Tag: inheritance tax

Environmental Land Management and Inheritance Tax relief

Posted on by Alicia Sprott

Under the new ELM schemes, farmers and landowners are rewarded for farming in a sustainable way, under the Sustainable Farming Incentive (SFI). They can also be paid to support local nature recovery and the restoration of habitats, and large-scale tree planting.

Whilst farming land in an environmentally sustainable way should continue to attract 100% Agricultural Property Relief (APR) for Inheritance Tax (IHT) purposes, there is a concern that where land is taken out of agricultural production for the recovery of plants, wildlife and habitat protection, the qualifying conditions for claiming APR will not be met. Under current legislation, where land has not been owned and occupied for agricultural purposes immediately before it is transferred, relief is not available. Whilst farmers and landowners may, in certain circumstances, still qualify for Business Property Relief, the inability to claim APR could be a real barrier for farmers and landowners making long term commitments to take land out of agricultural production.

The Government has listened to concerns and has published a consultation document entitled ‘Taxation of environmental land management and ecosystem service markets’. The consultation is a call for evidence on how the tax system can better encourage private investment in ecosystem service markets (production and sale of carbon credits and biodiversity units), and a call for evidence to support a reform of APR, to include relief for land managed for environmental purposes under an environmental scheme.

The Government has made it clear that any reforms of APR will not benefit from land that did not previously qualify for relief. This could be an issue for farmers who have already diversified away from agricultural land use.

The Government’s review is welcome, as there has to date been little guidance from HMRC on the tax implications that the increasing number of environmental schemes can have, for farmers and landowners. In light of the Government’s ambition for net zero by 2050, we expect to see the introduction of further sustainability tax measures that encourage farmers and landowners to not only produce the food we need, but also to protect and enhance our natural environment.

If you have any questions regarding APR and the potential reforms, please get in touch with Kay Mind, Director. The consultation closes shortly, and we will provide further commentary when the Government publishes the results.

This article has been taken from our Private Client Summer Briefing 2023. Click here to read more.

Inheritance Tax: Charitable donations

Posted on by Alicia Sprott

An often-overlooked subject in relation to tax is the relief available on qualifying charitable Gift Aid donations. Gift Aid payments are made net of 20% basic rate tax. If you wish for a charity to receive a total of £1,000, a physical payment of £800 is required. The charity will then claim back the £200 from HMRC. For basic rate taxpayers, no further adjustment is required, however for higher and additional rate taxpayers, an adjustment is required via the tax return. The tax relief is obtained via the extension of the basic rate band, by the gross charitable donation made, meaning more income is subject to tax at the lower rates.

Any charitable donations made in the current tax year prior to the submission of your tax return can also be carried back to the previous year to accelerate any tax relief. This can be particularly beneficial as there is an interaction between Gift Aid payments and the calculation of your Personal Allowance (your personal allowance tapers by £1 for every £2 you earn over £100,000). For example, an individual with a gross income of £101,000 could make a £800 (net) charitable donation and carry this back. This would mean that they have a reinstated Personal Allowance and have reduced their tax liability by £400. The net cost to the taxpayer would be £400 (£800 cost less £400 saving), however, the charity would benefit from the £1,000 donation (£800 paid plus £200 from HMRC).

In addition to Gift Aid donations, individuals can give shares in quoted companies on a recognised stock exchange to a charity. The gross value of the shares, on the date of the gift, is treated as a deductible payment for Income Tax purposes. No further adjustments are required to the tax computation, or the tax rate bands as above. A gift of shares worth £800 would result in an Income Tax saving of £480, meaning a net cost of £320 to the individual. Please note, in this case the charity would not receive the additional £200 as no ‘Gift Aid’ can be claimed from HMRC on an outright gift. This can be especially useful if you have an asset which, if disposed of on an open market, would result in a CGT liability. When making a transfer of assets to a charity, it is not a taxable event for CGT purposes, increasing any further tax savings.

Budget 2023 included an update to the tax relief on EEA/EU charitable donations. Previously, donations to charities located in the EEA/ EU would qualify for Gift Aid, following the principles explained above. However, to obtain tax relief on donations made after 15 March 2023 (subject to a very few charities which have asserted their UK charitable status), it will be restricted to UK charities only. This change is not just relevant for Income Tax purposes but could also affect your Inheritance Tax (IHT) exposure. If you have any specific donations in your will to overseas charities, please contact Duncan Cleary, or our Private Client team, to ensure that the charity (or charities) will qualify for IHT relief under the new definition.

This article has been taken from our Private Client Summer Briefing 2023. Click here to read more.

Record Inheritance Tax receipts in 2023

Posted on by Alicia Sprott

The Government’s decision to freeze the IHT threshold has led to more families being dragged into the IHT net. The IHT threshold of £325,000 has not increased since 2009, while the average UK house price increased by more than 80% between 2009 and early 2023. The announcement in the 2022 Autumn Statement to freeze the IHT threshold until April 2028, will see the Government collect billions in extra tax that would not be possible if the nil rate band had increased with inflation.

While there have been calls for the abolition of IHT, it is unlikely that the Treasury would be willing to forfeit £7bn a year in receipts, which helps to fund our public services, without a viable alternative. We may see some IHT reforms, but scrapping the tax altogether would leave a sizeable hole in the Treasury budget, presumably needing to be filled by increases in other taxes.

In our opinion, given the current state of the UK economy, IHT is here to stay. Therefore, lifetime planning remains key if you wish to minimise the tax you pay to the Treasury and maximise the family wealth you pass on to the next generation.

IHT planning can include lifetime giving, charitable giving, gifting surplus income or setting up a family trust or investment company. Maximising IHT allowances and reliefs also plays a part in reducing your exposure.

Our IHT specialists are on hand to assist you with your estate planning and provide you with bespoke solutions to minimise your potential IHT exposure.

For a full list of our IHT planning services, please download our factsheet here and contact Kay Mind, Director, for any further assistance.

Family investment company: pros and cons

Posted on by Sara McKenzie

An FIC is a private company, either limited or unlimited, where the shareholders are family members who typically hold different classes of shares. The parents will typically hold voting shares while the children would be issued non-voting shares with rights to receive dividends. The governing articles can be tailored to suit the specific needs of the family and cover the distribution of company profits, the return of capital, the transfer of shares and the appointment of directors.

The directors (usually the parents) will have the day-to-day control of the company and make relevant investment decisions.

In addition to facilitating the transfer of wealth to the next generation, the FIC can, if managed efficiently, reduce the family’s overall tax burden.

Benefits of an FIC

An FIC can be set up by transferring cash or assets into the company. The initial transfer of assets into an FIC is not subject to an Inheritance Tax (IHT) entry charge of 20% if the cash/assets exceed the nil rate band of £325,000. This makes the FIC more attractive to families than the traditional trust which limits the funds that can be settled free of IHT. Also, unlike a trust, there are no IHT 10-year charges or exit charges if and when capital is distributed.

The transfer by the parents of cash/assets into an FIC and the subsequent issue/gift of shares to the children can remove value from the parents’ estates and thus reduce the IHT exposure on their deaths. The gift of shares to the children will not be subject to IHT, provided that the parents remain alive for seven years from the date of the gift.

The profits of the FIC are charged to Corporation Tax (currently 19% but increasing to 25% from 1 April 2023), which is lower than the rates of Income Tax and Capital Gains Tax (CGT) for individuals. Holding investments through an FIC rather than personally can result in significant tax savings for the family.

The value of the FIC shares held by the shareholders can be discounted for IHT purposes because they usually hold a minority interest in the company. This can result in a significant IHT saving on the death of a minority shareholder.

Disadvantages of an FIC

An FIC can be tax inefficient if all of the company profits are paid out to the family as this creates the potential for double taxation. The company pays Corporation Tax on its profits and then the shareholders will pay Income Tax when profits are distributed in the form of a dividend. The FIC is therefore more tax efficient if the profits are retained in the company.

If assets rather than cash are transferred into the FIC, this may trigger a CGT charge, and if property is transferred, this could trigger a Stamp Duty Land Tax charge. A transfer of cash is by far the best option to minimise the family’s tax exposure.

The set-up costs and ongoing administration, such as completing annual accounts and Corporation Tax returns, can make an FIC unattractive and therefore, the FIC is recommended for initial investments in excess of £1 million.

An FIC will not be suitable for all families but if you wish to discuss how a family company could benefit you and your family please speak to Kay Mind, Director, or your usual contact at haysmacintyre.

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