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Inheritance Tax

Business Succession and Inheritance Tax…

Clients regularly talk to us about their key points of concern when considering what the future will hold for their valuable assets once they have passed away – squandered inheritance or claims on the estate, and Inheritance Tax.  

Following death, legacies can be carved up by squabbling families, spent or claimed against as part of divorce proceedings, turning valuable, profitable and income producing businesses in to no more than a headache for the recipients of a will.  

Inheritance Tax (“IHT”) can worsen that headache significantly; often publicised as the UK’s most hated tax, it broadly operates by taxing the value of a person’s estate which is over and above the nil rate band (currently £325,000). 

While the nil rate band has been frozen since 2009, property (perhaps the most often inherited asset class except from cash) prices have risen significantly, which has resulted in more and more estates and households becoming liable to the tax.  

IHT can be complex and where due consideration and foresight has not been given, dismay and confusion can ensue at what is generally one of the most emotional periods of our lifetimes. 

Proper planning and forethought can moderate the complexities involved with succession and IHT and can help to provide clarity and control to the taxpayer and their loved ones. With proper planning and support It is possible to protect and retain assets intended to be bequeathed for future generations. We have set out an example below of the planning process a family might go through and the benefits that they and their family could enjoy as a result: 

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Calls for the Abolition of Inheritance Tax

Inheritance TaxIt has recently been revealed that HMRC collected a record £4.7bn (2015/16) in inheritance tax receipts during the transitional period before the launch of a new, generous, inheritance tax (IHT) allowance in April 2017. Reports suggest that a significant portion of those receipts stem from families who would have otherwise benefitted from the forthcoming allowance had their relatives not died during this two year transitional period, and this has renewed calls for the tax to be abolished completely.

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Budget 2015 – Number 2

BudgetDuring the closing phases of the recent general election campaign there seemed to be an air of desperation emanating from the Tory ranks, as David Cameron and George Osborne delivered a wide ranging assortment of commitments and pledges aimed at seducing floating voters as they battled to retain office. Such was the slapdash, and allegedly miscalculated, nature of these commitments (particularly regarding deficit reduction) that much derision, and demands for clarity, not only from the opposition, but also from independent entities such as the Institute of Fiscal Studies and the Financial Times (who complained that the party had become ‘fiscally irresponsible’) came their way.

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Deeds of Variation under Threat

iStock_000046894284_XXXLargeFor the past two decades, the beneficiaries of a deceased’s estate have been legally entitled to alter, deny or completely redirect, any legacy bestowed by the deceased, whether under a Will or intestacy. Whilst a Will, and ultimately the known wishes of the deceased are usually regarded as sacrosanct, the requirement for this kind of flexibility after death becomes especially clear in cases where a Will is deficient, out of date, unfair or even lacking in existence, as the consequences of oversights left unchanged could result in financial calamity which would, in many cases, be the opposite result of what was intended.

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Employee Ownership Trust

In March 2013, the Government announced proposals to introduce relief from Capital Gains Tax (CGT) on the sale of an interest in a business into an employee ownership trust (EOT), along with a promise to further investigate employee focussed incentives in a bid to assist companies in the recruitment, retention and motivation of staff.

 

On 4 July 2013, the announcement was put to consultation so that the Government could take views on the proposals for CGT relief and Income Tax (IT) exemption. The provisions subsequently drafted have now been incorporated into the Finance Act 2014.

 

This document looks at the legislation published as a result of the consultation process, (the summary of responses to the consultation process can be found here) in particular relating to the CGT, IT, Inheritance Tax (IHT), and Corporation Tax (CT) reliefs which have now been made available to Employee Ownership Trusts (EOTs).

EOT’s are relatively well established although somewhat under-utilised due to the restrictions placed on trust property; however, these new reliefs should make the structure much more attractive. Focussing on increasing morale and productivity, the EOT is a form of trust which enables a company to sell and distribute shares to its staff. There are conditions which define what makes a trust an EOT, (such as the controlling interest requirement) and employees also have to meet certain criteria to qualify as a beneficiary of the trust, which we will look at below.

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