Sunday, 22 January 2012

The gifts that were never gifts for inheritance tax!

If you gift an asset (e.g. a house) but you continue living in it (or have some benefit from it or you don't pay for the use of the asset), the taxman says, you never gave it away for inheritance tax! So, it will be part of the death estate on the donee's death, even though the donee survives for longer than 7 years.

However, if you die within 7 years of the gift, there is a problem: is the gift to be taxed as a lifetime gift or as part of the deathe estate? The answer is, the taxman will prepare two tax computations and the one with the highest tax will apply. 

If the donee gives up any benefit from the asset just before he/she dies, the asset will not come back into the death estate! But, the taxman will treat it as a lifetime gift - with inheritance tax implications of course if death happened in less than 7 years from the date the benefit was given up! At least that way there is some hope!

Of course, having a gift being taxed as lifetime gift as opposed to being in the death estate has certain advanatages: The amount taxed is often lower for appreciating assets (e.g. houses) and the lifetime gift will attract annual exemptions and taper relief.

So, did you think you were the clever one?

Sunday, 15 January 2012

How to minimise inheritance tax if assets in the death estate stand at a loss after the death!

If during the estate administration period, any losses arising from the sale by the personal representatives of death estate assets (within 1 year for quoted shares and 3 years for land & buildings), will reduce the value of the estate and hence the inheritance tax due on death - thus resulting in practice in inheritance tax repayment.

However, once the administration of the estate has ended and assets have been distributed to the beneficiaries, there will be no IHT repayments should the beneficiaries sell their assets at a loss. So, where there are assets in the estate that have depreciated in value post death, PR's should move quickly in realizing any assets if they have to, in order to have the IHT bill reduced and hence protect the beneficiaries!

And another thing: there anti-avoidance provisions in place to ensure that PR's do not deliberately sell quoted shares at a loss in order to generate an inheritance tax refund. According to those, all purchases of shares up until 2 months after the last sale in the 12 months period after the death, are taken into account for the loss calculation. In the case of land & buildings, we need to look at purchases up to 4 months after the last sale in the 3 years period after the death.

As we can see, the way the law has been designed acknowledges the fact that in practice it is not so unusual for administration periods to drag for way too long periods!

Friday, 6 January 2012

Inheritance tax valuation of similar assets owned collectively

The default position for valuing gifts is NOT open market values (i.e. how much the assets would fetch to the donee if sold on the open market.

Instead, we measure the value of gifts by how much the donor has lost as a result of the gift, i.e. by how much the donor's estate has gone down ("loss to the donor principle").

For the purpose of valuing similar assets owned jointly by spouses (e.g. shares), we look at them as one - doing so increases the value of shares when together spouses have control in the company (more than 50%) but individual shareholdings looked in isolation do not.

However, when similar assets are held jointly by individuals who are not married, the position is different. We value gifts of those assets using the loss to donor principle as explained above. But, there are special rules for real property (land and buildings) to take account of market realities.