When Harold Wilson’s government introduced CTT in 1975, it was intended that it would be more difficult to avoid paying the tax. Introduced was a lifetime charge to tax on gifts whenever they were made, certain exemptions and reliefs as well as a set of complicated rules for taxing property settled on trusts.
But everyone likes a challenge and the industry got busy trying to devise schemes to avoid paying the tax. A number of insurance-based mitigation packages were launched in the early 1980s that exploited the facility of giving an asset away and retaining an annual benefit from the gifted property while at the same time removing it from the estate for CTT purposes.
Enter modern day IHT and the gift with a reservation of benefits rule.
In this series of articles we will consider what is included in an estate, how it is calculated and the various exemptions and reliefs. We will also consider ways of mitigating IHT.
There is more to an estate than you might expect. An estate can include the family home, its contents, cars, bank and building society accounts, investments (for example, shares and investment bonds) and a share of any assets owned jointly. It can also include certain gifts made during the deceased’s lifetime.
However, from the estate certain debts and liabilities can be deducted, such as funeral costs and relevant outstanding bills, like credit card debts.
When arriving at the net value of the estate there are also exemptions and tax reliefs to be considered.
The rules surrounding tax reliefs, deductions and gifts can be complex but do play an important part of estate planning for clients.
Valuing an Estate
All assets that the deceased owned absolutely at the date of their death need to be valued and included in the IHT400 or IHT205 forms. But sometimes it can be difficult to establish whether an asset needs to be included and the value attached to that asset.
When valuing a gift, most of the time the market value (realistic selling price) is used. But remember if the gift was part of assets that were worth more combined than split the value of the gift is the loss to the estate. For example, two vases together are worth £100,000 but separately they are worth £30,000. If the deceased gifted one of the vases the loss to the estate is actually £70,000 - the value of the vases together less the value of the vase that the estate retained.
Jointly owned property
Where the deceased owned an asset with another person the whole asset must firstly be valued. Then the deceased’s share needs to be calculated and added to their estate.
Where the asset is a house and the other owner was not the deceased’s spouse or civil partner 10 per cent is taken off the other owner’s share if the house was situated in England, Wales or Northern Ireland. However, if the house is situated in Scotland £4,000 is taken off the whole asset before working out the deceased’s share.
The deceased may also have held a joint bank or building society account with another person.
Even though the surviving owner will automatically inherit the whole of the money, the value of the deceased’s share is included in their estate. If all the money in the joint account was provided by the deceased then the total value of the account should be included.
For example, some elderly people hold their bank accounts jointly with their children to ensure that the children can access the account on their behalf. As the children did not provide any of the money in the account on their parent’s death the full balance should be included in their parent’s estate as it was their money initially.
What lifetime gifts are chargeable to IHT on death?
Also, when valuing the estate all gifts the deceased made in the seven years before death need to be considered.
Written by Kim Jarvis, Canada Life
Kim Jarvis is Technical Manager with Canada Life’s ican Technical Services Team.
Canada Life offers a range of wealth management solutions, including retirement income planning, estate planning and investment solutions from a choice of jurisdictions, including the UK, Isle of Man and Republic of Ireland.
