Inheritance Tax (IHT) is a concern for many individuals and families if not managed properly, particularly those with significant assets such as property, business interests or investment. Diane Warren, Head of Private Client Tax at Fiander Tovell, highlights the top IHT planning mistakes and how to avoid them.
Failing to Utilise Available Reliefs
There are various reliefs available during life and after death that are key to effective IHT planning. For example, the Residence Nil Rate Band of £175,000 applies if the estate is under £2 million and the home is passed to a direct descendant. Annual exemptions, though small individually, can also add up over time.
Diane’s Solution: “To make sure you don’t miss out on these allowances, review your estate plan regularly and consult an IHT specialist to structure your estate to maximise these reliefs.”
Not Updating Your Will
Your will is the foundation of your estate plan, but many fail to update it after life changes like marriage, divorce or acquiring assets. An outdated will can lead to a higher IHT bill or assets being passed to the wrong beneficiaries.
Diane’s Solution: “Regularly reviewing and updating your will is key to IHT planning. Revisit it every few years or after major life changes to ensure it aligns with your wishes and is tax efficient.”
Overlooking the Seven-Year Rule for Lifetime Gifts
Gifting assets during your lifetime can reduce IHT, but many misunderstand the seven-year rule and taper relief. If you pass away within seven years of gifting, those assets remain part of your estate for tax purposes. Taper relief applies only to the value above the nil rate band, not the entire gift.
Diane’s Solution: “Work closely with an adviser to ensure your gifts are structured in the most beneficial manner. We often recommend a strategy of making regular smaller gifts, which can fall within annual exemptions and be exempt from IHT straight away.”
Leaving it Too Late
IHT planning can be an emotional topic, and many avoid it while they’re younger. However, delaying planning often means it’s too late to take advantage of options that reduce IHT exposure, such as surviving seven years after a gift.
Diane’s Solution: “Understanding your IHT exposure and available reliefs is crucial for effective estate planning. Seek professional help early to make informed decisions.”
Seek Professional Advice
IHT planning is complex, and mistakes can be costly. Diane Warren and her team at Fiander Tovell are experts in estate and tax planning, helping families navigate IHT. Whether it’s valuing your estate, reviewing your will or making lifetime gifts, professional guidance is key to preserving wealth for future generations.
To learn more or discuss your specific needs, please get in touch by calling 023 8033 2733 or email dianewarren@fiandertovell.co.uk
Did you know that in the 2023 Spring Budget, Jeremy Hunt announced changes to Research and Development reliefs that will equate to an extra £50 million of R&D expenditure in 2023/24?
Research and Development (R&D) reliefs provide support to companies that focus on innovative scientific and technological projects. The reliefs allow companies in the UK to continue to be a driving force of advancement on the world’s stage. However, this is inevitably subject to the government’s control over R&D relief rates. R&D reliefs can be tricky to navigate, which is why we’re on hand to break down the different R&D schemes available for different businesses.
To claim R&D relief, you must be able to explain how your project:
looked for an advance in science and technology
had to overcome uncertainty
tried to overcome this uncertainty
could not be worked out easily by a professional in the field.
What reliefs are available?
There are three R&D relief schemes; Research and Development Allowance (RDA); Small and Medium Enterprises Research and Development Relief (SME R&D Relief); and Research and Development Expenditure Credit (RDEC).
First, it’s important to know that Research and Development Allowance (RDA) typically gives traders relief for 100% of qualifying expenditure on research and development. In this instance, qualifying expenditure refers to capital expenditure that is incurred on research and development directly carried out by the trader, or on the trader’s behalf. This is provided that:
the research and development is related to a trade that the trader carries on, or
the trader sets up and commences a trade connected with the research and development.
This relief is similar to the Annual Investment Allowance, except isn’t limited to £1 million of capital expenditure.
For SMEs with less than 500 staff, and a turnover of under €100 million or a balance sheet total under €86 million, SME R&D relief can be claimed. This allows the company to deduct an extra 86% of their qualifying costs, on top of the 100% RDA deduction (total deduction – 186%).
For a profitable company, this effectively reduces the tax bill by 21.5% of the R&D expenditure (this reduces slightly if the company’s profits are small and it pays tax at only 19%).
Loss-making companies can surrender their R&D-related losses for a tax credit. This is normally at 10% of the loss, but there is an enhanced credit rate of 14.5% for loss-making R&D intensive SMEs. The enhanced credit allows loss-making R&D intensive SMEs to claim a credit worth £27 for every £100 they spend, whereas most companies can only reclaim £18.60.
(To qualify as R&D intensive, a company must spend 40% of their total expenditure on R&D.)
The Research and Development Expenditure Credit (RDEC) rate is available to large companies and SMEs that do not qualify for SME R&D relief. The RDEC allows companies to claim a 20% cash credit back on qualifying R&D expenditure. This is taxable at the main rate of corporation tax, so the net cash credit is only 16% of the expenditure.
What research and development costs can be claimed
Throughout the course of an R&D project, there are certain costs that R&D relief can be claimed for. These include:
Employee costs
Subcontractor costs (only for the SME scheme)
Software
Consumable items
Payments to clinical trials volunteers
There are some costs which cannot be claimed, such as:
The production and distribution of goods and services
Capital expenditure
The cost of land
The cost of patents and trademarks
Rent or rates.
All of the above is subject to fairly complex rules limiting the qualifying expenditure, and there are also a number of reporting requirements in addition to the normal corporation tax return process. HMRC are focusing their attention on R&D claims at the moment, and so care must be taken in preparing and submitting any claim for relief.
If you have any questions about any issues covered in this article, or would like further advice about your finances, please contact us on 023 8033 2733.
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