WILLS, GIFTS & INHERITANCE TAX

Many of us get together with the family at Christmas and that prompts us to think about making or updating our Will.  Whilst it can be tempting to think this is something to leave until later in life, in the absence of a will there are statutory rules which dictate how your assets are distributed on death.  People often think that if they die without making a Will, their spouse (or civil partner) will automatically inherit everything, but this is not necessarily the case. According to the laws of intestacy in England, for deaths occurring on or after 26 July 2023, the surviving spouse would inherit a statutory legacy of £322,000, all of the personal effects, and half of the remaining estate. The deceased’s surviving children (or their descendants) would split the remaining half of the estate equally, and if under the age of 18 their inheritance is kept back for them until they turn 18.

Passing on the Family Home

When considering the wording of your Will, you should note that the inheritance tax (IHT) nil rate band continues to be frozen at £325,000, subject to any announcements in the Spring Budget. There is currently an additional nil rate band of up to £175,000 for passing on the family home to direct descendants on death.   Where some of the nil bands are unused on the death of the first spouse, the balance is available on the death of the surviving spouse, potentially allowing a married couple (or civil partners) to pass on assets of up to £1 million at today’s rates without paying IHT.  The residence nil band is even available when you downsize to a cheaper property. For example, if a married couple currently live in a large house worth £500,000 and downsize to a flat worth £300,000, they could give away some of the proceeds during their lifetime and yet still benefit from inheritance tax relief based on the higher valued property. They could also sell the house and move into a rental property or a care home and still benefit from this nil band.

Leaving Money to Charity

If you leave at least 10% of your estate to charity, the rate of Inheritance tax on the amount chargeable Is reduced from 40% over the nil rate bands to just 36%.  This would reduce the amount passing to other beneficiaries and needs to be carefully considered.

Gifts Annual Exemption

It may be worth utilising the £3,000 gifts annual exemption for 2023/24 and, if available, the unused amount from 2022/23. Note that £3,000 is the overall exemption for the tax year, not the amount for each gift. More generous amounts can be given away by taking advantage of the exemption for regular gifts out of income.

Regular Gifts from Income

Inheritance tax is designed to tax transfers of capital, so if the donor can demonstrate that gifts are made out of surplus income then the transfers are not taken into consideration for IHT. The exemption applies where there is regularity to the payments, such as a standing order to pay school fees or pension contributions on behalf of children or grandchildren. HMRC will also require proof that the payments are paid out of post-tax income and do not limit the donor’s normal lifestyle so detailed records are required.

Pension Contributions on Behalf of Others

Normally an individual’s payments into a pension scheme are limited to their relevant earnings in a given tax year, but this restriction does not apply where the contributions are less than £3,600 gross, allowing parents and grandparents to make payments on behalf of children and grandchildren with limited income.  Payments of £2,880 a year would attract a 25% uplift from the government which could grow to a substantial amount by the time the child reaches retirement age (currently 55 but increasing to 57 in 2028). The parent or grandparent may be able to justify that the payments qualify for the regular gifts out of income exemption from inheritance tax mentioned above if a standing order was set up for no more than £240 a month.

ADVISORY FUEL RATE FOR COMPANY CARS

The table below sets out HMRC advisory fuel rates from 1 December 2023. Where the employer does not pay for any fuel for the company car, these are the amounts that can be reimbursed in respect of business journeys without the amount being taxable on the employee.  You can also continue to use the previous rates for up to 1 month from the date the new rates apply.   For hybrid cars you must use the petrol or diesel rate and for fully electric vehicles the rate is 9p (10p) per mile.

DIARY OF MAIN TAX EVENTS – December, January & February 2024

AND LASTLY   . . .

From the team at Clarksons