Inheritance tax: what do you need to know?

Richard Gray looks at what the future may hold for dental professionals dealing with inheritance tax

The UK and Ireland differ in their treatment of inheritance tax, but both allow the deceased party’s husband, wife or civil partner to receive the entirety of their estate tax-free. The differences come about when the surviving partner also dies.

Ireland
The situation in Ireland could not be more divergent from the UK at the moment. The Irish government has chosen to go down an altogether different route by reducing the inheritance tax exemption for children from €543k in 2009 to €225k from 2012 onwards. This means that anything above this limit is taxed at 33%.

Some may be able to think of a hundred reasons why this has happened, but I hope you don’t mind if I keep my own counsel on this one.

Northern Ireland
Before you start to panic that all of your money is going to be taken from your children on death, I should tell you that there is an exemption if your estate is under £325k. Some of you may relax, but no doubt there is still some panicking going on as you tot up the value of your house, that apartment in Donegal and those few shares you picked up over the years.

Don’t despair – with timely planning a significant reduction can be made in the tax you pay

Well, fear not, as the UK government has (following extensive lobbying) agreed to allow the surviving partner to use their deceased partner’s exemption. This means that their children can take advantage of a £650k exemption following the death of both parents.

Any taxable assets over £325k (for a single person) or £650k are taxed at 40%. Although you should note that the value of some trading businesses and farms are exempt. If you are someone who intends to keel over with your scaler in hand, you can rest easy knowing that the value of your practice may be exempt from tax.

Planning
There is no doubt that some of you are still panicking about the fact that your estate is above the exemption limit. Firstly, well done, this is a nice problem to have.

Secondly, don’t despair because with timely planning a significant reduction can be made in the tax you pay. There are a number of reliefs available in Ireland such as agriculural relief, business relief and the interestingly-named ‘favourite nephew’ relief (which also applies to nieces).

In the UK, you can take advantage of potentially exempt transfers, business and agricultural property reliefs, annual exemptions and putting your assets into an appropriate vehicle, such as a family company or limited liability partnership (LLP).

Business property relief
As most of you are business owners, I think it makes sense if we explore business property relief in both jurisdictions.

The Irish government is not particularly generous when it comes to exemptions. In business property relief, relevant assets are not exempt and instead get a 90% reduction in taxable value. As the rules of what is included are quite complex, it is perhaps easier to know that any businesses that make/hold investments and deal in currencies, securities, stocks or shares, land or buildings are excluded. Every other business may have the benefit of the relief and should be reviewed in detail.

In the UK, a ‘business’ includes an interest in a business; unlisted shares (or listed if you control the company) and land, buildings, plant or machinery used in your business and held in a trust that you have the right to benefit from.

Trusts
As a very basic bit of planning, until you get your affairs in order, a number of people take out life protection written in trust to cover any potential tax liability. Trusts may also be considered, but like life insurance, this is not for everyone and professional advice should be taken to devise your best way forward.

Richard Gray is a chartered accountant, licensed insolvency practitioner and a partner in a Belfast practice. Contact Richard via email at richard@pgraccountants.com.