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Archive for the ‘Inheritance tax’ Category
Wednesday, August 24th, 2011
Q I would be grateful for advice regarding my elderly aunt’s estate: I am her attorney and sole beneficiary in her will. She moved in with us several months ago and has expressed a wish to give her house to me now. I was wondering about the tax implications of this transfer of ownership, both for her and myself, and whether this would be different if the house is kept or sold. Also, is it possible to transfer ownership without incurring solicitor costs? DW
A To answer your last question first: yes, it is possible to transfer ownership of a property without paying a solicitor, by using the forms provided by the Land Registry. But there would still be a cost involved as you would have to pay Land Registry fees of between £50 and £920 depending on the value of the house.
As for tax implications, there would be no stamp duty land tax to pay as gifts of property do not attract this tax. However, there may be a potential inheritance tax bill if your aunt were to die within seven years of making the gift. This would also be the case if your aunt sold the house and gave you cash instead of giving you the physical property. But giving you cash could save you a tax bill, because if your aunt gave you the house and you subsequently sold it, you might have to pay capital gains tax if you sold it for more than it was worth when you were given it.
Posted in Capital gains tax, Features, guardian.co.uk, House News, Inheritance tax, Letters, Money, Property, Stamp duty, Tax | Comments Closed
Friday, July 15th, 2011
A mystery shopping exercise found that as many solicitors produced poor-quality wills as unregulated will-writers
You’re better off going to a solicitor to do your will than to some bloke who collars you in a shopping centre and offers to do it for £49, right? That is the view, of course, of the Law Society’s chief executive, Des Hudson, who extolled the “excellent advice” solicitors provide in his response to Thursday’s Legal Services Consumer Panel report on the will-writing market.
Unfortunately, the panel’s research does not bear this out. A mystery shopping exercise involving 101 consumers seeking wills from a variety of providers found that as many solicitors produced poor-quality wills as unregulated will-writers, concern over whose practices, prompted by Panorama among others, sparked the whole investigation. One in four wills produced by each group failed to pass muster from a panel of experts. On the basis of the findings, you’re better off going to a bank to get your will done.
Though not a big enough sample to be anything more than indicative, it still makes embarrassing reading for the Law Society, which has long campaigned against unregulated will-writers. And it is arguably of greater concern given that, according to the panel, solicitors produce two-thirds of the 1.8m wills written every year, compared to will-writers’ 10% market share.
The panel told the Solicitors Regulation Authority that it needs to look at the training of solicitors in will drafting and, more broadly, the question of ensuring their ongoing competence, which is not checked once they have qualified.
The report identified problems with the unregulated sector, such as sharp sales practices and lost wills where companies disappear without trace, but equally the panel found that will-writers “provide a valuable alternative to solicitors as they tend to be cheaper and the key element of their business model – providing wills and related services in the home – appeals to consumers due to the flexibility of service”.
It added: “The best will-writing companies at least match the service provided by solicitors.”
A survey conducted by the panel found that 90% of people would recommend their will-writing company to others.
But then none of those happy consumers would know if their will was actually defective. The big difference is that if something goes wrong with a will drafted by a solicitor, there is a raft of consumer protections – including a complaints procedure, indemnity insurance and a compensation fund – to fall back on. With many will-writers, there is nothing.
While the panel said more could be done by trading standards officers and the Office of Fair Trading to improve current standards, it called on the supervisory regulator, the Legal Services Board, to make will-writing a so-called reserved activity. This means will-writers would need proper training and regulation to continue in the field.
As a result, the board has launched its first statutory investigation into whether to extend the scope of regulation, although this will actually go further by looking at what measures are required to protect consumers in the linked probate and estate administration markets as well. There’s not much point in making sure a will is properly written if it is easy for a rogue administering the estate it distributes to run off with all the money.
A danger of regulation is that it drives up costs, which could discourage people from making wills – which not enough people do anyway – and could drive providers out of the market, reducing choice. However, the panel thinks the case to regulate is sufficiently strong and these risks can be mitigated. Research shows that people are not that price sensitive when it comes to wills, recognising the importance of getting it right.
Will-writing, a big market with many services that can be cross-sold, is likely to be a key battleground when new providers enter the law later this year with the advent of alternative business structures (ABSs). Already the Co-op, which has built a £25m legal services business in less than five years largely on the back of probate and personal injury work, has signalled its intention to expand its operation by becoming an ABS at the earliest opportunity. Combining its funeral and probate services would be, dare one say, a classic example of horizontal integration.
Neil Rose is the editor of legalfutures.co.uk
Posted in Comment, Consumer affairs, guardian.co.uk, House News, Inheritance tax, Law, Money, Property, Solicitors, Writing a will | Comments Closed
Saturday, June 4th, 2011
• IHT property investigation targets 9,500 estates
• HMRC can impose fines up to 100% of additional tax liability
HM Revenue & Customs has targeted increasing numbers of bereaved middle England families by carrying out almost 9,500 investigations into inheritance tax valuations last year, according to a leading accountancy firm.
UHY Hacker Young said HMRC had conducted 9,368 investigations into estates and beneficiaries in the year to December 2010, and raised additional tax of £70m by challenging the valuations of properties included in the estates of deceased people.
Inheritance tax (IHT) is payable if the assets of an estate total more than the current tax-free threshold of £325,000. UHY says that, despite recent house price falls, property values still pull thousands of families into the IHT net. But estate beneficiaries – often the children of the deceased and their families – face financial penalties if HMRC investigates an IHT property valuation and finds it to be incorrect because “reasonable care” was not taken during the valuation.
HMRC will check by asking whether estate administrators sought professional advice from a qualified independent valuer and whether they questioned anything unusual about the valuation. Tax inspectors would also expect estate administrators to draw the valuer’s attention to particular features of the property that might affect its value (such as development potential, an existing tenancy or occupancy by people other than the deceased).
If HMRC finds that reasonable care was not taken, it is able to fine the estate and its beneficiaries up to 100% of the additional tax liability, as well as the extra tax due.
Mark Giddens, partner at UHY, says: “Inheritance tax doesn’t just affect millionaires, but most of middle England where the estate may consist of little more than an average-size property, and a family member may take on the task of administering the estate themselves.
“If a property is undervalued by £20,000, this could result in an additional £8,000 tax, plus, say, a 30% penalty of the additional tax, making a total of £10,400. That is a considerable sum of money to raise when the estate and its beneficiaries may not be very cash rich.”
Anyone in charge of a deceased person’s estate has a year to submit an IHT valuation before they incur a penalty for late account filing. But interest starts to accrue six months after the end of the month in which the death occurs, so estate administrators are immediately under pressure to get all the valuations in, questioned if necessary, and the tax paid quickly.
It means that many families are caught between trying to file an IHT valuation within the time limit and taking the time to file the most accurate valuation they can. HMRC has previously advised estate beneficiaries to obtain several property valuations and engage a professional valuer or chartered surveyor – though the cost of this is often beyond families.
Giddens adds: “Obtaining further valuations from estate agents or surveyors adds significant additional costs on the estates. However, with house prices in London and the south-east starting to return to pre-recession levels, beneficiaries need to be aware that the potential fine resulting from a mis-valuation will rise proportionately.”
A spokesman for HMRC said: “Only about 3% of estates pay any inheritance tax at all, but when the value of the property can materially affect the tax payable, it’s only right we confirm the value offered. This is not an investigation but a routine check, which in the vast majority of cases simply confirms the value offered. This helps to protect both the exchequer and the taxpayer.”
The Revenue also said that the property part of an IHT bill can be settled over 10 years if it remains unsold, though this is impractical for many families who need to sell the property in order to pay the tax bill.
Posted in House News, House prices, Inheritance tax, Money, News, Property, Tax, The Observer | Comments Closed
Wednesday, May 18th, 2011
Q I’ve a friend who wants to gift their fully paid off house to their son, and still remain living in it. It is below the threshold for inheritance tax so what would she or the son be liable for?
Would she still be required to pay him rent and what sort of values would be allowed? Would it have to be market rates? NM
A If your friend gave away her house and continued to live there rent-free, on her death, the gift would be treated as what’s called a “gift with reservation” because she continued to benefit from the house after making a gift of it.
What that means for inheritance tax is that the house would still form part of her estate when calculating the possible tax bill. So there’s no advantage of giving the house away now and living in it without paying rent.
But if she did pay her son a market-rate rent for the house after giving it to him, it would be treated as a genuine gift and so would not form part of her estate on death (assuming she dies over seven years after making the gift).
However, I’m struggling to see why your friend would want to give up control of and pay rent on a home that she owns outright, and so is currently not costing her anything. Assuming she wants to carry on living there until she dies, it would be much simpler – and cheaper – for her to leave the house to her son in her will.
Posted in Features, guardian.co.uk, House News, Inheritance tax, Money, Property, Tax | Comments Closed
Wednesday, May 4th, 2011
Q My parents are in their 70s and own a second property, which they let out. They want to sell but fear the capital gains tax (CGT) which would be levied. They bought the house for £53,000 in 1987 and it is on the market for £210,000. They each own 50%.
On selling they have been advised of a CGT bill of between £15,000-£25,000 each after both their annual CGT limits of £10,600 have been applied. They understand that the CGT would be levied at 28% as the capital gained, after tax, will take them above the higher tax limit (ie the capital gain is effectively counted as income for that tax year).
However, it is unclear if this higher tax limit is for a single person or a couple. Would just over £80,000 of the gain be taxed at 18% and the excess above this and including all other annual income charged at 28%? If the house is put in four names – my parents, my sister and I – would this mean the CGT bill is reduced because there would be four CGT allowances?
I understand there are also implications for inheritance tax and the seven year rule. I also believe that if this transfer were enacted but the house did not sell then the revenue from the let would be split four ways, with each party paying income tax. I am not clear, though, on whether the transfer of ownership would involve stamp duty. Please help! JS
A Assuming your parents sell the property for £210,000, the most each will have to pay in CGT is just over £19,000. This is worked out by taking the sale price of £210,000, subtracting the purchase price of £53,000 and dividing by two to give a gain of £78,500 that each of your parents might make. From the £78,500 you then subtract the tax-free CGT allowance of £10,600 (in the 2011-12 tax year) to produce a taxable gain of £67,900. Assuming the higher CGT rate of 28% the tax bill would be £19,012 each.
But that assumes all of the gain is taxed at 28%, which it not might be. The capital gain is not taxed as income, but you are right in thinking that any capital gain is added to income to determine what rate of CGT is payable. If taxable income (gross income minus personal tax allowance) plus capital gain comes to less than £35,000, all of the gain is taxed at 18%. If taxable income plus gain comes to more than £35,000 (as in your parents’ case), the portion of the gain that takes you over the £35,000 is taxed at 28% while the portion of the gain up to £35,000 is taxed at 18%. As your parents are taxed separately their actual tax bills will depend on their income, so could be very different.
Transferring half the property to you and your sister would not mean you benefit from four times the annual tax-free allowance of £10,600. Giving away half the property counts as a disposal for CGT purposes and it’s the person (or people) doing the disposing who are liable for the tax and also entitled to claim the tax-free allowance.
But the tax-free allowance is not given per gain, it is given against total gains in a tax year. So if, in the same tax year, your parents gave away half the property and then sold the other half – each making a gain of £39,250 at each disposal – the taxable gain after the annual allowance would be the same as if they had simply sold the property.
If your parents did give you and your sister half the property you are right that inheritance tax could be payable if your parents died within seven years of the gift being made, but not if they survive for seven years. You are also right in thinking that if the house continued to be let you would have to divide the rental income between you and pay tax on it.
Any transfer of property is potentially liable to stamp duty land tax if it is over the £125,000 threshold, so not in your case, although you would have to pay a fee to the Land Registry on transfer of ownership.
Posted in Capital gains tax, Features, guardian.co.uk, House News, Inheritance tax, Letters, Money, Property, Stamp duty, Tax | Comments Closed
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Where there’s a will should there be regulation? | Neil Rose
Friday, July 15th, 2011A mystery shopping exercise found that as many solicitors produced poor-quality wills as unregulated will-writers
You’re better off going to a solicitor to do your will than to some bloke who collars you in a shopping centre and offers to do it for £49, right? That is the view, of course, of the Law Society’s chief executive, Des Hudson, who extolled the “excellent advice” solicitors provide in his response to Thursday’s Legal Services Consumer Panel report on the will-writing market.
Unfortunately, the panel’s research does not bear this out. A mystery shopping exercise involving 101 consumers seeking wills from a variety of providers found that as many solicitors produced poor-quality wills as unregulated will-writers, concern over whose practices, prompted by Panorama among others, sparked the whole investigation. One in four wills produced by each group failed to pass muster from a panel of experts. On the basis of the findings, you’re better off going to a bank to get your will done.
Though not a big enough sample to be anything more than indicative, it still makes embarrassing reading for the Law Society, which has long campaigned against unregulated will-writers. And it is arguably of greater concern given that, according to the panel, solicitors produce two-thirds of the 1.8m wills written every year, compared to will-writers’ 10% market share.
The panel told the Solicitors Regulation Authority that it needs to look at the training of solicitors in will drafting and, more broadly, the question of ensuring their ongoing competence, which is not checked once they have qualified.
The report identified problems with the unregulated sector, such as sharp sales practices and lost wills where companies disappear without trace, but equally the panel found that will-writers “provide a valuable alternative to solicitors as they tend to be cheaper and the key element of their business model – providing wills and related services in the home – appeals to consumers due to the flexibility of service”.
It added: “The best will-writing companies at least match the service provided by solicitors.”
A survey conducted by the panel found that 90% of people would recommend their will-writing company to others.
But then none of those happy consumers would know if their will was actually defective. The big difference is that if something goes wrong with a will drafted by a solicitor, there is a raft of consumer protections – including a complaints procedure, indemnity insurance and a compensation fund – to fall back on. With many will-writers, there is nothing.
While the panel said more could be done by trading standards officers and the Office of Fair Trading to improve current standards, it called on the supervisory regulator, the Legal Services Board, to make will-writing a so-called reserved activity. This means will-writers would need proper training and regulation to continue in the field.
As a result, the board has launched its first statutory investigation into whether to extend the scope of regulation, although this will actually go further by looking at what measures are required to protect consumers in the linked probate and estate administration markets as well. There’s not much point in making sure a will is properly written if it is easy for a rogue administering the estate it distributes to run off with all the money.
A danger of regulation is that it drives up costs, which could discourage people from making wills – which not enough people do anyway – and could drive providers out of the market, reducing choice. However, the panel thinks the case to regulate is sufficiently strong and these risks can be mitigated. Research shows that people are not that price sensitive when it comes to wills, recognising the importance of getting it right.
Will-writing, a big market with many services that can be cross-sold, is likely to be a key battleground when new providers enter the law later this year with the advent of alternative business structures (ABSs). Already the Co-op, which has built a £25m legal services business in less than five years largely on the back of probate and personal injury work, has signalled its intention to expand its operation by becoming an ABS at the earliest opportunity. Combining its funeral and probate services would be, dare one say, a classic example of horizontal integration.
Neil Rose is the editor of legalfutures.co.uk
Posted in Comment, Consumer affairs, guardian.co.uk, House News, Inheritance tax, Law, Money, Property, Solicitors, Writing a will | Comments Closed