What is a Situs Asset?
Situs Assets are known generally as assets that are located for legal purposes. Forms of inheritance, such as shares or property, are included under this bracket and as such are subject to taxes faced by these. This has been the case since April 2017, when the UK Government decided that all UK resident property would come under the scope of the UK Inheritance Tax (IHT). This is the case regardless of which domicile the property is held in or how it is ‘enveloped’.
How is IHT calculated?
The standard rate of IHT is 40%, however, there are many exemptions, these include:
- If the estate value is less than £325,000 then it is below the exemption threshold, and therefore will not be taxed. This threshold is expected to remain the same until 2026.
- Any gifts that were given before the last seven years of the deceased life are exempt from inheritance tax
- The IHT rate lessens to 36% if 10% of the inheritance is given to charity
- If the main property is left to children (including adopted, stepchildren, etc…) the exemption threshold rises to £500,000.
Anything in the first £325,000 of any estate will be exempt from IHT. Only inheritance that is above this rate will be affected by IHT upon death.
Marriage and Civil Partnerships
Inheritance tax rules for married couples and civil partners state that they can leave their possessions and property to each other when they die, without any tax being due. In addition to this, the partner who dies may use both partners’ tax-free allowance when leaving the property and possessions to family and friends.
How does residency affect IHT?
Individuals are now charged IHT directly and indirectly on situs assets, regardless of domicile. All residential property held within the UK will be subject to the tax rates above. This means that even those not considered as UK Domiciles will still be subject to IHT when holding UK-based assets, any assets held outside of the UK will be outside of this scope, however.
Who is considered to be a UK domicile?
Anyone who has lived in the UK for 15 of the last 20 tax years will be considered a UK Domicile and will be subject to IHT on everything they own worldwide.
Business Property Relief
Shares in a private company are also subject to IHT but there is a very valuable relief available known as business property relief. There are certain qualifying conditions to be met for this scheme, and there are specific activities for a business to consider to ensure that they meet the requirements for BPR (i.e., investment vs trading activities and mixed activities), but if applicable, property shares are able to be transferred upon death or during lifetime free of IHT.
Qualifying conditions of BPR
- The company must be privately owned and the shares must be unquoted. An AIM listing is also permitted
- The shares must have been owned for at least two years
- The company must be a trading business as opposed to an investment business.
- BPR is not generally available if the company wholly or mainly deals in land, buildings or investments
- If a company operates both as a trading business and an investment business BPR can be put at risk. In this circumstance, consideration should be given to creating two separate businesses to save tax
- A holding company with trading subsidiaries can qualify for BPR
- Any asset owned by the company but which has now been used wholly or mainly for the business during the last two years or which is not required for future business use will not qualify for BPR (e.g. a high level of cash can cause problems unless there is clear and convincing evidence that it is required for future business purposes
- Finally, if the shares are subject to a sale contract, no BPR is available. It is important to make sure that any shareholder agreement, providing shareholders to purchase the shares of a deceased shareholder, does not result in a contract and thus the loss of BPR
How can Animo help?
Our specialist consultants are able to share valuable insight on these matters as experts in their fields. To find out more on the specifics of the above-mentioned, or if you have any other queries, get in touch today and a member of our team will be happy to support you. Get in contact by calling +44 (0)207 060 0835, emailing firstname.lastname@example.org, or by filling in a contact form below.