Likely Changes to Inheritance Tax

This week the Office of Tax Simplification (‘OTS’) issued the first of 2 reports looking at Inheritance Tax (‘IHT.’) The 2nd is due in the spring and will explore key technical and design issues with the tax.

The OTS says the review has attracted an unprecedented level of public engagement and contribution. In a long article on 24th November trailing the report the Financial Times quotes it as saying ‘the IHT regime is too complex and confusing’ and needs a dramatic overhaul.

I think this will occur in the foreseeable future and it is likely IHT will be replaced by a gift tax. If you want to make lifetime gifts and access our present ‘7 year rule’ time is, I think, of the essence.

I set out below some points from the OTS paper:

  • a common criticism of IHT is that wealthy individuals can give away many of their assets before they die and pay less IHT than others who need to keep a greater proportion to support their living costs;
  • fewer than 3% of estates have a value above £1m;
  • Whilst IHT is set at 40%, research for the report shows the rate actually paid by the average estate is much lower. They say it peaks at just over 20% ‘for estates valued at £6 to £7m, after which it falls to 10% for estates with a value of £10m or more…The reason…. is that a greater proportion of their assets are likely to be covered by a relief. On average 70% of the value of an estate worth more than £10m is relieved in this way’;
  • The above statistics don’t take into account gifts made more than 7 years before a person’s death. Such gifts are not subject to IHT and HMRC does not collect data about them. It has recently commissioned external research on lifetime giving to obtain better data. It is expected that the results will be published in 2019.

As a tax and estate planning practitioner

  • I am surprised by the OTS’s research that for many estates the effective rate of IHT is circa 20%. This is not my experience especially where clients have sizable property assets;
  • I think HMRC is likely to bring in legislation better to track lifetime gifts;
  • I don’t expect a major overhaul of our IHT business property and agricultural property regimes;
  • I think our present IHT regime for lifetime gifts generous. There is no limit on the size of gift an individual can make in their lifetime free of IHT. If they are rich enough they can give away £1bn free of IHT if they survive 7 years and retain no benefit in the asset gifted. This compares to the US where the circa $11m threshold is (I understand) a lifetime allowance.

I say wills are the last communication of love you leave. Estate planning is part of that process. My recommendation is that people make use of the present IHT regime for making lifetime gifts before it is altered or even taken away.

If you think I can help you in thinking through/understanding the tax implications of different estate planning ideas please get in touch.

Robert Schon

29th November 2018.

2nd homes and inheritance tax planning

In writing this note my call to action is to ask readers who may want to embark on UK Inheritance Tax planning on their second home – in or outside the UK – to come and see me

As a solicitor specialising in UK tax law I am recurrently surprised that people who live here (UK tax residents) are unaware that the default position is that they are liable annually to UK tax on their worldwide income and gains.

As HMRC says in guidance issued in November 2017 on correcting [UK] tax due on offshore assets ‘anyone who owns or has an interest in assets held offshore or has had a source of income that is offshore, or has moved income or the proceeds of capital gains offshore is potentially affected’ by a liability to UK tax/an obligation to correct an incorrectly submitted prior UK tax return.

I want in this note to tell a story that comes up not infrequently relevant to individuals who own a second home outside the UK. I conclude by saying there is a wholly legitimate way to embark on inheritance tax planning for second homes that is within the Inheritance Tax legislation and ‘does the job.’

The story

 Mr X who owns a home in Spain personally and wants to mitigate Inheritance Tax on this asset by transferring it to his 3 adult daughters. The Spanish property is important to Mr X and all his family and all intend to use it after the gift.

Mr X is told in Spain that if he makes the intended gift he can enjoy a usufruct (a right to use) for his lifetime and for Spanish purposes won’t have to pay any rent or worry about who pays the utility bills etc after the gift. He is also told for Spanish Capital Gains Tax purposes there is one value for the property which is accepted in Spain in the case of ‘donations’ and this is divorced from anything to do with market value.

The UK advice Mr X receives is that

  1. the UK regards the creation of a usufruct as a transfer into trust on which IHT is due if the chargeable transfer by Mr X exceeds £325,000;
  2. for Capital Gains Tax purposes the UK will deem Mr X to have realised market value when he transfers the Spanish property to the usufruct. He will be liable to pay UK Capital Gains Tax on his gain even though he has received no cash; and
  3. for Inheritance Tax purposes, assuming he enjoys the usufruct within 7 years of his death, he will be treated as having reserved a benefit in the Spanish property and its value will be in his estate on death.

The approved Inheritance Tax route

The Inheritance Tax legislation has an exemption from the gift with reservation anti avoidance rules called the co-ownership exemption.

The co-ownership exemption applies when the donor and the recipient(s) occupy the land; and the donor does not receive any benefit other than a negligible one, which is provided by or at the expense of the recipient(s) for some reason connected with the gift.  Occupation, but not necessarily as a family home, is required


Tony and Cheri own a seaside property in Deal which they acquired many years ago for £70,000. It is now worth £300,000 and does not benefit from Capital Gains Tax main residence relief (Tony and Cheri elected for their London property.) They wish to give a share of the Deal house to their 2 adult children who use it during the summer months. The objective is to have the property owned as to 25% each by Cheri and Tony and their 2 children. Each co-owner comes and goes as they please; leaves possessions in the house; has their own bedroom and a set of keys. For each child it is a second home

The co-ownership exemption from Inheritance Tax will apply provided that all co-owners occupy the Deal property. On the facts above this should be the case.

The gift by each of Cheri and Tony is an Inheritance Tax potentially exempt transfer which will be outside each of their estates if each survives the gift by 7 years.

As regards expenses at a minimum Tony and Cheri and their 2 children should split the running costs of the Deal property 25% each. If Cheri and Tony can afford it there is no Inheritance Tax reason why they cannot continue to meet all the running costs. The 50% they meet for their children will be within the scope of Inheritance Tax but may be exempt from charge either under the Inheritance Tax annual exemption or as a gift out of income.

The gift by Cheri and Tony will be a disposal for Capital Gains Tax purposes and these implications will need to be considered and understood. It may be the charge to Capital Gains Tax can be deferred/’rolled – over.’

The above Inheritance Tax planning has issues if for example a child of Tony and Cheri’s dies before their parents and/or if Tony and/or Cheri cease to occupy the Deal home because they go into a nursing home. With planning, should these facts present, the Inheritance Tax issues that arise can be overcome.

If you would like to discuss anything raised in this note, please get in touch.


Robert Schon

November 2017

Planned changes to our tax regime for non domiciled individuals

On 19th August HMRC announced plans to change the way it taxes non domiciled individuals (‘non-doms’) who live in the UK. These changes will be effective from 6th April 2017.  The planned changes are most pressing for those non doms who have lived in the UK for close to 15 of the last 20 years and own assets outside the UK such as land; cash or shares. They are also however relevant to long-term UK resident non doms who will become deemed-domiciled in April 2017 (see below) because they have been resident in the UK for 15 of the past 20 years.

What makes you a non dom?

You will be a non dom if you come from a jurisdiction outside the UK and have not displayed an intention to leave that other jurisdiction permanently.

UK case law has held that a Canadian who came here in 1932 and married an English woman and lived here with his wife into the 1970s had not acquired a UK domicile because he had always said if his wife predeceased him he would return to Canada.  He remained a non-dom for UK tax purposes because, in effect, he had not fixed voluntarily his sole or chief residence in the UK with an intention to live in the UK for an unlimited time. This case is still good law.

Background to the planned tax changes effective from 6th April 2017

An individual’s domicile is relevant for 3 UK taxes being inheritance tax (‘IHT’) Capital Gains Tax (‘CGT’) and income tax.

For IHT, for many decades the law has had a deeming rule that makes an individual deemed UK domiciled once that individual has been UK tax resident for 17 out of 20 years. The consequence is once X is IHT deemed domiciled s/he is within the scope of IHT on their worldwide estate whereas before IHT  was only relevant to that individual’s UK estate.

The planned changes effective 6th April 2017 include

– extending the deeming rule to make an individual deemed UK domiciled for income tax; CGT and IHT purposes once that individual has been resident in the UK for 15 out of 20 years i.e. it will apply from the start of year 16. Affected individuals will be taxable on worldwide income and gains as they arise and will be within the scope of IHT on their worldwide assets.

– a special window for 1 year from 6th April 2017 for all UK resident non doms to ‘clean up’ their offshore mixed bank accounts/funds comprising cash. This will allow the offshore fund to be reconstituted into its constituent parts being e.g. capital gains; original capital (including gifts e.g. from parents) and income. Once the cash fund has been reconstituted it will facilitate bringing cash into the UK in a way that means the individual can bring clean capital before realised gains and realised gains before taxable income. This will reduce the individual’s exposure to UK taxes when cash from the prior mixed fund is brought here; and

– allowing an individual who becomes deemed UK domiciled on 6th April 2017 to rebase their non UK capital assets to their value on that date. CGT rebasing will not be available to individuals who become deemed domiciled after 6th April 2017.

An IHT planning opportunity for those close to becoming deemed IHT domiciled because they are approaching being UK tax resident for 15 out of 20 years

For IHT purposes non UK assets, called ‘excluded property’, can be kept outside the scope of IHT if the non dom owner settles these assets on trust before s/he has been UK tax resident for 15 out of 20 years. This statutory rule applies regardless of the form of the settlement and even if the settlor is amomg the beneficiaries. In other words s/he can keep non UK assets outside the scope of IHT and still benefit from them. The planning is effective regardless of whether the settlor’s domicile subsequently changes to that of the UK.

This is what I call a ‘blessed route’ meaning it is totally approved tax planning having its foundations in long established thought through tax policy.

About Robert Schon

In 2017 I will I have worked  in the area of UK tax law for 40 years. Throughout I have had an interest in non dom planning. I worked in the City for 30 years before setting up this business in 2005 to offer advice on those areas of tax law that mean the most to me. These include tax and estate planning for my local community.