Proposed changes to IHT for siblings

At the moment, only those who are married or who are registered civil partners are exempt from paying inheritance tax (IHT) on money or property left to them by their spouse. This was expanded to include heterosexual civil partnerships at the end of 2019.

But the law does not cover siblings who are cohabiting.They are liable to pay the standard IHT rate of 40% of anything over the £325,000 threshold.

The injustice this poses for some households was highlighted by the recent case of Catherine and Virigina Utley. They have lived together for over 30 years in the house in Clapham which they both bought. Despite being co-owners, when one of them dies the surviving sister will be forced to sell the property to be able to pay the IHT, estimated at about £140,000. 

Shocked by the unfairness of this situation, Lord Lexden has brought a new Bill to the House of Lords. Under the new proposals, siblings would be exempt from paying IHT on property left to each other, provided they had lived together for at least seven years and that the surviving sibling was over 30. As well as brothers and sisters, the law would also apply to half brothers and sisters and be valid in England, Wales, Scotland and Northern Ireland.

While this would be good news for cohabiting siblings, some people feel the proposed changes do not go far enough. The new law still wouldn’t provide any protection for those who are cohabiting but who are not married or in a civil partnership. Cohabiting couples do not have any rights to their home on the death of their partner. In this respect, the UK is way behind other countries.  

A change to the law for cohabiting siblings in terms of IHT will raise questions as to where the line is drawn. Other platonic couples, such as parents and children, or friends who own a property together, may also want to be considered. The rules will have to be sufficiently tightly defined so as not to be open to abuse.      

If you would like to review your IHT liability, do not hesitate to get in touch with us.

The question of who should pay for social care is a pressing one; successive governments have grappled with the issue and none have found a concrete solution. At the moment, some people who don’t qualify for local council funded care have to sell their homes to cover the costs, which can exceed £1,500 a week. 

Last year, in his first speech as Prime Minister, Johnson outlined the need for a reform of the current system and back in March, the government launched a parliamentary inquiry into the shortage of care available on the NHS. Since then, the large number of coronavirus deaths in care homes across the country has kept the issue firmly in the spotlight.

Ministers in Boris Jonhnson’s health and social care taskforce are currently studying a scheme where everyone over 40 would start contributing towards the cost of care in later life. Over 40s would have to pay more in tax or national insurance, or be obliged to insure themselves against hefty care bills.

Matt Hancock, the Health Secretary, is a keen advocate of the plan and is committed to coming up with a solution.

The system that ministers are considering draws on pre-existing models for funding social care in Japan and Germany. Both systems have drawn admiration as sustainable ways of solving the challenges that an ageing population brings.

Under the German system, everyone starts contributing to the scheme when they start working, and employers match their contributions, similar to workplace pension schemes in the UK. At the moment, 1.5% of each person’s salary, plus a 1.5% employer contribution, are ring fenced for social care in later life.

Elderly Germans can use this money to pay carers to help them at home or use them for care home fees. They can even give them to relatives and friends for helping to look after them. 

The Japanese scheme is similar, but people only start contributing when they are 40.

At the moment, nothing has been confirmed. Officials are still looking into the exact mechanism by which over 40s would pay. However, social care experts have cautioned that an insurance model would have to be compulsory to ensure people paid.

The scheme under consideration has found favour with campaigners. Caroline Abrahams, the charity director at Age UK, said the scheme “may be rather a good deal, since that system offers a level of provision and reassurance that we can only dream of here at the moment.” She added that the scheme would “arguably [be] an appropriate act of national atonement after the catastrophic loss of life we’ve seen in care homes during the pandemic”.

It will be interesting to see how the government eventually decides to finance its scheme. Watch this space.

With many furloughs coming to an end and an increasing number of redundancies being announced, the Bank of Mum and Dad is being asked to step in on a regular basis to help its adult children with their financial commitments. 

Parents are seeing their children’s debt escalate, which is often primarily due to rent payments. Under coronavirus legislation, private landlords have to give their tenants 3 months’ notice to quit but nevertheless the payment is still due. While homeowners can take a mortgage payment holiday and add the debt to the end of the mortgage, tenants have to repay what they owe much more quickly, even if they have agreed a schedule with their landlords. Housing benefit is often unlikely to cover the full rent. With no source of income on the horizon, grown-up children may resort to requesting a parental bailout.      

One hazard in a shared house can be that one of the occupants may decide to ‘disappear’ if they are very behind with the rent, leaving the other housemates to cover the arrears. This is a particular issue if the parents of one the remaining tenants had agreed to act as rental guarantors at the outset.         

Which leads on to the next stage of helping with house purchases. Many parents are keen to help their offspring to get a foot on the property ladder. According to Legal and General, the average contribution by the Bank of Mum and Dad rose by more than £6,000, to £24,100 in 2019. This put it in the top 10 of UK mortgage lenders, with parents having given £6.3 billion collectively. 

In the current climate, especially with many high Loan to Value (LTV) mortgages being withdrawn, parental input is certainly needed. But when parents may be facing financial difficulties of their own, are they going to be as willing to keep on lending and gifting deposits?

Some parents may decide to hold fire in the hope that more properties may come onto the market and prices may drop dramatically. Others may decide that if it’s been a bit of a shock to the system having a grown-up child suddenly back under their roof under lockdown, helping provide the funds for a quick house purchase may be preferable!    

If you do decide to act as the Bank of Mum and Dad, it’s important to make sure you can afford it. If you’re using your pension and savings to help out, consider what impact that will have on your own retirement. 

It’s also important to make sure it’s clear whether the money is a gift or a loan, as this will have different tax implications. If your child is moving in with a partner, you may want a say in how the rights to the property will be held should the relationship break down at some point.     

Do get in touch if you have any queries regarding the issues involved in being part of this well-known financial lending institution.

The big issue which has been dominating the accounting world in recent months is IR35. Will businesses be ready when the reforms come in on 6th April? 

The overwhelming view expressed by representatives from various accountancy bodies is that they will most certainly not be, not least because legislation is still not finalised.         

IR35 was introduced in 2000 as an anti-tax avoidance rule, aimed at freelancers or contractors who were deemed by HMRC to be, in effect, working as employees. Under the new rules, every medium and large private sector business in the UK will be responsible for determining the tax status of any contractor they use. This has already been the case in the public sector since 2017.

HMRC is adamant that the reforms should go ahead in order to tackle the ‘fundamental unfairness’ surrounding the current non-compliance with the rules, which it believes could cost the Exchequer more than £1.3bn by 2023-24.   

However, the investigation by the House of Lords finance sub committee has revealed that there are still many uncertainties and unanswered questions. Despite the impending start date, the actual implementation rules are still being set out by HMRC. There is also concern that the CEST tool, which checks someone’s employment status, is still not up to the job.

Julia Kermode, chief executive of the Freelancer & Contractor Services Association, commented that there was mounting evidence that clients had been unable to fully prepare in advance of the April 2020 changes. She explained that a number of businesses were only just finding out about their new liabilities as HMRC’s education programme was delayed to do the general election. 

While large employers, who have in-house tax teams, may have been able to make some preparations, smaller businesses are thought to be less ready as they don’t have the expertise to understand the intricacies of the off-payroll reforms. And even if larger companies are in better shape, the view is that no one is truly prepared.

Businesses are disappointed that their calls for the reforms to be postponed have been ignored and feel that the review by the Treasury didn’t go far enough. They feel that the issues experienced by the public sector since 2017, with many contractors simply leaving and working elsewhere, have not been heeded. This has caused major problems with resourcing and recruitment in organisations like the NHS. There is also concern that some large companies will react by simply issuing a blanket ban and not hiring contractors at all. 

Although experts have welcomed the fact that the Treasury has promised a ‘soft landing’ in the first year of the reforms, they have warned that businesses in the private sector shouldn’t be complacent. The ‘light touch’ will still mean that HMRC will impose penalties if there is thought to have been deliberate non-compliance.   

At the moment, only those who are married or who are registered civil partners are exempt from paying inheritance tax (IHT) on money or property left to them by their spouse. This was expanded to include heterosexual civil partnerships at the end of 2019.

But the law does not cover siblings who are cohabiting.They are liable to pay the standard IHT rate of 40% of anything over the £325,000 threshold.

The injustice this poses for some households was highlighted by the recent case of Catherine and Virigina Utley. They have lived together for over 30 years in the house in Clapham which they both bought. Despite being co-owners, when one of them dies the surviving sister will be forced to sell the property to be able to pay the IHT, estimated at about £140,000. 

Shocked by the unfairness of this situation, Lord Lexden has brought a new Bill to the House of Lords. Under the new proposals, siblings would be exempt from paying IHT on property left to each other, provided they had lived together for at least seven years and that the surviving sibling was over 30. As well as brothers and sisters, the law would also apply to half brothers and sisters and be valid in England, Wales, Scotland and Northern Ireland.

While this would be good news for cohabiting siblings, some people feel the proposed changes do not go far enough. The new law still wouldn’t provide any protection for those who are cohabiting but who are not married or in a civil partnership. Cohabiting couples do not have any rights to their home on the death of their partner. In this respect, the UK is way behind other countries.  

A change to the law for cohabiting siblings in terms of IHT will raise questions as to where the line is drawn. Other platonic couples, such as parents and children, or friends who own a property together, may also want to be considered. The rules will have to be sufficiently tightly defined so as not to be open to abuse.      

If you would like to review your IHT liability, do not hesitate to get in touch with us.

Do you know where your will is? Even more importantly, do the people who will act as your executors, in the event of your death, know where your will is stored?  

The recent discovery at Lloyds Banking Group that 9,000 wills had been left in storage and not passed on to customers serves as a stark, cautionary tale. The bank is now desperately trying to match envelopes with the relevant families.  

The wills were kept in the bank’s ‘Safe Custody’ service – an ironic name given that the custody actually proved too safe, with no one knowing about the wills’ existence. The service closed to new customers in 2011.

The error means that some executors may have administered a deceased’s estate using what turned out to be the wrong will, unaware that the right one was stored at Lloyds. As a result, some families are having to re-examine old bequests years after they were thought to have been settled.     

Not only will this have caused great inconvenience, it will also have been incredibly distressing for those involved. 

Michael Culver, chairman of Solicitors for the Elderly, commented that the processing failure could lead to estates being wrongly distributed, contentious probate claims, negligence claims against executors and administrators, issues with tax payments and, ultimately, the last wishes of the deceased not being honoured.     

The bank, however, has said that it was only in a small percentage of cases that they did not trace the will when a customer died. According to their spokesperson, 90 per cent of the newly discovered wills had already been superseded by a later will or there were copies available elsewhere. In some cases, the estates were declared intestate but had been distributed in line with the deceased’s wishes anyway.         

What action can be taken? Families affected should make a complaint to the Financial Ombudsman and a counter claim against Lloyds directly. Compensation will be offered, including legal costs, and LLoyds have promised that it won’t claw back assets given to the wrong people. 

As for the future, what lessons can be learnt? It is recommended to always register a will. This case illustrates that it is often better to use a solicitor, who will be specialised in making and storing wills, rather than a high street bank. You can also register a will with the Probate Service for a one-off fee of £20. 

The Society of Trust and Estate Practitioners (STEP) advises against safety deposit boxes for wills as it means the executor cannot get access until they get probate and this cannot be granted without a will, so it becomes a bit of a Catch 22 situation.  

If you do have a will stored in a safety deposit box, consider moving it elsewhere to ensure it is accessible. Make sure its whereabouts is known to your executors. It may not be something you or your family want to think about right now but it could save a lot of stress and worry at a difficult time later.