Inheritance tax – don’t pay what you don’t have to

We have all heard the saying before ‘the only two certainties in life are death and taxes’, so when it comes to inheritance tax (IHT) this means they can turn up together.
Almost £4.9 billion was paid in inheritance tax in 2016/17, which is a record high. No wonder the Chancellor Philip Hammond has asked for a review of ‘simplification’.
The first step is to try and work out if you will be affected by IHT. Under normal circumstances, IHT is paid at 40% of the value of your entire estate, which is your property, money, assets and possessions over £325,000 (the normal nil rate band). There’s also an additional allowance if you pass on your family home to a direct descendant, which is currently set at £125,000. The simplest way to check if you might be affected is by using an online calculator, this will work it out for you. Although they won’t take into account all of your personal circumstances.
Making gifts
There are plenty of ways to reduce or remove IHT altogether and, the sooner you do this the better. One way is to make gifts.
Money towards house deposits or university fees, are great ways to give your loved ones that helping hand towards their future. Gifts like this can also reduce the size of your estate and your potential IHT bill, though there are rules to follow and to adhere to.
1. Exempt gifts – these are IHT free immediately.
2. Potentially exempt gifts – these may become IHT free over time.
3. Chargeable gifts – these might mean an immediate IHT charge.
You should however be aware that once you make your gift you can’t take them back, so it is worth considering if the recipient will be responsible with it.
The gift becomes the property of whoever you’re giving it to. Therefore, you will no longer benefit from any income and you won’t be able to access the capital in the future if you needed it.
You should always consider taking professional financial advice when planning life changing financial situations. Your tax advisor at McPhersons will show you the steps to take when planning for IHT.
Tax rules and benefits are constantly changing and depend on personal circumstances. Your tax advisor can check that you are up-to-date and are making the most of your personal allowances.
Contact us or give us a call and we’ll help you understand whether IHT is likely to affect you, and whether you could take action to reduce it.
Ainsley Gill
McPhersons Chartered Accountants

What are the alternatives to buy to let?

HMRC seems determined to make things less attractive for buy to let landlords by increasing stamp duty as well as phasing out the ability to claim your mortgage interest as an expense. The latter means that some landlords will be paying tax on income that they don’t actually receive due to mortgages. So what are the alternatives?

Rent a Room
Under the Rent a Room scheme, you are allowed to claim rental receipts of up to £7,500 per annum tax free for renting a furnished room in your home. You can rent out as much of your home as you like. This scheme can’t be used for homes converted into separate flats.
In addition, you can also provide services to these guests such as cleaning and laundry, possibly even providing meals. This residence has to be your main or only residence.
Furnished Holiday Let (FHL)
A Furnished Holiday Let is a type of rental property classification in the UK and Ireland. It provides some tax advantages as long as it meets requirements relating to availability, actual bookings and level of furnishings.
Contrary to longer term lets, capital allowances can be claimed to kit out your holiday let (making it higher spec would obviously attract higher income). Other expenses that can be claimed are similar to a buy-to-let property; interest on loans, bills, letting fees, cleaning products, cleaning costs, general maintenance costs. Beware of personal use – if you use the property for half the year, only 50% will be considered commercial expenses.
Earnings are classed as ‘relevant earnings’ so can be used to make pension contributions.
When you sell the property you may be able to claim Capital Gains Tax reliefs which are also not available for normal buy-to-let property owners.
To top it off, council tax is not applicable if you rent the property out for more than 140 days per annum. However, business rate property tax is payable (although you may be eligible for small business rate relief on this.
You may wish to consider whether these benefits outweigh the risk of not filling the property for sufficient days of the year. To qualify for the above, the property must be available to the public to let for at least 210 days as well as actually let for 105 days.
In addition, if your income exceeds the current VAT threshold which is £85,000, you will have to become VAT registered and hence charge VAT on rental incomes. This only becomes an issue with multiple properties (or indeed expensive ones).

Contact our tax department for advice on Rent a Room, holiday lets or buy to let properties
Ainsley Gill
McPhersons Chartered Accountants