Inheritance TaxJun 13 2019

How to help clients value their estate

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How to help clients value their estate

The issue of inheritance tax has divided opinion for a number of years, both among politicians and the general public.

Currently, the nil rate IHT threshold is £325,000 for a single person or £650,000 for a married couple, and has not changed since 2009.

Martin Pickles, technical adviser for the SimplyBiz Group, comments: “Not only has the nil rate band not increased, but there have been no recent increases in the other standard exemptions, for example, the annual exemption being £3,000 since April 6 1981 before the introduction of IHT.

“However, there has been some tinkering around the edges; the introduction of the transferable nil rate band between spouses and civil partners from October 9 2007 and, more recently, the residence nil rate band, from April 6 2017.”

And IHT has been lucrative for HM Revenue & Customs. According to figures from the tax man, IHT receipts are set to reach £10bn a year by 2030, almost double the amount received today, at £5.4bn for the 2018 to 2019 tax year.

Many elderly clients envision they can pass on their homes to their families, when the reality is many homes have to be sold to pay the IHT bill.Robert Clough

Yet it has also been described as a voluntary tax. Neil Jones, wealth management and tax specialist at Canada Life, comments: “With careful planning, it is possible to reduce or remove any liability altogether”.

According to Alison Beech, partner at Percy Hughes & Roberts Solicitors, the main criticism is IHT is interpreted by many as a form of double taxation. She comments: “This forces taxpayers to pay out in the event of their death on income that has already been taxed.”

Robert Clough, investment manager at Thesis Asset Management, says the most common attitude he encounters among clients is, “I worked hard for this money and I am keen to pass it on to my family”.

He opines this is understandable, especially given the area in which many of his clients live. “Estates based in Guildford, where many of my clients reside, paid the most in the UK during 2015 to 2016 as the tax affected 658 families, with the average family paying £231,000 to the Treasury.”

But Mr Jones says it’s not only the wealthy who should be wary. “It’s a mistake to believe people need to be particularly wealthy to incur an IHT liability, as more are being caught by the IHT trap”, he explains.

Moreover, it could force families into financial decisions they might not have wanted to make – as Mr Clough says: “Many elderly clients envision they can pass on their homes to their families, when the reality is many homes have to be sold to pay the IHT bill”.

Despite these warnings, Canada Life’s number-crunchers have warned 18 per cent of estates worth up to £1m do not have an estate plan, and so are set to pay unnecessary IHT.

Lack of understanding

One of the biggest problems with IHT is the lack of understanding. Many people simply do not know how much tax their dependants may end up paying, partly because they do not know how to assess the value of their estate accurately.

Recent figures from a survey commissioned by provider Canada Life revealed the majority of over-45s do not know how much inheritance they will pass onto their beneficiaries.

Canada Life’s 2019 IHT Monitor also revealed 63 per cent of over 45s have not told their beneficiaries how much inheritance they plan to leave.

Mr Jones comments: “There is a clear disconnect among over-45s between their desire to leave something behind to their beneficiaries and the need to fund their own retirement.

“It seems many are losing the battle, acknowledging they don’t know how much they can leave behind to the next generation.”

So how can advisers help clients assess the value of their estate accurately so proper financial planning can begin?

Nucleus head of product technical Tracyann Kneen states: “An individual may calculate the value of their estate, using guidance from HMRC.

“But clearly a qualified professional is best placed to value someone’s taxable estate, as well as provide recommendations to reduce the taxable value subject to the progressive tax that is IHT.”

Firstly, assessing the estate means valuing all the assets owned or shared at the time of death, although as SimplyBiz’s Mr Pickles adds, the value of an estate is constantly changing: “While the crucial value is at the date of death, there is some flexibility for reassessment, should the value have decreased when realised by the beneficiaries”.

So what is included in the estate?

Ms Beech says: “If the deceased owns any property - or a share in a property - it must be included in their estate for IHT purposes. This must include the value of the property at the time of the person’s death.

“Any stocks and shares must also be included at the time of death. If the shares are listed on the London Stock Exchange, for instance, the value can be determined quite simply. However, if the deceased had shares in different companies, a professional valuation may be recommended.”

While valuing cash and quoted shares is relatively simple, it might be necessary for a financial adviser to help clients obtain a professional valuation of other assets whose value might not be readily apparent.

These additional assets can include:

  • Property
  • Land
  • Jewellery
  • Artwork
  • Vintage cars
  • Antiques
  • Furniture and furnishings
  • Life insurance policies not written into trust
  • Anything else which has re-sale value (such as any items listed on insurance policies).

Any non-exempt gifts made in the seven years before death may be included in the estate.

Ms Beech continues: “There are several other additional factors to consider when valuing an estate, including whether the ownership of any property and assets was shared between one or more individuals. Property owned as joint tenants will pass automatically to the survivor outside of the estate.”

What is not included in the estate – whether deducted or exempt – for valuation purposes is also important to consider.

Things that are deducted from a client’s estate for valuation purposes include:

  • The mortgage.
  • Outstanding loans or debts.
  • Overdrafts and credit card balances.
  • Amounts borrowed from other individuals (with valid documentation).
  • Unpaid utility bills.
  • Other bills.
  • Funeral expenses, within reason.
  • Unpaid income tax or capital gains tax bills.

Property

But the biggest thorn in the flesh is the family home.

Soaring house prices have helped some homeowners to become millionaires, but as the IHT threshold has been stubbornly at £325,000 since 2009, hundreds of thousands of modest households are now potential targets for this tax.

Without proper financial planning, Mr Jones warns, “the government is undoubtedly receiving tax that with proper planning wouldn’t need to be paid”.

Moreover, there are exemptions to use. In April 2017, HMRC introduced a tax-free residence allowance – the residence nil-rate band (RNRB) which started at £100,000 and is due to rise by £25,000 per year until it hits £175,000 in 2020.

This means that a couple could effectively leave up to £1m worth of property to their children, step-children or grandchildren (2x personal allowance of £325,000 plus 2x residential allowance of £175,000) without paying tax, provided the property is the client’s residence, rather than a buy-to-let property or holiday home.

Will Hale, chief executive of Key, calls this a “useful exemption”, but says many people do not understand this.

Sarah Saunders, personal tax manager for RSM UK, says: “If you plan to leave the house to somebody other than a direct descendant or your spouse, then it may lead to a high tax charge, and it is not easy to transfer the value while you continue to live in the house.

“If, however, the property is left to a linear descendant it can qualify for the RNRB, effectively expanding your tax free estate materially.”

Using the RNRB

Ms Kneen highlights the main points of the residence nil-rate band to help value.

If clients own their home (or a share in it), their tax-free threshold can increase by an extra £150,000 to £475,000 (from £325,000).

This is if it is left it to a direct descendant (such as children or grandchildren) and their estate is worth less than £2m.

This means that in 2019-20 a couple can pass on £950,000 tax-free.

The residence nil rate band is set to rise to £175,000 from April 2020.

Precious pile?

Rhoda Copper, chartered tax adviser and council member of the Institute of Professional Willwriters, says if a person who is married or in a civil partnership passes away but does not use their nil rate bands on death, then those bands will be available for their spouse or civil partner to use on their death.

She reminds advisers: “If IHT is payable, it is due by the end of the sixth month after the person’s death.

“If there is not enough cash in the estate to fund the tax payment, the executors will need to sell the deceased’s assets or source a loan to pay the tax. Interest is charged by HMRC if the tax is paid late but it may be possible to pay tax in instalments on certain assets.”

So is the family home a precious pile or a tax millstone?

Mr Hale says: “It can be both. Just 8 per cent of estates paid any IHT in 2016 to 2017 and this figure may well fall as the new tax-free residence allowance rules have come in around the clients’ home – which for many is their largest asset.”

However, he acknowledges the equation does rely on the person being in a position to devote their entire IHT allowance to tax-free property transfer. “Depending on how valuable the estate is in totality, the property can either be a tax millstone or well-loved family home," he says. 

This is why Mr Hale is a strong advocate of financial advice and professional estate planning.

Mr Pickles agrees property can be a particular hurdle. He says: “Planning with the home is difficult, as continued occupancy by the potential donors is required, so a gifts with reservation can easily be invoked.

“Yet gifting to children can result in financial difficulties should they become bankrupt or get divorced, since the gifted property is an asset included in the financial assessment.”

As far as he is concerned, the classic whole-of-life policy in trust is “often the most effective planning option to meet the IHT liability and doesn’t rely on the property being sold, which can be a protracted and expensive process”.

But what about clients living abroad? Canada Life’s Mr Jones elaborates: “International property can be a problem in itself, as it can be liable to different laws of succession.

“Depending on the country, it can mean the property goes to someone other than the named beneficiaries of a UK will, so advice specific to the country where the property is situated is important. It may require a separate will to be drawn up in that jurisdiction.”

simoney.kyriakou@ft.com

Simoney Kyriakou is currently on maternity leave