In this episode, Simon Garner discusses Inheritance Tax and Declarations of Trust.
Simon will explain what Inheritance Tax is and who’s responsibility it is to pay it. He also describes how most estates don’t fall within the Inheritance Tax threshold because they can make use of certain exemptions and reliefs.
Simon discusses the three main areas where clients reduce the amount of Inheritance Tax that may be due on their estates, including Wills, donating to charities and giving gifts.
In this podcast, Simon will also discuss Declaration of Trusts. He describes the circumstances where they can be used and why clients might want to make one.
Transcript
Paul
I’m Paul Harvey and welcome to the Warners Solicitors series of Podcasts. I’m delighted to introduce you to Simon Garner of Warners Solicitors. For this podcast and we will be discussing Inheritance Tax and Declaration of Trust. Before we embark on this topic, Simon, could you describe what you do with Warners?
Simon
I specialise in drafting Wills, putting Powers of Attorney in place and also probate and tax planning as well.
Paul
OK, so let’s start off with Inheritance Tax, Simon, and can we describe what is Inheritance Tax, please?
Simon
Simply whenever a person passes away, Inheritance Tax may be due depending on the value of the estate. What I mean by the estate is that it includes any property, any money, so that’s bank accounts, investment accounts. It is also possessions, so usually their high-value items like cars and jewellery. It will all be taken into consideration then based on the value of that, sometimes Inheritance Tax might be payable.
Paul
Thank you, we will come onto the kind of tax levels that are concerned here, but who actually pays Inheritance Tax?
Simon
Inheritance Tax is actually paid by the personal representative, so under the Will, that’s the executors. If there isn’t a Will in place, then you’ve passed away intestate, so then it would be the administrators of your estate.
Now sometimes I get calls from executors in a bit of a panic saying, “I’ve got this Inheritance Tax bill, and I need to pay it.” Well, what will happen, more often than not, is that if it is a large estate and Inheritance Tax is due, the money will actually be paid from the estate. It’s the duty of those personal representatives to pay it from the estate. So that’s usually how it works.
Paul
If you can give us a sense of how much Inheritance Tax could be applicable
Simon
The standard rate of Inheritance Tax is 40%, so it’s one of our higher taxes as it were but what will happen on most estates is that you can claim a number exemptions which I’ll talk about in a moment. There are also quite a lot of reliefs that you can claim as well. So whilst that figure of 40% sounds quite a lot, it can usually be whittled away. So on, most estates tax won’t actually be payable.
Paul
Simon, I’m interested to know how the last budget might have affected any changes in Inheritance Tax?
Simon
In the most recent budget, what’s happened is the nil-rate band and the residence nil-rate band, which I’ll explain in a second, were frozen, and they’ve been frozen till 2026. So what that means is that with the nil-rate band, that’s the first £325,000 of your estate is tax-free. This is obviously great news. There’s also what’s called a residence nil-rate band, which is £175,000, which can be claimed in certain circumstances. This is where you have a residential property that forms part of your estate, and you’re passing it on to your children or grandchildren who are your lineal descendants, so this is not people at cousins, aunts, uncles, things like that then you can claim that additional band. It is unfortunately frozen till 2026. Hopefully, that will rise a little then, but unfortunately, we’re stuck with those levels for now.
Paul
Did you say unfortunately or fortunately?
Simon
Unfortunately for clients but actually fortunately for the taxman.
Paul
When is Inheritance Tax payable?
Simon
It’s quite rare, actually, Inheritance Tax. We get calls from clients who often say, “oh yeah, they’re worried about an Inheritance Tax bill”, but Inheritance Tax is only payable in about 4% of the estates based on the last government statistics the reason being for that is often estates aren’t worth a lot of money but also there’s certain exemptions and reliefs that you can claim which I have briefly mentioned there.
The main exemption I’d like to talk about is spouse exemption which means that when an estate passes from a married couple or civil partnership to the survivor in its entirety, it is tax-free. So no tax is payable, and then on the second death, you can the consider things like the nil-rate band and the residents nil-rate band, as I just mentioned. So what will happen is on the second death, those allowances can also be transferred, as well, so you can have a £325,000 allowance and a £175,000 allowance for the first to pass away. So combined, you can have an allowance of up to £1,000,000, which, as I said, is a lot of the reason why only 4% of estates are liable for Inheritance Tax because most people’s estates aren’t worth £1,000,000 or they’ve claimed the spouse exemption as well.
There are other reliefs as well there’s agricultural property relief and business relief, but they’re a bit more specific depending on if you own things like farmland or if you’ve got company shares. That’s not suitable for now to discuss that’s a bit more specialist.
Paul
Do you think the government are anxious to increase that percentage?
Simon
By keeping the rate as it is, it’s a little bit of a stealth tax, I think. It’s not rising in line with inflation as it was originally planned, so as house prices go up and as inflation goes up, more estates are going to be liable for Inheritance Tax. Unfortunately, that just how it’s going to be; until the economy is a bit more stable, the government hasn’t got any reason to change it, unfortunately.
Paul
If you look in areas like Tunbridge Wells, a lot of detached houses that are almost on average around about £1,000,000 aren’t they in certain core areas.
Simon
Well, that’s exactly it. I’m based in Sevenoaks, and we have exactly the same thing. It’s just unfortunate people in this area that a lot of their allowances will be taken up just by their property, so if they’ve had very successful careers and they’ve got money in the bank, and they’ve got inheritances, then yeah, unfortunately, a lot of their estates are going to be liable to Inheritance Tax.
Paul
So is there a deadline by which to pay, and has Covid actually affected these deadlines?
Simon
Yes, it has to a certain extent. When someone passes away and Inheritance Tax is due, there isn’t a deadline, but HMRC will ask for Inheritance Tax to be paid by the end of the sixth month after that person passes away. Now it’s not the end of the World if you don’t pay it by that date, but interest will be due only at a nominal rate, but still, interest will be due on the balance Inheritance Tax.
I think Covid has a bit of an effect because, with people working from home and everything taking a little bit more time with processes not necessary in place at the time, there has been a bit of a delay by HMRC and by the probate registry. It’s just unfortunate that things are taking a bit longer. I think they’re catching up as processes have been improved, but it’s just something really for executors and administrators to be aware of when someone passes away. If you think you’re dealing with a large estate, then you want to try and avoid that interest if you can.
Paul
Are there ways to reduce the amount of tax paid? Is that something that is part of your remit?
Simon
Yes, it certainly is. There are three main ways, really. The first one is having a Will. A lot of people will say to me, “oh, I just need a basic Will, and I’ve got very simple circumstances, and I don’t want anything complicated.” Which for a lot of people is absolutely fine. It’s not a problem, but what we do as solicitors is we take into account all the circumstances in your life really, not only whether you own your property, what your bank balances are and what your family arrangements are because if you want basic Will but then, for example, you’ve got kids from a first marriage and you’re on a second marriage we need to consider the circumstances to make sure not only you’ve got the best Will for you but also one that is most tax-efficient as well. So that’s usually the best place to start.
If you give at least 10% of your estate to charity and your estate is liable to Inheritance Tax, you will be charged at 36% rather than 40%, so if you’ve got a large estate, that’s something to consider. But also in terms of those reliefs, I mentioned earlier on, so just making sure you claim if there’s a spouse exemption, you can claim it with the nil-rate band and the residents nil-rate band and if they are transferable as well. One way not to pay any Inheritance Tax is to make sure the value of your estate is below £1,000,000 if you are a couple.
So one way of doing that is using your annual £3000 pounds allowance. Then there are also various other ways of doing it so if you give money to a child for their wedding and also you can give money away as well. I know there’s this term ‘The bank of Mum and Dad’ a lot of people will give money to their children for their house deposits which is fine if you survive more than more than seven years from the date of that gift then that won’t form part of your estate. So the long and short of it is sort of spend it is the short answer. If you spend the money and you’re below those allowances then you won’t have any Inheritance Tax to pay, but obviously, your beneficiaries will inherit less money as well.
Paul
Thank you, there are some very useful bits of information there Simon thank you very much, so that’s about Inheritance Tax and now let’s come on to Declaration of Trust
Simon
A Declaration of Trust quite simply is a legally binding document which records the financial arrangements between joint property owners and really anyone who’s got a financial interest in that property.
Paul
Why would I need a Declaration of Trust?
Simon
There’s a couple of ways you can own a property. You can own them as joint tenants or tenants in common. The effect of owing as joint tenants is that on the first death, I keep mentioning death apologies, but 100% of the property will pass to the survivor. So it’s nice and simple. You can also own it as tenants in common, which is where you each own a distinct share of the property. It’s usually 50/50, but there’s not really a right or wrong way of owning property, but it really depends on what your circumstances are, and it’s up to us as solicitors to advise you on what the pros and cons are of each and how best to own the property depending on what your situation is.
For example, if you have a second marriage, you may want to own it as tenants in common so that your share of the property under your Will goes to your children and your partner or stepchildren, and their share can go to them. Really the purpose of it is ultimately to remove uncertainty as to what happens to each person’s financial investment in that property and then just provides a bit of clarity for everyone involved.
Paul
How much uncertainty does it cause if I don’t have a Declaration of Trust in place?
Simon
It’s not the end of the World, but it’s more to do with if anyone disputes it. The usual position is if you don’t declare how you want to own a property and there’s two of you, you’ll own it as joint tenants, so it keeps it very simple if you own it as joint tenants and you don’t specify the shares, or it’s not clear the default position is 50/50. So it’s really depending if you’ve got, say, for example, bank of Mum and Dad is giving you a share, and you want to pay that back then it’s good to have something included in there. Or, for example, one person is in a better financial position than the other, and they say, “well, I’m going to pay 75% of the mortgage” or “I’m going to provide a different amount of the deposit”, and you want to record that in there then it’s usually best to try and do that because if you don’t then, it can be a bit of a problem down the road.
Paul
Should I register my Declaration of Trust with the Land Registry? Is that compulsory?
Simon
It’s usually best to do that, and the idea being, as I said, going back to the idea of being certain you want to try and have it on the title just so it’s clear for everyone involved. Not just for you, but for anyone buying the property. What will happen in practice is that your solicitor will put what’s called restriction on the title, which will be nice bold lettering saying “Restriction” it will say, in very convoluted language, essentially that this property can’t be sold without the consent of both owners, for example, there are often other restrictions in there so there’ll be something like a mortgage or if it’s leasehold you’ll need the consent of the freehold owner. There’ll be something on the title that says something to that effect. So it’s usually best to do that, and your solicitor should advise you of that when you purchase the property.
Paul
Can a Declaration of Trust be overturned or challenged by anybody?
Simon
It can be, but this is very difficult. It’s done through the courts, and it’s avoidable if possible. What we usually suggest, and we also suggest this with Wills, is that you really review the paperwork every three to five years. The reason being is because what may suit you now might not suit you in the future. I had that with clients fairly recently where they said they put a Declaration of Trust in place 20 years ago because they just got married and there were very specific circumstances. They were looking at it again, and they thought, hold on, we’ve been together 20 years, and we don’t really need this anymore. Let’s just own it as joint tenants. We know what we want to do, and they were absolutely fine with that, so again, it depends on whatever suits your circumstances really.
Paul
I suspect clearly you need to use a solicitor to draw up a Declaration of Trust, and of course, Warners are very experienced in that exercise.
Simon
Whether you need a solicitor, it’s much the same as drafting a Will. These are things that you can do, but it’s a case of you want to make sure they’re right, so I’ve often been sent documents by potential clients saying, “Oh can you look at it and can you review it” and sometimes these documents are OK, but there’ll be issues they haven’t considered. So we would look to consider all the circumstances involved we use all the experience that we’ve gained over the years and just make sure that the documents are the most suitable for you and they are executed, and most importantly they’re valid as well so that they are worth paper they are written on.
Paul
Simon, what’s the best way for people to contact you if they want more information?
Simon
So the best way is to either call reception on 01732 770660 or alternatively we have an enquiry form on the website so if you put in all your details so name, email address, phone number, and at the little message section of the bottom and you can put that for my attention and then I’ll be happy to help.
Paul
Thank you very much. I’ve been with Simon Garner of Warners Solicitors, and we’ve been talking about Inheritance Tax and Declaration of Trust.