Hong Kong Inheritance Tax Planning
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Gifts That Are Exempt From Inheritance Tax
If your estate is worth more than the Inheritance Tax threshold – (£325,000 for the 2010-11) tax year – there are some important Inheritance Tax exemptions that allow you to make gifts to others and not have to pay tax on them when you die.
Exempt Beneficiaries or ‘Donees’
You can make gifts to certain people and organisations without having to pay any Inheritance Tax. These gifts are exempt whether you make them during your life or as part of your will.
You can make exempt gifts to:
- Your husband, wife or civil partner, as long as they have a permanent home in the UK
- A ‘Qualifying’ charity established in the EU or another specified country.
- Some national institutions such as museums, universities and the National Trust
- Any UK political party that has at least two members elected to the House of Commons or has one elected member, but the party received at least 150,000 votes
Gifts that you give to your unmarried partner, or a partner that you’re not in a registered civil partnership with, are not exempt.
You can give away gifts worth up to £3,000 in total in each tax year and these gifts will be exempt from Inheritance Tax when you die. You can carry forward any unused part of the £3,000 exemption to the following year, but if you don’t use it in that year, the carried-over exemption expires.
In addition to the annual exemption there are other exemptions for certain types of gifts. These are explained below. Exemptions cannot be combined to increase the amounts given away to the same person.
Some gifts made during your lifetime are exempt from Inheritance Tax because of the type of gift or the reason for making it.
Wedding Gifts / Civil Partnership Ceremony Gifts
Wedding or civil partnership ceremony gifts are exempt from Inheritance Tax, subject to certain limits:
- Parents can each give cash or gifts worth £5,000
- Grandparents and great grandparents can each give cash or gifts worth £2,500
- Anyone else can give cash or gifts worth £1,000
You have to make the gift – or promise to make it – on or shortly before the date of the wedding or civil partnership ceremony. If the ceremony is called off and you still make the gift – or if you make the gift after the ceremony without having promised it first – this exemption won’t apply.
You can make small gifts up to the value of £250 to as many individuals as you like in any one tax year. However, you can’t give more than £250 and claim that the first £250 is a small gift. If you give an amount greater than £250 the exemption is lost altogether.
You also can’t use your small gifts allowance together with any other exemption when giving to the same person.
Regular Gifts or Payments That Are Part Of Your Normal Expenditure
Any regular gifts you make out of your after-tax income, not including your capital, are exempt from Inheritance Tax. These gifts will only qualify if you have enough income left after making them to maintain your normal lifestyle.
- Monthly or other regular payments to someone.
- Regular gifts for Christmas and birthdays, or wedding / civil partnership anniversaries.
- Regular premiums on a life insurance policy – for you or someone else.
You can also make exempt maintenance payments to:
- Your husband, wife or civil partner.
- Your ex-spouse or former civil partner.
- Relatives who are dependent on you because of old age or infirmity.
- Your children, including adopted children and step-children, who are under 18 or in full-time education.
The Seven-Year Rule – ‘Potentially exempt transfers’ (PETs)
Any gifts you make to individuals will be exempt from Inheritance Tax as long as you live for seven years after making the gift. These sorts of gifts are known as ‘Potentially Exempt Transfers’ (PETs).
However if you give an asset away at any time, but keep an interest in it – for example you give your house away but continue to live in it rent-free – this gift will not be a potentially exempt transfer and will be included in your estate for IHT liability calculations.
If you die within seven years and the total value of gifts you made is less than the Inheritance Tax threshold, then the value of the gifts is added to your estate and any tax due is paid out of the estate.
However, if you die within seven years of making a gift and the gift is valued at more than the Inheritance Tax threshold, Inheritance Tax will need to be paid on its value, either by the person receiving the gift or by the representatives of the estate.
If you die between three and seven years after making a gift, and the total value of gifts that you made is over the threshold, any Inheritance Tax due on the gift is reduced on a sliding scale. This is known as ‘Taper Relief’.
Gifts Into Trusts
Gifts into trust are not generally exempt from Inheritance Tax.
The exceptions are: QNUPS and QROPS
Passing On Your Home To Your Children
You can give your home to your children – or someone else – at any time, even while you’re still living in it. However, if your estate (including your home) is worth more than the Inheritance Tax threshold (£325,000 in 2010-11), there may be tax implications.
Inheritance Tax When Passing On Property
For Inheritance Tax purposes, giving your home away is treated as making a gift. The rules about passing on property are complicated, so it’s a good idea to seek legal advice.
There are two things about gifts to be aware of when passing on property:
- Seven-year rule. You can make an outright gift of your home to someone, no matter what it’s worth, and it will be exempt from Inheritance Tax if you live for seven years after making the gift. This is known as a Potentially Exempt Transfer.
- Gifts that you continue to benefit from. If you give your home to your children with conditions attached to it, or if you continue to benefit from the home yourself, this is known as a ‘Gift with reservation of benefit’ and the gift won’t be exempt from Inheritance Tax, even if you live for seven years afterwards.
Giving Your Home Away and Moving Out Of It
You can make social visits and stay for short periods in the home you give away, but there are guidelines as to how frequent the visits can be without the home becoming a ‘Gift with reservation of benefit’.
Giving Your Home Away and Continuing To Live In It
You can continue to live in your home as your primary residence after giving it away, provided you pay a market rent to the new owner. Bear in mind that the new owner may have to pay Income Tax on the rent you pay them.
If you don’t pay a market rent, the gift will be considered a ‘Gift with reservation of benefit’ and the house may be subject to Inheritance Tax.
Selling Your Home and Giving The Money To Your Children
If you sell your home and give the money to your children, the gift won’t be included in your estate for Inheritance Tax purposes, provided you live for seven years after you make the gift.
However, if you sell your home, give the money to your children and then move into their home – whether this is into a granny annex they’ve made for you with the money or a room in a house they have purchased – there could be Income Tax implications. You may be classed as living in a pre-owned asset if you don’t pay the market rent.
If both you and your children sell your homes, pool your money and buy a new home as joint owners to live in together, the part belonging to you will be considered part of your estate for Inheritance Tax purposes.
If you don’t make equal contributions to the purchase, or don’t occupy the same share of the property as you purchased, you may have to pay Income Tax as your share may be classed as a pre-owned asset.
If You Give Your Home To Your Children and They Move In With You
If you give your home to your children and they move in with you, the gift will be treated as a ‘Gift with reservation of benefit’ and the home will still be subject to Inheritance Tax.
However, if you give half of your home to your children, they move in with you and you share bills jointly, the half that you give them won’t be treated as part of your estate for Inheritance Tax purposes as long as you live for seven years after making the gift.
Capital Gains Tax On A Home You Give Away
As long as the home you give away is your main home, Capital Gains Tax won’t be payable.
However, if you give away a second home, Capital Gains Tax may be payable if the property has increased in value between when you first owned it and when you gave it away.
The person you give the home to may also have to pay Capital Gains Tax if they make a profit when they sell, give away or exchange – ‘Dispose of’ – the home, unless it’s their main home.
Ways Of Owning Property
There are different legal ways that you can own your home in England, Wales and Northern Ireland:
- Sole tenancy – you personally own the home 100 per cent
- Joint tenancy – you own the home jointly and equally with one or more people and your share passes automatically to the other joint owners
- Tenants in common – you own a property with one or more people but each share doesn’t have to be equal and you can give away your share however you want to
The Law Is Different In Scotland.
Leaving Your Home In Your Will
If you and your spouse or civil partner owns your home as joint tenants, the surviving spouse or civil partner will automatically inherit the home and there will be no Inheritance Tax to pay on the property when the first partner dies.
If you own a property as tenants in common with another person, you each own a portion of the property. You can pass your portion on to your children when you die. Dividing your property between your spouse and grown-up children in this way reduces the future size of the taxable estate when your surviving spouse dies.
It is a good idea to discuss the implications of changing the way you own your home(s) with a solicitor if your estate is worth more than the Inheritance Tax threshold.
Hong Kong Inheritance Tax Planning
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This web page was written in 2015. For the latest information please download the latest FREE Expat British UK Pension Transfers QROPS GUIDE; QROPS information explained.
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