven years of the persons death will be included in the value of the estate. Any gift made more than seven years from the death of the person making it is free of any liability for tax. These gifts are known as “Potentially Exempt Transfers” (PETS) and become wholly exempt once seven years have elapsed and the donor is still alive. If the donor dies within seven years of making the gift only a percentage of the tax payable will be due, depending on how long before the death it was made, in keeping with the following scale:

6-7 years: 20% of gift at rate of 8%
5-6 years: 40% of gift at rate of 16%
4-5 years: 60% of gift at rate of 16%
3-4 years: 80% of gift at rate of 32%
up to 3 years 100% of the gift at rate of 40%

Life Insurance Policies

If a person has a life insurance policy on his or her life and for own benefit the value of the policy forms part of the estate. If there is a gift of the policy during that persons lifetime then the premium payment and not the policy becomes potentially exempt transfer which will not be included in that persons estate if they survive seven years after the gift. If a policy is taken out of the benefit of another person it is the premium payment which is the PET and not the value of the policy. Policies such as this can be a useful way of making provision for inheritance tax liability on an estate as a whole.
Gifts with reservation

One way in which a person may seek to minimise inheritance tax liability is to reduce the value of the estate by making gifts before death. As demonstrated, these will be regarded as PETS and may be brought into estate if death occurs within seven years. There is another factor to be considered. If a person gives something away but still continues to enjoy it or derive benefit from it, then such a gift will form part of the estate whenever it was made so long as the donor continued to enjoy it up to his or her death. This is known as a “gift with reservation” because the donor receives a benefit. To avoid a gift with reservation, the gift must be enjoyed by the person to whom it has been given.

The payment of tax

Whenever money is left in a will consideration needs to be given as to whether inheritance tax attributable to it is to be paid out of the residue of the estate or to be paid by the person receiving the legacy.  If inheritance tax comes from the residue of the estate then it should be declared to be free of tax, if paid by the person to whom it is left, it is declared subject to tax. From overall value of the estate for inheritance tax purposes, reasonable funeral expenses can be deducted. In addition, any additional expenses incurred in administering or realising property outside of the United Kingdom against its value (to a maximum of 50%) can be realised.

Gifts to charitable institutions

Gifts to charities are exempt at any time whether as lifetime gifts or passed under the terms of a will. They can be expressed as either to a specific charity or as an amount to be distributed by the dead persons trustees. These can be the same as the executors in which case they should be names as trustees as well as executors.

In many cases a person will make a will many years before death. This could mean that unless a will is revised regularly, the amounts of money specified as bequests may become devalued through inflation so that on death they no longer present the original size of the gift that was intended.

One common way of overcoming this is to express the gift was a percentage or proportion of the overall net estate.

If you wish a bequest to go to a specific branch of a charity this must be specified, otherwise the gift will go to head office as a matter of course.