Inheritance Tax: The things you need to know

Inheritance Tax: The things you need to know

What do you need to know about inheritance tax?

Inheritance tax is a tax on the estate of someone who has died, and with property prices continuing to rise along with the recent introduction of the residence nil rate band (RNRB), the number of people that will become liable for inheritance tax will only increase. In this article, we look at a few key things that you need to know regarding inheritance tax.

Reviewing your Will

It is often thought that having a will in place can reduce your inheritance tax liability. In actual fact, the main function of a will is to state who will inherit your assets. With legislation continuously changing, it is recommended that you check your will frequently, maybe even as regularly as every four to five years. This reduces the chance of something in the legislation changing and having to pay unnecessary tax.

Joint tenancies

Joint tenancies are very common nowadays, and both tenants have equal rights to the property. But what happens if one of the tenants dies? Everything is passed on to the surviving tenant with zero inheritance tax and, for this instance, the nil rate band (NRB) and residence nil rate band (RNRB) are also passed over. This means that the new tapering rules will apply if the estate is worth more than £2m following the death of the second tenant and if it is worth more than £2.2m (as of 2017) the full RNRB allowance will be lost.

Frozen nil rate band

If the value of an estate is below the current NRB of £325,000, there’s usually no tax to pay. Married couples and civil partners can have a joint allowance of £650,000, but any assets above these two figures come with a tax of 40%. HMRC has frozen the NRB, which was set in 2009, until April 2021 and therefore as assets continue to rise between now and 2021, people will continue to own estates that are worth more than the £325,000 limit. This means that they will be held liable for inheritance tax.

There can be exemptions for example, on the first death when the estate passes to a spouse/civil partner, there would usually be no tax to pay. Gifts to charity do not incur inheritance tax and if they exceed 10% of the value of your estate, it could reduce your inheritance tax rate from 40% to 36%.

The NRB and RNRB are transferable

As the heading says, both the NRB and the RNRB are transferable between married couples and civil partners. This means that the unused percentage of the RNRB or the NRB can be transferred from the estate of one spouse to the other and then claimed back upon the second death.

Multiple homes don’t qualify

In order to qualify for the RNRB relief, you can only elect one residential property. The only people who can elect the appropriate estate are the personal representatives of the estate. Buy-to-let properties, as well as any other properties that have never been their main home are excluded.

Property will be treated individually

Property is an area that will eat into the NRB, or in some cases, exceed it. However, families are aware of this and causes them to give or ‘gift’ the property to their children. This could reduce their liability to inheritance tax but, as a consequence, remove security and control of owning a home and could be considered as a gift with reservation. As a result of this, the new RNRB has been be introduced by the government and will be phased in over a four-year period, starting from the 2017/18 tax year. This will be available to everyone. Regardless of whether the child is step, foster, adopted or linear descendants upon death, the RNRB is only available when the main residence is passed over to children.

Nigel Smith, Director of Hawsons Wealth Management Limited, had this to say: “Inheritance Tax is a voluntary tax. You can plan to effectively reduce your inheritance tax payable upon death.”

Free initial meeting

Natasha Fathers, Director of HWM

Natasha Fathers

Director of Hawsons Wealth Management Limited, Sheffield

0114 229 6557
What is an Enterprise Investment Scheme?

What is an Enterprise Investment Scheme?

EIS: A brief background

In 1994, the Government launched a scheme called ‘The Enterprise Investment Scheme’ or EIS for short, and this scheme was created in order to encourage individuals to invest in companies that were in the early stage of their lifespan. It was regarded as an alternative source of funding to more customary sources of capital.

Investing in any company comes with its risks, but it could be said that there are more risks associated with investing in a company that has only just been set up. This is why tax breaks are available in order to balance that risk, while also rewarding the investment. Since its introduction, over 24,000 companies have received investment and as a result of the scheme, over £14.2bn has been raised. Over £1.8bn was raised under the EIS in 2016 alone, according to the HRMC & National Statistics Report back in October.

What are the tax benefits to EIS investors?

EIS offer a number of favourable tax incentives due to the extra risk that comes with investing in smaller businesses, and these are:

  • 30% upfront income tax relief – increased from 20% in April 2011 to a maximum £1m investment in any tax year and shares are held for a minimum of three years. This means you could have a maximum tax reduction of £300,000 in any one tax year (providing you had the tax liability to cover this amount). The tax relief is set against the year the shares are purchased.
  • After two years you can claim 100% inheritance tax relief;
  • 100% capital gains deferral for the life of the investment;
  • Tax-free growth and;
  • Loss relief

How can I access EIS companies?

Prospective investors can either invest in an EIS ‘fund’ or in single companies. An EIS fund is actually a Portfolio Service usually via a discretionary fund manager. It consists of a manager, who has expertise in EIS or unquoted companies, using their knowledge to select a portfolio of EIS qualifying companies. There are multiple different investment strategies available covering multiple sectors.

Natasha Fathers, Independent Financial Adviser at Hawsons, had this to say: “With the introduction of the tapered annual allowance on pension funding for clients who are high earners; alternative investments such as EIS are definitely forming a greater part of our discussions around financial planning.”

Natasha Fathers Senior Independent Financial Advisor

Natasha has achieved Chartered status and is a senior member of the team at Hawsons Wealth Management. You can contact her or the team at [email protected] or 0114 2296557.

HMRC – Shopping for undeclared VAT

HMRC – Shopping for undeclared VAT

HMRC – Shopping for undeclared VAT

Retailers – Currently there appears to be a HMRC control exercise, being undertaken across the UK, on all types of retailers.This exercise may involve an Inspector visiting the client’s premises.

Please note: HMRC legislation states that the retailer MUST retain a record of each individual transaction. This is usually by way of a till roll(s). Also, a record of your Daily Gross Takings (DGT) and of how those gross takings are made up, must be kept.

KEEPING DAILY “Z” READINGS SHOULD ALLEVIATE PROBLEMS IN THIS AREA.

Tills – HMRC, during VAT inspections, are looking into, the alleged, excessive use of the no sale button on tills. In some cases where there is perceived over-use, HMRC has raised huge VAT Assessments based on the average recorded sales on these tills. Where VAT Tribunals have found that there was excessive use of the “no sale” button, they have found this to be indicative of a sale made but not recorded.

RECORD REASONS FOR THE USE OF “NO SALE” TRANSACTIONS

Card Transactions – HMRC has been obtaining details of debit and credit card transactions from the transaction processing companies and they are using this information to identify businesses who have failed to declare all or part of their income.

Penalties can be huge where instances of this are found, as they are deemed to be deliberate, by HMRC.

RECORDS MUST BE KEPT OF ALL STREAMS OF INCOME

 

Tony Nickson is a VAT Consultant at the firm. He provides practical VAT advice to a wide range of clients in numerous business sectors and advises on matters relating to sole proprietors, partnerships and corporate bodies on all VAT issues including exporting, importing or providing goods/services within the UK. Please contact Tony on [email protected] or 0114 266 7141.

Input Tax – Beware of the pitfalls!

Input Tax – Beware of the pitfalls!

VAT expert Tony Nickson outlines the pitfalls to avoid when reclaiming input VAT.

1. Reclaims for purchases made before VAT registration

It is important to ensure that the maximum amount of input VAT is reclaimed on your business expenditure. This includes input tax on expenditure incurred before you register for VAT which is often overlooked.

Be aware that there are time limits for backdating claims for VAT paid before registration. From your date of VAT registration, the time limit is:

  • 4 years for goods you still have, or that were used to make other goods you still have, and
  • 6 months for services.

You should also remember that:

  • you can only reclaim VAT on purchases for the business now registered for VAT, and
  • they must relate to your ‘business purpose’ – i.e. they must relate to VAT taxable goods or services that you supply.

2. Inputting errors

Duplication – input tax errors involving duplications are common, perhaps due to the increasing use of computers, photocopiers and phones to produce invoices. Pro-forma invoices should not be used to claim input tax.

Transposition errors – a common error, which can be genuine or careless. A single digit error could end up being very expensive, especially after HMRC penalties.

To ensure that errors are avoided, it is important that spreadsheets are set up properly and data is inputted accurately. VAT returns are only as accurate as the person inputting the data!

3. Not adjusting for unpaid expenditure

There is a requirement to add back input tax if the related expenditure remains unpaid six months after the date of the supply or the due date for payment (whichever is the later).

This is often overlooked and is one of the most common errors I found as a VAT officer. It can also add up to substantial amounts of tax owing.

4. Non-business use has been ignored

Input tax may not be claimed on expenditure which is for private or non-business purposes.

Typical examples include: costs related to domestic accommodation; sporting and leisure activities unrelated to the business; personal benefits to company directors, partners and proprietors.

5. Partly exempt – but do you realise it?

When a business has expenditure, which relates to exempt supplies, as well as taxable supplies, it becomes partly exempt and can only claim the input tax related to its taxable supplies.

Many businesses do not recognise that they are partly exempt or carry out partial exemption calculations incorrectly. We can assist with any queries relating to this.

6. No link to a taxable transaction

A basic condition of input tax deduction is that the goods or the services purchased must have a “direct and immediate link with a taxable transaction”.

For example: an item purchased for the home will not usually have any link to your business.

This is a complex area and you should seek advice if you are in any doubt.

7. Business entertainment claimed

The VAT treatment of entertainment costs cause confusion to many businesses. Generally input tax can not be claimed on business entertainment unless it is provided to employees or overseas customers.

Business entertainment includes the provision of food and drink, theatre or concert tickets, accommodation, entry to sporting events and facilities, or the use of capital assets such as yachts and aircraft for the purpose of entertaining.

Sponsorship arrangements can include elements of business entertainment and apportionment of the input tax may be required.

8. Tax reclaimed on cars

Generally, input tax can not be claimed on the purchase of cars.

Input tax can only be claimed on the purchase of a car when one of the following applies:

  • it is a stock in trade car of a manufacturer or a dealer, or
  • it is intended to be used primarily as a taxi, a driving instruction car or for self-drive hire, or
  • it is to be used exclusively for business purposes and will not be available for anyone’s private use, which normally includes home to work journeys.

This restriction applies to purchases of new cars and of second-hand cars on which VAT has been charged.

If you lease a ‘qualifying car’ (i.e. it meets one of the above conditions) for business purposes you will normally be unable to recover 50% of the VAT charged. The 50% block is to cover the private use of the car. You can reclaim the remaining 50% of the VAT charged, subject to the normal rules.

9. Errors relating to the Flat Rate Scheme

A business using the Flat Rate Scheme (FRS) will pay a fixed rate of VAT to HMRC and is generally not able to reclaim input tax on purchases. However input tax may be claimed on individual purchases of capital expenditure goods with a VAT inclusive cost of £2,000 or more.

You get a 1% discount if you use the FRS and you’re in your first year as a VAT registered business. But please remember, the 1% discount is for the first year after registration (not the first year of using the FRS) and is only available for this period.

10. Limited cost trader pays more VAT than necessary

A “limited cost trader” is a business that has to use a special percentage – 16.5% – for the VAT flat rate scheme. The business must review the rules every quarter to determine whether it meets the definition of a limited cost trader.

It is important the rules are reviewed every quarter as you can move from a limited cost rate of 16.5% in one period, to your relevant sector rate in another (if your costs fluctuate above and below 2%).

If you are a limited cost trader you may pay more VAT than you would do on standard accounting – so you should regularly check to make sure the Flat Rate Scheme is still right for your business. If you are voluntarily registered for VAT, it may be that you can de-register from VAT.

If you have any concerns relating to your business’ VAT claims, please get in touch with Tony Nickson or your usual Hawsons contact.

Alternatively, we offer all new clients a free initial meeting to have a discussion about their own personal circumstances – find out more or book your free initial meeting here. We have offices in Sheffield, Doncaster and Northampton.

 

Tony Nickson is a VAT Consultant at the firm. He provides practical VAT advice to a wide range of clients in numerous business sectors and advises on matters relating to sole proprietors, partnerships and corporate bodies on all VAT issues including exporting, importing or providing goods/services within the UK. Please contact Tony on [email protected] or 0114 266 7141.

Tax payment due 31 July – have you paid?

Tax payment due 31 July – have you paid?

Tax payment due 31 July – have you paid?

If you are self-employed or registered for Self-Assessment, then you may be required to make a tax payment by 31 July. This relates to the second instalment on account for the 2016/17 tax year.

How do I pay?

HMRC offer a number of ways to make your July tax payment, including by debit or credit card online, via bank transfer and by cheque through the post. Full details can be found here.

Please be aware that you will be charged interest if you do not pay the payment on account by the due date.

If you have not had a statement or payslip from HMRC before the due date of 31 July do NOT delay paying. Under Self Assessment it is up to you as the taxpayer to pay the right amount of tax at the right time.

What are payments on account?

If your tax liability for the year comes to more than £1,000 (unless more than 80% of your tax liability was met by tax deducted at source such as via PAYE), then you are required to make payments on account for the following tax year. The payments on account are half of the tax you owe for the previous year. Payments on account are payable on 31 January and the following 31 July.

Can I reduce the payments?

If you think your income may be lower in the following tax year, you can apply to reduce the payments on account. However, be aware that if you reduce them by too much and a balancing payment is required, HMRC will charge interest on the shortfall.

You must tell HMRC if you want to reduce your payments on account. This can be done by either completing a SA303 form, via your tax return, or if you file your tax return online, through HMRC’s online services account.

If you have any queries on your July tax payment, please get in touch with your usual Hawsons contact.

Alternatively, we offer all new clients a free initial meeting to have a discussion about their own personal circumstances – find out more or book your free initial meeting here. We have offices in Sheffield, Doncaster and Northampton.

 

 

Craig Walker is a senior tax manager at the firm. He advises on all matters tax related, both corporate and personal, including income, capital gains and inheritance. For more details and advice, please contact Craig on [email protected] or 0114 266 7141.