Dis­pelling myths

HK Golfer - - Club House -

There are some com­mon mis­un­der­stand­ings about In­her­i­tance Tax.

UK In­her­i­tance Tax (IHT) is a tax levied on the es­tate (money, prop­erty and pos­ses­sions) of a per­son who has died – or in cer­tain cir­cum­stances where life­time gifts have been made, as out­lined in myth 4 be­low. It af­fects any­one who is deemed domi­ciled in the UK and / or owns non-ex­cluded as­sets in the UK.

As you may or may not be aware, some changes have been an­nounced re­cently to the way IHT will be cal­cu­lated. A new main res­i­dence nil-rate band of £100,000 has been in­tro­duced from April 2017, in­creas­ing each year up to £175,000 in 2020. Whilst this move will come as a re­lief to a good many in­di­vid­u­als, el­i­gi­bil­ity will de­pend on in­di­vid­ual cir­cum­stances and not all will be able to ben­e­fit from it. IHT re­mains a threat to many es­tates and it is a tax about which there re­main many mis­con­cep­tions.

Myth one: UK In­her­i­tance Tax doesn’t ap­ply to me now I’ve moved abroad

UK In­her­i­tance Tax is ap­pli­ca­ble to your world­wide es­tate if you are deemed domi­ciled in the UK, even if you are no longer liv­ing there.

Two spe­cial rules ap­ply to those who have em­i­grated from the UK: the three-year rule, and the 15 out of 20 rule. If an in­di­vid­ual’s per­ma­nent home was in the UK at any time in the three years be­fore they died, or if that in­di­vid­ual had been res­i­dent in the UK for at least 15 of the 20 tax years up to their death, then, in most cases, they would be treated as domi­ciled in the UK for pur­poses of In­her­i­tance Tax. These rules are ex­pected to be con­firmed in the fi­nance bill.

HMRC only recog­nises a change of domi­cile if there’s strong ev­i­dence that some­one has per­ma­nently left the UK and in­tends to live abroad in­def­i­nitely. Even if the in­di­vid­ual re­mains non UK res­i­dent, they will re­vert to their domi­cile of ori­gin if they be­come res­i­dent in an­other coun­try.

Myth two: UK In­her­i­tance Tax doesn’t ap­ply to me as I am not a Bri­tish cit­i­zen

If you own as­sets in the UK (ex­cept ex­cluded as­sets), re­gard­less of your res­i­dency, na­tion­al­ity or domi­cile, your es­tate will be sub­ject to UK In­her­i­tance Tax on your death, or on gifts made dur­ing your life­time.

Myth three: There is only one tax rate for UK In­her­i­tance Tax – 40%

Ac­tu­ally, there are three rates ap­pli­ca­ble to the es­tate: 40%, 36% and 0%. The 0% rate, or ‘nil rate’ (which is dif­fer­ent to an ex­emp­tion), ap­plies up to £325,000 per per­son, a level which the govern­ment has frozen un­til April 2021. UK IHT is a cu­mu­la­tive tax, so all gifts made in the seven cal­en­dar years pre­ced­ing an event (nor­mally death) count to­wards this to­tal.

Once you breach that ‘nil-rate band’, you will pay 40% on the re­main­der.

The Bud­get in 2011 added a new band. If the de­ceased leaves 10% or more of their net es­tate to char­ity, then the tax rate is 36% above the nil-rate band (and af­ter de­duc­tions for UK IHT ex­emp­tions and re­liefs). The govern­ment in­tro­duced this to en­cour­age char­i­ta­ble giv­ing and to sup­port the vol­un­tary sec­tor.

Myth four: UK In­her­i­tance Tax is only paid on death

Ac­tu­ally, UK IHT must be paid on some gifts while the donor is still alive. There are three types of gift for tax pur­poses. First, there are those that are ex­empt, where an im­me­di­ate charge to UK IHT will never be due. Next, there are those that are ‘po­ten­tially ex­empt’, where a tax may arise if the donor dies within seven years – and where the cu­mu­la­tive value, of such gifts to­gether with the value of the donor’s es­tate on death, ex­ceeds the donor’s nil-rate band.

Fi­nally, there are gifts that are ‘charge­able’ or tax­able.The most com­mon form of charge­able gift arises when a dis­cre­tionary trust is set up. The tax rate ap­pli­ca­ble to such gifts is 50% of the death rate and is im­me­di­ately payable, though tax only be­comes due once the to­tal value of charge­able gifts made by the donor within the last seven years ex­ceeds their nil-rate band. Gifts to bare trusts and dis­abled trusts are ex­empt.

Myth five: “In this world noth­ing can be said to be cer­tain, ex­cept death and taxes”

Ben­jamin Franklin’s renowned quote was mak­ing the point

that the new United States Con­sti­tu­tion, how­ever solid it looked, was not guar­an­teed to hold; not as cer­tain as it is that one’s wealth will be taxed. How­ever, in the case of UK IHT, it is gen­er­ally only ex­treme wealth or, more likely, poor plan­ning that makes pay­ment in­evitable.

From char­i­ta­ble and party po­lit­i­cal do­na­tions to gifts made to spouses and civil part­ners, there are many ways to save your heirs an IHT bill. In the UK, there is an an­nual gift­ing ex­emp­tion of £3,000 that can be car­ried for­ward if it wasn’t used in the pre­vi­ous tax year, pro­vid­ing the po­ten­tial for a mar­ried cou­ple to re­move £12,000 from their joint es­tate im­me­di­ately. In ad­di­tion to gifts out of so-called ‘ex­cess in­come’, there are more es­o­teric ex­emp­tions, such as gifts for main­te­nance of a de­pen­dent rel­a­tive.

The avail­abil­ity of these ex­emp­tions and the suit­abil­ity of their use will, of course, vary based on in­di­vid­ual cir­cum­stances.

The level and bases of tax­a­tion, and re­liefs from tax­a­tion, can change at any time. The value of any tax re­lief de­pends on in­di­vid­ual cir­cum­stances.

The ‘St. James’s Place Part­ner­ship’ and the ti­tles ‘Part­ner’ and ‘Part­ner Prac­tice’ are mar­ket­ing terms used to de­scribe St. James’s Place rep­re­sen­ta­tives. Mem­bers of the St. James’s Place Part­ner­ship in Hong Kong rep­re­sent St. James’s Place (Hong Kong) Limited, which is part of the St. James’s Place Wealth Man­age­ment Group and is a mem­ber of The Hong Kong Con­fed­er­a­tion of In­surance Bro­kers CIB, a li­censed cor­po­ra­tion with the Se­cu­ri­ties and Futures Com­mis­sion, and reg­is­tered as an MPF In­ter­me­di­ary. St. James’s Place Wealth Man­age­ment plc Reg­is­tered Of­fice: St. James’s Place House, 1 Tet­bury Road, Cirences­ter, Glouces­ter­shire, GL7 1FP, United King­dom. Reg­is­tered in Eng­land Num­ber 4113955.

To re­ceive a copy of The In­vestor mag­a­zine pro­duced by St. James’s Place Wealth Man­age­ment, please con­tact us at hongkong.info@sjp.asia.

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