Understanding the new residence nil rate band

A new Inheritance Tax main residence nil-rate band (RNRB) will be introduced from April 2017. The RNRB will introduce a new £175,000 per person transferable allowance for married couples and civil partners when their main residence is passed down to children after their death. This allowance is in addition to the existing £325,000 per person Inheritance Tax threshold.

The allowance will be phased in from 2017-18 at £100,000, increasing to £125,000 in 2018-19, £150,000 in 2019-20 and £175,000 in 2020-21. The allowance will be available to the deceased person’s children or grandchildren. There will be a tapered withdrawal of the additional nil-rate band for estates with a net value of more than £2m. This will be at a withdrawal rate of £1 for every £2 over this threshold. There are also special measures in place that ensure there is no disincentive to downsize or sell a home from the date the measure was announced. Ie if the downsizing results in excess cash being within the estate then this cash will be treated as if it were part of the main residence.

Taken together this means that by 2020-21, parents will be able to pass on property worth up to £1 million free of Inheritance Tax to their direct descendants. From 2021/22 onwards the RNRB is due to increase annually in line with the Consumer Prices Index (CPI).

 

To qualify for the RNRB:

  • The deceased’s estate must include a residential property or qualify under the downsizing rules.
  • The RNRB is transferable where the second spouse or civil partner dies after 5 April 2017 irrespective of when the first of the couple died.
  • If there is more than one residential property the personal representatives can nominate one to qualify.
  • The property must have been a residence of the deceased. A buy-to-let property would not qualify for the relief.
  • The property must be left to a direct descendant (including a step-child, adopted child or foster child) or lineal descendant of the deceased.
Gary
post by
on 11/04/2017

Gross assets test and other requirements

A company hoping to raise finance using the SEIS scheme must meet a number of requirements. Some of these apply only at the time the relevant shares are issued. Others must be met continuously, either for the whole of the period from date of incorporation to the third anniversary of the date of issue of the shares, or in some cases, from date of issue of the shares to the third anniversary of their issue. If the company ceases to meet one or more of those conditions, investors may have their tax relief withdrawn.

This includes the following:

  • The company must be unquoted at the time of issue of the shares. AIM and PLUS Markets listed companies are eligible.
  • The company must have fewer than 25 full-time employees (or part-time equivalents). If the company is the parent company of a group, that figure applies to the whole group.
  • The company must have no more than £200,000 in gross assets.
  • The company must not have had any investment from a Venture Capital Trust (VCT), or issued any shares in respect of which it has submitted an EIS compliance statement.
  • The company is restricted as to the amount of money it may raise under SEIS. It may not receive more than £150,000 in total under the scheme.

In this blog we will look in some more detail at the gross assets test which states that the issuing company’s gross assets (per their balance sheet) must not exceed £200,000 immediately before the shares are issued. It is important to note that this test only applies at the time the shares are issued. A company’s gross assets refers to all the assets without any deduction in respect of its liabilities.

If the company is part of a group the £200,000 figure applies to the total gross assets of the group. However, shares held in subsidiaries and loans to subsidiaries are excluded for the purposes of calculating the gross assets figures.

Within 3 years of the date of the relevant share issue, all the monies raised by the SEIS must be spent for the purposes of a qualifying business activity, carried on either by the issuing company or by a 90% subsidiary. If this condition is not met, investors will lose their tax relief. The condition will be considered to be met if an insignificant amount is used for a non-qualifying purpose, or remains unspent.

Give us a call in the office to find out if you meet the requirements to utilise SEIS.

Gary
post by
on 28/03/2017

Understanding lifetime transfers

The current Inheritance Tax limit is £325,000 per person. This is the amount that can be passed on free of IHT as a tax-free threshold. An additional Inheritance Tax main residence nil-rate band (RNRB) will also be introduced from next year.

On top of this allowance, gifts made during a person’s life are not subject to tax at the time of the gift. These lifetime transfers are known as Potentially Exempt Transfers (PETs). These gifts or transfers achieve their potential of becoming exempt from IHT if the taxpayer survives for more than seven years after making the gift. If the taxpayer dies within 3 years of making the gift, then the IHT position is as if the gift was made on death.

A tapered relief is available if death occurs between three and seven years after the gift is made. There are insurance products such as a seven-year term assurance policy that can be used to reduce the amount of IHT due should the taxpayer pass away within seven years of making a gift. Obviously, there will be an additional cost associated with such insurance policies.

The rules surrounding PETs have resulted in many people wanting to make gifts long before they die. The problem in practice is that they do not want to give up control over the assets concerned. A common example is a person giving their house away but continuing to live in it rent-free. Such gifts are known as ‘gifts with a reservation of benefit’.

HMRC does not accept that a true gift has been made so the ‘gift’ remains subject to IHT even if the taxpayer dies more than 7 years later. These rules can be even more complicated if a trust has been established. We would be happy to advise those with existing trusts and those considering setting up trusts on the best way forward.

We also look at SEIS investments as a way to exempt assets from inheritance tax while still staying under your control. These investments becoming exempt from inheritance tax after just two years since they will qualify for business asset relief.

Gary
post by
on 14/03/2017

Take-up of EIS and SEIS

HMRC recently published the latest National Statistics on the number of companies raising funds under the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS). The full report makes for interesting reading and includes updated figures for 2014-15. The first figures for 2015-16 are expected to be published in April 2017.

The main points raised in the report are as follows:

Enterprise Investment Scheme

  • Since the EIS was launched in 1993-94, 24,620 individual companies have received investment through the scheme and almost £14.2 billion of funds have been raised.
  • Data for 2014-15 shows that 3,265 companies raised a total of £1.81 billion of funds under the EIS scheme. This represented the highest amount of funds raised since the scheme was launched. In 2013-14, 2,840 companies raised £1.59 billion of funds.
  • Data for 2014-15 shows that the 1,660 companies raising funds for the first time under the scheme raised a total of £1.02 billion compared with 1,405 first time companies raising £897 million in 2013-14.
  • In 2014-15, companies from the Business Services sector accounted for over £600 million of investment. This comprised one third of all EIS investment. The hi-tech and energy & water supply sectors also garnered significant investment.
  • London and the South East continued to account for the largest proportion of investment with companies in these regions receiving 65% of investment in 2014-15.
  • The number of investors claiming Income Tax relief on Self Assessment forms under EIS increased from 28,830 in 2013-14 to 29,380 in 2014-15. The majority of these investors made a claim for tax relief in respect of an investment of less than £50,000.

Seed Enterprise Investment Scheme

  • In 2014-15, 2,290 companies received investment through the SEIS and £175 million of funds were raised. This compares with 2,110 companies raising a total of £171 million under SEIS in 2013-14.
  • The average investment per company under SEIS in 2014-15 was around £77,000.
  • Over 1,800 of these companies were raising funds under SEIS for the first time in 2014-15, representing £152 million in investment.
  • In 2014-15, companies from the Hi-tech and Business services sectors made up 62% of the amount of SEIS investment received.
  • The largest proportion of funds raised through SEIS was raised by companies registered in London and the South East.

In 2014-15, 8,150 investors claimed Income Tax relief on Self-Assessment forms for SEIS, compared to 7,795 investors in 2013-14.

Gary
post by
on 28/02/2017