The Finance Bill 2013 has introduced a number of changes which will effect how Inheritance Tax (IHT) will operate. We will be highlighting each change in detail. The first change we will look at is the lifetime exemption for transfers from UK domiciled spouses and civil partners to their non-UK domiciled partners.

Since 1983, a lifetime gift or an asset transferred on death between a UK domiciled spouse and his non-UK domiciled spouse is exempt for the first £55,000. Any lifetime gift over the exempt amount is deemed to be a potentially exempt transfer (PET) which will only became chargeable to IHT if the donor dies within seven years of making the gift.

Because of the Finance Bill 2013, any lifetime gift made on or after 6th April 2013 will now be exempt for the first £325,000, which corresponds to the nil rate band for IHT. This means that the UK domiciled spouse can now transfer twice the value of the nil rate band to his non-UK domiciled partner before incurring a tax liability.

SO HOW WILL THE NON-DOMICILED SPOUSE EXEMPTION INTERACT WITH THE NIL RATE BAND?

The easiest way to demonstrate the interaction is by giving an example:-

EXAMPLE

Simon, who is UK domiciled, is married to Simone is Swiss domiciled. On 31 December 2013, Simon gifts Simone a property in London with a value of £300,000. On 1 January 2015, Simon gifts Simone investments with a value of £100,000. Simon then dies leaving an estate at death of £500,000 to Simone.

Gift Of Property Of £300,000 On 31 December 2013

The gift of £300,000 is covered by the non-domiciled spouse exemption of £325,000. This gift will not be subject to IHT.

Gift Of Investments Of £100,000 On 1 January 2015

Out of the total lifetime exemption of £325,000, £300,000 was applied to the gift of property on 31 December 2013. Therefore, only £25,000 can be applied to the gift of the investments. Therefore, £75,000 of this gift will be deemed to be a potentially exempt transfer.

You should also note that because the non-domiciled spouse exemption has been fully used on lifetime gifts, the exemption cannot be applied on Simon's estate at the time of death.

If Simon dies BEFORE 1 January 2022, then his chargeable estate will be the PET of £75,000 plus the value of his estate on death of £500,000. A total of £575,000.

If Simon dies AFTER 1 January 2022, then the PET of £50,000 falls out of consideration and chargeable estate will just be the value of his estate on death of £500,000.

SO HOW WILL THE NON-DOMICILED SPOUSE EXEMPTION INTERACT WITH THE TRANSFERABLE NIL RATE BAND?

On the death of the first partner, any unused nil rate band can be transferred to the surviving partner. How does this work in practice? Again, an example is the best way of showing the interaction between the two.

EXAMPLE

Gerald, domiciled in the UK, is in a civil partnership with Gunther who is domiciled in Germany. On 6 April 2013, Gerald gifts investments worth £500,000 to Gunther. This means that £325,000 of the gift is covered by the non-domiciled spouse exemption with the remaining £175,000 deemed to be a potentially exempt transfer.

If Gerald dies before 6 April 2013 and the value of his estate on death is £75,000, then the chargeable estate will be the estate on death of £75,000 plus the potentially exempt transfer of £175,000 (i.e. a total of £250,000). Assuming that the current nil rate band of £325,000 will still apply, then there will be an unused nil rate band of £75,000 (i.e. £325,000 less £250,000) which can be transferred to Gunther's which, on his death, his estate will benefit from.

If you would like advice on planning your estate then please contact us here.

The Finance Bill 2013 has introduced a number of changes which will effect how Inheritance Tax (IHT) will operate. We will be highlighting each change in detail. In the second part, we look at the change whereby a non-domiciled spouse can make an election to become UK domiciled.

From 6th April 2013, a non-domiciled spouse can make a written election that they be treated as a UK domiciled person for IHT purposes only. The election can be backdated seven years although the effective date cannot be any earlier than 6 April 2013.The election, once made, is irrevocable while the spouse remains in the UK. The election will cease to have effect if the person who made the election is not resident in the UK for four successive years after making the election

ADVANTAGES AND DISADVANTAGES

The main advantage of making the election is that the UK-domiciled partners will be able transfer assets between themselves which will be exempt for IHT.

However, this will need to be set against the fact that a non-domiciled spouse will only be charged IHT on its UK assets. Making the election will result in that spouse being charged IHT on their non UK assets as well.

FLEXIBILITY IN MAKING THE ELECTION

As already stated, the election can be backdated for seven years. Also, the decision to make the election can be deferred until after the UK domiciled spouse has died. This allows for greater flexibility in planning before the election decision has to be made. Therefore, the non-UK domiciled spouse could make the election:-

• during the lifetime of their UK domiciled spouse and be treated as being domiciled from any time after 6 April 2013;
• within two years of the death of the UK domiciled spouse, if that person died on or after 6 April 2013. The election can be made by
  •  the non-domiciled spouse themselves; or
  • by the personal representative of the non-domiciled spouse if the non-domiciled spouse has also died AFTER the domiciled spouse.
  

WHEN IS THE BEST TIME TO MAKE THE ELECTION?

It is lucky that there is such flexibility in deciding to making the election. Some decisions that appear, on the face of it, easy can sometimes come back to haunt you!

EXAMPLE

Gerald, who is UK domiciled, is married to the French domiciled Simone. The couple live permanently in the UK. The couple's only asset is their shared private residence worth £750,000. Simone has no assets located abroad.

The decision to make the election appears simple - the election should be made so that any lifetime or death transfers between the couple will be exempt from tax.

However, on 31 December 2015, Simone's aunt dies leaving Simone a chateau in the south of France worth £1m. Gerald dies on 31 March 2016 leaving his share of the shared private residence to Simone. Simone dies on 31 December 2016.

What would the effect be if Simone had or had not made an election during Gerald's lifetime.

Election Made

If the election is made, then on Gerald's death, Simone would have a chargeable estate as follows:-

The obvious disadvantage of Simone making a lifetime election is that the French chateau is now subject to UK Inheritance Tax.

No Election Made

If Simone does not make an election to be UK domiciled then her chargeable estate will be as follows:

There are a number of points to be made:-

1. If Simone remains non-UK domiciled for IHT purposes then her chargeable estate will only consist of UK based assets. The French chateau will not suffer any UK IHT;

2. The transfer of Gerald's share of the UK based private residence to Simone will be subject to the non-domiciled spouse exemption of £325,000. That means that £50,000 of the transfer forms Gerald's chargeable estate. However, the transfer will be covered by Gerald's nil rate band meaning that the unused nil rate band transferred to to Simone will be £275,000 (i.e. nil rate band of £325,000 less chargeable estate of £50,000).

What this example demonstrates is that the advantage of a non-domiciled spouse making the election during the lifetime of their UK domiciled spouse is very spouse. Only in rare circumstances would making a lifetime election result in less IHT being paid. It is better to wait and see!

If you would like advice on planning your estate then please contact us here.

HMRC has carried on with its policy of publishing the names of taxpayers, whether individuals or businesses, who they claim are deliberately defaulting from their duty to pay tax.

Such information will now be published by HMRC on a quarterly basis and the HMRC can shame and name defaulters if:-

• HMRC has carried out an investigation and the person or business has incurred one or more penalties for a deliberate default;
• the penalties incurred involve tax of more than £25,000.

What HMRC think they will achieve by their naming and shaming of so-called defaulters. If these taxpayers are evading tax why are they not being prosecuted? After the Jimmy Carr affair in 2012 this seems nothing more than sensationalism rather than a serious policy to increase the tax take.

Research by National Savings and Investments (NS&I) has revealed the amount of money individuals are setting aside has reached its highest level for nine years. Britons are now saving an average of £104 a month – equivalent to eight per cent of their monthly income. The beginning of 2013 is the third quarter in a row that saving levels have increased, jumping £90 on the previous quarter.

Set a savings goal

According to NS&I, those aged 25 to 34 are saving the most; £125 a month – more than nine per cent of their monthly incomes. Despite the encouraging news, 20 per cent of Britons admit to saving nothing on a monthly basis.

Of those surveyed, 28 per cent had specific savings goals which led to them saving an extra £39 per month more than those who saved for no specific reason. The most common savings goals for the 25 to 34 group were saving for a home, a mortgage or home improvements.

A helping hand

Elsewhere, similar research revealed that many people are failing to make the most of their tax-free savings allowances. According to research from First Direct, a quarter of adults own stocks and shares but are failing to make use of their stocks and shares individual savings account (ISA) allowance.

Savers are able to invest a total of £11,520 into an ISA in the 2013/14 tax year, with any gains being free from income tax and capital gains tax. Of this amount, a maximum £5,760 can be invested in cash. The remaining sum can be placed in a stocks and shares ISA. Alternatively, the full £11,520 could be invested in stocks and shares.

First Direct found that only 14 per cent of survey respondents had used their available ISA allowance. Reasons included not knowing how ISAs worked, being put off by the application process and not knowing that a stocks and shares ISA even existed. One in ten said they had yet to use their cash ISA limit, 'perhaps not realising that this wasn't a prerequisite for holding a stocks and shares ISA,' said First Direct.

We can help you make the most of ISAs and tax-free savings allowances. Please talk to us to find out more.

One consequence of the implementation of RTI, is that a number of employers are changing the frequency of their payroll from weekly to monthly payroll.

Not only will this reduce the employer's cost of preparing the payroll but also reduces the possible number of situations that they can be fined under the new RTI penalty regime.

PROBLEMS

The employer may accrue problems in the future if they do not make the changeover properly. A change in the payroll frequency represents a fundamental change to the employees' contract of employment.

If there is a clear reserved right in the contract of employment allowing the employer to change the pay date then the employer can do so if it informs the employee of the change and gives at least 30 days notice.

If the employer has NO clear reserved right to make such a change then the employer should consult with the employees regarding the change and seek their agreement to the change which should be documented. They should give employees three months notice before making the change.

If the employees do not agree to the change and the employer goes ahead anyway, the employees have the right to make a claim for constructive dismissal because of the fundamental change to their contract.

HELPING EMPLOYEES WITH THE CHANGE

In order to ease employees into the new system, and to gain the employees' agreement to the change, employers should consider:-

• offering their employees a short term loan to help them make the adjustment to their income patterns; and
• allowing the employees time off so that they deal with any problems they have with the bank concerning any direct debits and standing orders.

We can help your business with regulatory compliance.