View the related Tax Guidance about Estate planning
An introduction to inheritance tax (IHT)
An introduction to inheritance tax (IHT)This guidance note provides a background to IHT and the basic principles.Background to inheritance taxInheritance tax is, essentially, a tax on gifts. This typically arises when a person dies and all the property that they own (their ‘estate’) passes to beneficiaries. An individual may also transfer their assets to others during lifetime. This could be an outright gift of assets to another person or a gift into trust.Assets in trust are held by trustees for the benefit of others, whose entitlement to them is restricted in some way. Special inheritance tax rules apply to trusts to reflect the separation of legal and beneficial ownership.IHT is a tax on the donor ― the person who is transferring the asset(s). It is calculated with reference to their estate. It is not a tax on the beneficiaries, though what the beneficiaries receive may be reduced by the amount of tax. This position contrasts with the law in certain other jurisdictions where ‘death duties’, gift tax or the equivalent are a tax on the people receiving the property and is taxed in accordance with their status or wealth. Clients who receive an inheritance often ask if they have to pay tax on it. Generally, the answer is ‘no’, because any tax due has fallen on those administering the estate or trust, and will have already been paid. However, this may not always be the case, as a lifetime gift may give rise to IHT if the donor dies
Woodlands
WoodlandsWoodlands may attract one of three different types of relief from inheritance tax (IHT) depending on the nature of the land and timber operations. These are:•agricultural property relief (APR) covered in the Agricultural property relief (APR) guidance note•business property relief (BPR) covered in the BPR overview guidance note•or woodlands reliefThis note concentrates on woodlands relief but APR and BPR are also considered briefly below.Woodlands may obtain APR if they are occupied with agricultural land or pasture and their occupation is ancillary to that of the agricultural land or pasture. An example is a strip of woodland acting as a wind shelter for farmland. Alternatively, woodlands may qualify for BPR if they are run as a commercial business (eg orchards or nurseries) or otherwise generate business profits by regularly producing timber.APR and BPR are usually to be preferred to woodlands relief. This is because, effectively, APR and BPR provide the equivalent of an exemption from IHT (at 50% or 100% of the relevant value of the property) whereas woodlands relief only defers IHT. Moreover, woodlands relief only defers the IHT on the timber, not on the underlying land. However, there will be occasions when woodlands are either not associated with agricultural property or are not part of commercial operations (eg where held as part of a private estate or as an investment) and so woodlands relief needs to be considered.The remainder of this note concentrates on woodlands relief.Outline of woodlands reliefIt is only possible to claim this
Domicile
DomicileIntroductionDomicile is one of the key factors to consider when deciding whether, or to what extent, an individual is liable to tax in the UK. The other is residence, see the Residence ― overview guidance note. As mentioned below, non-domiciliaries are able to use the remittance basis of taxation in the UK, which means that their foreign income and gains are not taxable in the UK unless they are brought to the UK. This guidance note explains what domicile is, why it matters, how to change it and how to report non-domiciled status to HMRC. Note that other countries may have different interpretations of domicile from the UK.In Spring Budget 2024, the Chancellor announced that the remittance basis would be abolished from 6 April 2025 and that the UK taxation of worldwide income and gains will be based on conditions relating to an individual’s residence status rather than their domicile. This means that the concepts of domicile and deemed domicile will no longer be relevant for income and gains arising on or after 6 April 2025. For details of the changes, see the Abolition of the remittance basis from 2025/26 guidance note.Currently, an individual’s domicile and deemed domicile status also determines their liability to inheritance tax (IHT), as discussed below, and it is also expected that this will move to a residence-based regime. The technical rules will be consulted on before the new regime takes effect, which will not be before 6 April 2025. One proposal is that there
Fact finding ― inheritance tax planning
Fact finding ― inheritance tax planningPreliminary mattersAn essential first step of any estate planning exercise is to get to know the client and find out all the relevant information about his circumstances (past, present and future), as far as these can be determined.The adviser will first need to complete the necessary identification procedures to comply with money laundering regulations. The usual client acceptance (on-boarding) procedures will need to be followed as well.The adviser will then need to take instructions from the client. These should be recorded in writing and form part of the client care agreement so that the scope of the work to be undertaken is clearly understood by both adviser and client. The extent of the work may develop into other areas as the matter progresses and this should also be agreed on both sides.What are the relevant questions to ask the client?Once the client’s objectives are clear, the adviser should carry out a detailed fact-find. The nature of the information required will be determined by the type
Timing of disposal for capital gains tax
Timing of disposal for capital gains taxDate of disposalThe date of the disposal determines the period in which the gain is subject to capital gains tax (CGT). When the rates of CGT change, the determination of the date of disposal can also affect the rate of CGT that applies to the gain.Given the Chancellor’s announcement of the reduction of the residential property gains higher rate from 28% to 24% with effect from 6 April 2024, it may be desirable for taxpayers who were due to exchange contracts on the disposal of residential property before 6 April 2024 to delay this until 6 April 2024 or later (providing the buyer agrees). This will be relevant where a taxable gain arises, eg on a let property, that would be taxable at higher rates. See ‘Under contract’ below. For the rates of CGT, see the Introduction to capital gains tax guidance note.The rules for determining the date of disposal vary according to the type of disposal made.Type of disposalUnder contractWhere an asset is disposed of and acquired under a contract, the time of the disposal and acquisition is the time when that contract is made, ie the date contracts are exchanged. It is not the date of the completion of the contract, or time of the conveyance or transfer of the asset (if different). However, if the contract is never completed, the disposal never takes place. In the case of a conditional contract, the time of disposal and acquisition is the time
Family investment company (FIC)
Family investment company (FIC)What is a family investment company (FIC)?An FIC can apply to many different types of company structures used for different purposes although originally they began as estate planning vehicles. This guidance note summarises how an FIC can be a useful structure for a family business and provides links to additional sources of information. The structuring of FICs is a complex area with a lot of options on how to hold the shares, etc, therefore if an FIC structure is implemented, advice should be taken from relevant legal and tax experts.Essentially, an FIC is simply a company that has been established with the specific purpose of meeting the needs of, usually, a single family. An FIC allows the founders of the business to retain some involvement in the company and possibly a managed income stream but also pass the investments down to their children or grandchildren. They may be favoured above trusts because they are a more familiar structure but the option of using trusts should also be considered, see the Taxation of trusts ― introduction guidance note and the attached comparison of a FIC and a discretionary trust:The FIC is usually set up as a new company with a moderate level of share capital, eg 10,000, £1 ordinary shares to provide a reasonable capital base. Giving the family cash amounts in order to allow them to then subscribe for shares means that there are no issues of share valuation.Investments can be in any form that a
Will planning for assets qualifying for BPR
Will planning for assets qualifying for BPRThis guidance note considers how best to deal with assets which qualify for BPR on the death of the testator and the issues around Will planning for these assets to maximise the available relief. It considers the effect of leaving such assets by way of specific gift, maximising opportunities for planning with a spouse, the effect of assets qualifying for BPR on the availability of the residence nil rate band and the 36% rate. It also considers debts incurred acquiring, maintaining or enhancing assets qualifying for BPR before 6 April 2013 and the benefits of making a gift by Will rather than in lifetime. It highlights provisions in partnership and shareholders agreements that need to be considered to maximise relief, what to do to improve the BPR position before death, deathbed planning possibilities and what to do with assets where the BPR position is uncertain.For an overview of BPR, see the BPR overview guidance note.Will planning ― overviewAll clients should have a Will so that their estate is left as tax efficiently as possible to the people that they want to benefit after their death. Wills should be reviewed periodically and at certain life events such as marriage, divorce or the birth of children or grandchildren as well as when the size, nature or location of assets changes. For a general introduction to Wills, see the An introduction to Wills guidance note.Drafting Wills is not a reserved legal service (see the Reserved legal
Historical IHT schemes: Ingram and reversionary lease schemes
Historical IHT schemes: Ingram and reversionary lease schemesThe family home is often the largest asset in the estate and is frequently an obstacle to effective estate planning.The simplest approach is usually for the client to sell their home and downsize to a smaller property. They can make use of principal private residence relief for capital gains tax and release funds to make potentially exempt transfers (PETs) for IHT purposes. See the Outright gifts guidance note.However, many clients want to remain living in their home until their death. In this case, it will be difficult to give away the home without getting caught by the gift with reservation (GWR) of benefit provisions or the pre-owned asset tax (POAT). During the 1990s and early 2000s, a number of schemes and arrangements were devised to avoid these provisions and still remain living in the home. See the Gifts with reservation ― overview and Pre-owned assets tax (POAT) guidance notes.The introduction of the transferable nil rate band in 2007 rendered such planning for lower value estates less important. Planning has become even less relevant with the introduction of the residence nil rate band for residential interests in estates worth not significantly more than £2m. See the Nil rate band and the Residence nil rate band ― main provisions guidance notes.Nevertheless, tax practitioners will still encounter schemes which were set up years ago. The guidance notes on historical schemes provide some background information on how the schemes worked and what their current status is.This
Inter-spouse transfer
Inter-spouse transferIntroductionWhen a chargeable asset is transferred between two spouses or civil partners, there is a disposal by the transferor spouse / civil partner and an acquisition by the transferee spouse / civil partner for capital gains tax purposes. For simplicity, spouses and civil partners are referred to jointly as ‘spouses’ in this guidance note, but the commentary applies equally to both. For a discussion on the meaning of chargeable asset, see the Exempt assets for capital gains tax guidance note.No gain / no loss transfersThe disposal is deemed to take place at ‘no gain / no loss’ (which may also be written as NGNL) provided the couple is:•married or in civil partnership, and•living together during the tax yearTCGA 1992, s 58(1A), (1B)This has always been the case, but the no gain / no loss treatment was extended for separated couples where the disposal takes place on or after 6 April 2023. See ‘Separation and divorce’ below.In Scotland, a ‘common-law’ marriage is recognised as a legal marriage once there has been a declaration before the Court of Session (ie in the absence of a marriage ceremony). In Scots law, this is known as a marriage ‘by habit and repute’. Disposals between such a couple are also deemed to take place at no gain / no loss. A no gain / no loss disposal is one where neither a gain nor a loss arises to the transferor as a result of the disposal.A couple does not have to
Basic principles of CGT for trusts
Basic principles of CGT for trustsIntroductionThe trustees of a settlement are treated as a single person for capital gains tax purposes: that is to say, the trust is treated as a separate and single taxable entity. Capital gains tax is charged when the trustees (as a body) make a chargeable disposal. Such a disposal may arise when trustees sell or transfer trust assets in the course of administration of the trust. However, in addition to these ‘actual disposals’ of assets, there are occasions when trustees are ‘deemed’ to have made a disposal and capital gains tax is charged accordingly. In summary, deemed disposals arise when the nature of entitlement to the assets changes. See the Deemed disposals guidance note. The same principles of calculation apply to both actual and deemed disposals.ResidenceIf trustees (as a whole) are treated as UK resident, the trust is chargeable to capital gains tax on the disposal of assets wherever situated. If trustees (as a whole) are treated as non-resident, the trust is chargeable to capital gains tax only on the disposal of assets which are:•situated in the UK and used in the trust’s UK branch or agency (ie for the purposes of a trade, profession or vocation in the UK),•interests in UK land, or•assets which derive at least 75% of their value from UK land (eg company shares) and the trust has a ‘substantial indirect interest’ in the land. This might be for example a 25% investment in a company holding
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