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Month: August 2023

Inheritance Tax: Intestacy entitlement increased

Written by admin on . Posted in Inheritance Tax, Lasting Will & Testaments, Wealth, Wills & Probate. No Comments on Inheritance Tax: Intestacy entitlement increased

If an English or Welsh domiciled person dies without leaving a will, the amount that a surviving spouse or civil partner can inherit as a statutory legacy under the intestacy rules has – from 26 July – been increased from £270,000 to £322,000.

This statutory legacy only comes into play if the deceased also has children – the spouse or civil partner receives £322,000 and the deceased’s personal possessions, plus 50% of the remainder of the estate. The children receive the other 50% of the remainder. An exception applies where property is jointly owned. If there are no children, the spouse or civil partner will inherit the whole estate.

Example

Noah died intestate leaving an estate valued at £900,000. He is survived by his spouse, Emma, and two children. Emma inherits a total of £611,000 (£322,000 plus 50% of the remainder), and the two children will share £289,000.

Controversy

The statutory legacy is reviewed every five years, and the next review is due in January 2025. However, the five-year review period is overridden if inflation increases by 15% or more. The trigger point should have been December 2022, but inflation then fell in January 2023 before again going over 15%.

The 26 July uplift is therefore around seven months late, and some surviving spouses and civil partners will receive £52,000 less as a result of the delay. A House of Lords committee has raised the matter with the relevant authority, the Ministry of Justice, asking how such shortfalls will be dealt with.

Importance of leaving a will

The importance of leaving a valid will can be seen by looking at those who have no automatic right of inheritance:

  • Unmarried partners;
  • LBGT partners not in a civil partnership;
  • Relations by marriage;
  • Close friends; and
  • Close relatives other than children only inherit in certain circumstances.

The intestacy rules differ for those domiciled in Scotland or Northern Ireland.

The government has created an online tool to check who will inherit if someone dies without leaving a valid will. This can be found here.

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Agri-tax reliefs set for restrictions

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Draft legislation has been published that will, from 6 April 2024, restrict the geographical scope of agricultural relief and woodlands relief to property in the UK.

Currently, property can qualify for either agricultural relief or woodlands relief if it is situated in the European Economic Area (EEA). With the UK having left the EU, the change will bring the inheritance tax treatment of property located in the EEA in line with the treatment of property located in the rest of the world.

The change will also see property located in the Isle of Man and the Channel Islands ceasing to qualify for agricultural relief from 6 April 2024, bringing the treatment in line with that for woodlands relief.

Inheritance tax relief

  • Agricultural relief: This effectively exempts most land or pasture used to grow crops or to rear animals from inheritance tax. Relief applies both for lifetime gifts and on death.
  • Woodlands relief: Not as generous as agricultural relief, given it only covers growing timber, not the land itself, and inheritance tax is just deferred until timber is sold.
  • Business relief: There are no indications that business relief will be likewise restricted, so it may be possible to restructure agricultural and woodland interests affected by the change to instead qualify for this relief. Another option will be to gift agricultural property while relief is still available. If such planning is not possible, individuals will need to review their future inheritance tax exposure.

Environmental land management

The government is also consulting on how agricultural relief might be extended to certain types of environmental land management. The current rules are sometimes perceived as a barrier to landowners participating in environmental schemes due to concern that tax relief could be lost. Although business relief will often be available as an alternative, this relief is not available in all circumstances.

HMRC’s detailed guidance on agricultural relief can be found here.

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New PAYE process for High Income Child Benefit Charge

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One of the many criticisms aimed at the High Income Child Benefit Charge (HICBC) is that anyone caught by the charge needs to submit a self-assessment tax return even if all of their tax is collected under PAYE. However, this is set to change.

The government has announced that employed individuals will, in future, be able to pay the HICBC through their PAYE tax code without the need to register for self-assessment. The statement in July on draft Finance Bill legislation from Victoria Atkins, the Financial Secretary to the Treasury, didn’t give a date for the change, but said details would be released “in due course”.

The change will be particularly welcome for those earning just over £50,000 who have to go through the self-assessment process just to report and repay a small amount of child benefit.

Child benefit

For 2023/24, child benefit of £24.00 a week is paid for a first child, with £15.90 a week paid for each subsequent child. Child benefit is paid regardless of income, so the HICBC is the government’s way of reducing the amount paid to higher earners.

The charge

The HICBC can come into play when an individual – or their partner – receives child benefit and their annual income exceeds £50,000.

  • The charge removes 1% of child benefit for every £100 of income over £50,000.
  • Once income reaches £60,000, the charge is 100% so the amount of child benefit is essentially reduced to nil.
  • For those with several children, the HICBC can result in a high effective marginal tax rate.

For 2020/21, some 355,000 individuals were hit by the charge, with a high proportion having been subject to compliance checks by HMRC for failing to register for self-assessment. Despite the HICBC being in place since 2013 – and with HMRC running various publicity campaigns – there is still a general lack of awareness.

Although HMRC has adopted a more lenient attitude towards HICBC penalties in recent years, the maximum penalty can potentially be equivalent to the amount of HICBC owed.

Detailed government guidance on the HICBC can be found here.

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Take Two on Wealth tax…………

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Hard on the heels of May’s Sunday Times Rich List, will new proposals for a wealth tax gain any traction?

In 2020, a group of economic research bodies set up the Wealth Tax Commission to examine the options for a wealth tax to cover the huge costs then being incurred to handle the Covid-19 pandemic. The Commission produced a comprehensive report at the end of the year that suggested:

  • A one-off wealth tax (as opposed to annual);
  • A rate of 5%, payable at 1% a year for five years; and
  • The tax to be payable on all wealth above £500,000, including pensions and main residences.

The tax would have produced £260 billion in total, almost as much as income tax is projected to raise in 2023/24. While the proposals received considerable attention at the time, they were given the cold shoulder by the government and soon disappeared from view.

About two and a half years later, a new wealth tax proposal has been put forward by a group of three tax-campaigning organisations. Their launch came shortly after the latest Sunday Times Rich List was published, showing that 350 individuals and families together hold combined wealth of £796.5 billion.

The new wealth tax was substantially different from the Commission structure:

  • It would be an annual tax;
  • The rate would be 2%; and
  • It would only be payable on all wealth above £10 million.

The high threshold means that the annual amount raised each year would be less than the previous proposal – the campaigners suggested up to £22 billion, although the Commission’s 2020 research suggested a figure of around £17 billion for a similar structure– there are only around 22,000 individuals with wealth of greater than £10 million, according to the Commission.

Polling for one of the three organisations, undertaken by YouGov, showed 74% public support for the 2% wealth tax. Such a result is hardly surprising – most people are in favour of a tax from which they could only benefit.

This latest wealth tax proposal seems destined to suffer the same fate as its predecessor. Were the government to provide a counter argument, it could point out that the freezes it has made to the personal allowance and higher rate threshold alone will raise an extra £21.9 billion in 2023/24, rising to £25.5 billion by 2027/28. This seems unlikely however……………

Photo by Jingming Pan on Unsplash