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Telegraph
5 days ago
- Business
- Telegraph
Families hit with higher inheritance tax bills after HMRC disputes property values
HM Revenue and Customs (HMRC) hit 1,500 families with higher inheritance tax bills last year after disputing the value of their properties. The tax office challenged property valuations in 7,500 death duty cases last year, according to data revealed by The Telegraph in a Freedom of Information request. Under inheritance tax rules, when a person dies, the executor must declare the value of the estate to HMRC. But if that property later sells for a higher price, then the tax office may open an investigation to claw back unpaid inheritance tax. Of the 7,500 disputes, HMRC concluded that 1,500 families had underestimated the value of the property, which resulted in the tax office pursuing them for extra inheritance tax. Ian Dyall, of wealth manager Evelyn Partners, said: 'HMRC now has a significant amount of available data at its disposal. 'If that data points towards undervaluation of an asset, or even assets omitted from the inheritance tax submissions, then they are likely to investigate.' Mr Dyall said high-value properties in particular would be 'carefully scrutinised' by the tax office given the potential revenue at stake. To work out whether an executor has underestimated the price of the property, HMRC will refer to the Valuation Office Agency (VOA). This government agency was recently scrapped as part of a cost-cutting drive, and will be subsumed into HMRC by April 2026. In about half of cases last year, the VOA agreed with the valuations given by the taxpayer. But in over 3,500 cases, the VOA pushed ahead with an investigation. This three-month process typically involves a physical inspection of the property, as well as requests for further information from the taxpayer. Sean McCann, of the insurer NFU Mutual, said: 'The valuation office is instructed to consider any features that might make it attractive to a developer, such as a large garden or access to other land suitable for development.' In over 1,500 cases, the VOA decided the property value was higher than the taxpayer had said. Mr McCann said: 'Valuation of property is not an exact science. Negotiation will often occur where the executors have obtained a professional valuation which differs from HMRC's.' If they cannot come to an agreement about the value of the property, then the dispute can be escalated to the First-tier Tribunal Hearings. This comes amid a rise in inheritance tax investigations by HMRC. The tax office launched 3,961 investigations in the 12 months to April 2025, up 31pc on the previous tax year. By comparison, the number of property valuations referred to the VOA has fallen in recent years, from almost 16,000 in 2021-22. However, the proportion resulting in the VOA suggesting a higher property price has increased. For the best chance of defending an enquiry by HMRC, Mr Dyall recommended getting two independent valuations from qualified surveyors. Inheritance tax is charged at 40pc on the value of an estate worth more than £325,000. However, homeowners can claim an extra £175,000 if they leave their main home to their children, giving couples a £1m allowance. An HMRC spokesman said: 'The majority of people pay the correct amount of inheritance tax. In cases where it is suspected someone has not, investigations can be opened, including referrals to the Valuation Office Agency.'
Daily Mail
7 days ago
- Business
- Daily Mail
I don't currently work and draw a monthly income through my savings - will I be hit with a tax bill for the interest?
In the financial year 2024/25, I was in employment until the summer of 2024 – I was a higher-rate taxpayer. Since then, I have been unemployed and am drawing an income from a substantial pot of savings. In terms of my savings, I definitely breached my £500 personal savings allowance for 2024/25. But now am I'm confused as to what my PSA is – and whether HMRC will hit me with a big tax bill somewhere along the line. I'm in my late 30s and don't draw an income from anywhere else, just from my savings – including easy-access, monthly income, NS&I income bonds, Premium Bonds and once a year from fixed rate accounts. I also have Isas and investments, but they are currently growing – I'm not drawing any income from them. Am I being paranoid, will HMRC send me a tax bill and how does it know how much interest I earn from my savings? Lucie Spencer, financial planning partners at wealth manager Evelyn Partners replies: Whether or not you have breached your Personal Savings Allowance (PSA) depends on how much taxable income you earn in the 2025/26 tax year. As you are currently unemployed and no longer working full-time, you may end up being a basic rate taxpayer depending on when you start working before the end of this financial year. In that instance, your PSA will have doubled to £1,000 from £500, which, put simply, means that you can earn up to £1,000 in interest on your cash savings before you are liable for tax at your marginal rate of tax. However, you could end up with an even bigger PSA than you realise. As you remain unemployed, you still have your personal allowance of £12,570 to swallow up some of your savings interest. Low earners can use their personal allowance of £12,570 to earn interest tax-free if it has not been used up by earnings or other income, such as a pension. Those earning less than £12,570 receive an extra £5,000 tax-free allowance for their savings income, known as the starting rate for savers. This means an individual can earn £12,570 in income and £6,000 in savings interest (£5,000 starting savings allowance plus the personal savings allowance of £1,000) - that's a total of £18,570 from wages and savings interest before tax is applied. However, things get a little more complicated for those earning between £12,570 and £17,570 as for every £1 of non-savings income above the personal allowance, they lose £1 of their starting savings allowance. There may be a challenge from your one-year fix. The point at which a nest egg is liable for tax can depend on the interest rate applied to the account so a fixed-rate account that pays out all the interest at maturity could create a tax headache if all the interest gets paid out in a tax year where you have a substantial income. Ultimately, how much tax you must pay on your savings at the end of this financial year will depend on your total taxable income, including any future employment that starts before April 6, 2026, and the level of interest you earn. Anna Bowes personal finance expert at The Private Office replies: I'd say you are being sensible rather than paranoid, as it is important to be aware of any tax that you might owe. And of course, it not that easy to navigate. The PSA is linked directly to your income tax band, which is based on your total taxable income for any given tax year (6 April to 5 April). And the PSA is different depending on the level of tax you pay in that year. If you are a basic rate taxpayer, your PSA is £1,000 of tax-free savings interest. It's £500 if you're a higher-rate (40 per cent) taxpayer. But if you are an additional-rate (45 per cent) taxpayer, you do not have a PSA at all. You mentioned that you were employed until the summer of 2024. If the income from your savings and your salary took you into the higher rate tax bracket in 2024/25 then your PSA was £500, regardless of whether you were only employed for part of the year. The PSA is based on your marginal rate over the course of the tax year. Onto the current tax year – if the total taxable income from your savings and investments is less than the higher rate tax threshold, but more than the personal allowance of £12,570, then you are likely to be a basic rate taxpayer. But again, it depends on what your income is over the whole tax year, so if your circumstances change before 5 April next year and your income takes you over the higher rate threshold, then your PSA will again be £500. One thing to note is that, of the savings accounts you have mentioned, Premium Bonds prizes, and any interest earned on Isas are tax-free and don't count towards your taxable income or PSA. As you are not currently earning anything from wages or pensions, you may be able to use the full £5,000 of tax-free interest from the starting rate for savers. Tom Minnikin, partner at tax firm Forbes Dawson replies: If your only income is from earning interest – and assuming the income is less than £100,000 – you will qualify for various tax-free allowances. These are: The personal allowance of £12,570; the starting rate for savings which is £5,000; and the PSA - £1,000 if you are a basic rate taxpayer or £500 if you are a higher rate taxpayer. If you earn more, you will be taxed at either 20 per cent or 40 per cent. This depends on whether the income falls into the basic rate or higher rate tax bracket. Interest is taxable in the tax year it arises. This is typically when the interest is credited into your account, provided it is available to draw. Some accounts prevent access to interest until the end of a fixed period. In these circumstances, the interest will only arise at the end of the period. However, if the interest can be freely drawn but will incur a penalty, this remains taxable at the point it is available. Prizes from premium bonds - like interest - are not taxable. Income earned through an Isa wrapper is also tax-free. Will HMRC send you a tax bill? Anna Bowes replies: Banks, building societies and NS&I report your taxable interest directly to HMRC each year. When HMRC receives this information, it checks if you've gone over your PSA. If you have, any tax due will usually be collected via a change to your tax code in the following year – assuming you're back in employment and therefore part of the PAYE scheme. If you are not employed, you may need to fill in a Self Assessment return and pay the tax due. The bottom line though is that it is your responsibility to make sure you pay any tax due - if your interest does exceed your PSA, you will owe tax at your marginal rate for that tax year on the excess. So, keep track of how much interest you are earning and estimate your overall likely tax rate. If you expect to exceed your PSA again and in the future, it may be worth putting more into Isas if possible, where interest and growth are sheltered from tax altogether. Lucie Spencer replies: If the interest you earn on savings is over £10,000 you need to complete a Self-Assessment tax return. If you remain unemployed and don't complete Self-Assessment to self declare the interest you earn, your bank or building society will inform HMRC at the end of the tax year of how much interest you earned. You will then be notified on how much tax you need to pay, though you may find, if your income is lower and you can boost the tax efficiency of your savings, that the amount may be negligible.
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The Independent
28-05-2025
- Business
- The Independent
How your pension salary sacrifice works - and what HMRC tax changes would cost you
The publication of government research undertaken by HMRC around changes to workplace pensions has caused a stir, with the suggestion that the salary sacrifice scheme used by many working people in the UK might be set for an overhaul. This research questioned how businesses felt about prospective changes which would see pension contributions subject to income tax and National Insurance payments, resulting in an annual cost of up to £560 for employees and £241 for employers, based on an average £35,000 salary. Presently, most workers are auto-enrolled into saving into their pension automatically, though there are different thresholds, methods and benefits around this. The principle attraction here is that the money is taken from salaries to go into pensions pre-tax, giving relief to the rate of each person's tax band. HMRC's survey of more than 50 companies, commissioned under the previous government but only released by HMRC now, showed that most viewed the proposals for change negatively - though the Treasury has dismissed suggestion of impending alterations as 'totally speculative' and said all areas of tax are 'regularly' subject to research. 'This is a private HM Revenue & Customs consultation initiated in 2023 and it's far from certain that the Treasury has any intentions around salary sacrifice, but it's not the first time that it has come under the spotlight as a potential area for shoring up the tax take,' Gary Smith, financial planning partner at Evelyn Partners, explained to The Independent. Difference between DB and DC Defined benefit (DB) schemes are most frequently seen in the public sector and offer a set, guaranteed amount of income in retirement. They can be on a final salary basis or a career average, with employers funding it. Defined contribution (DC) schemes are much more common and many workplaces use them for auto-enrolled employees. Here, your eventual pension amount depends on how much has been put in across your working life, plus the returns earned on that invested money by pension providers. As such, they can vary wildly in value and even in terms of timing when is best to access them, depending on external factors like the stock market. Employee and employer pay in at least eight per cent combined, though many employers may pay in more than their minimum three per cent to match an employee's contributions. Boosting contributions to workplace pensions A crucial tool workers have in ensuring they have enough to fund their retirement is to up their own pension contributions across the years. Adding slightly more if you get a raise, for example, can have a material impact later down the line. And if you're able to comfortably reduce your immediate income, checking your workplace options to see if you or your employer contributes more is another way to make sure future you is facing a bigger retirement pot. Salary sacrifice it is not limited to just pension contributions. Childcare vouchers, vehicles or other benefits can come under salary sacrifice schemes. HMRC proposals and what they would mean for you It's important to note that the research published is not something imminently coming into force, or that any changes might occur at all right now. But pensions are subject to change - it's only a little over a decade since auto-enrolment came into force, remember. Changes such as these researched ones might have a massive impact though, not just in what you're left with decades down the line, but whether companies would even operate it any further. 'Salary sacrifice (SS) is a very efficient and effective way for employees to save into pensions, and it seems inevitable that watering it down – or dismantling it altogether - would hit pension saving, not just because the tax incentive would be diluted but also because faith in the pension system would be dented by more Government interference,' added Evelyn's Mr Smith. 'After the Chancellor's Budget statement, when she announced an increase to employers' National Insurance from April 2025, salary sacrifice arrangements for workplace pension schemes became more attractive for many employers, because of potential NI savings. If SS reform were to be seriously considered, employers who have introduced or started to introduce SS will be wondering which way to turn. 'Making pension contributions via salary or bonus sacrifice is a popular option for those whose earnings might fall into the 60% tax trap, a zone between £100k and £125,140 where the combination of high-rate tax and a tapered reduction in their tax-free personal allowance leads to a highly punitive effective income tax rate of 60%, which for many families is worsened by the withdrawal of child-care benefits. 'The fault here lies with an unfairly structured income tax and benefits system that penalises people in this situation disproportionately for increasing their earnings. Removing a perfectly legitimate mitigation strategy - increasing pension contributions via SS - would seem harsh without reforming the disincentivising tax step itself.'
Daily Mail
28-05-2025
- Business
- Daily Mail
I'm 80 and want to move in with my son and his family, will it create a tax trap?
My wife and I are 80. What are the tax implications and pitfalls, if we sell our house and buy another jointly with my son and his family in order to live together? What can we do to mitigate these? A.S, via email SCROLL DOWN TO ASK YOUR FINANCIAL PLANNING QUESTION Harvey Dorset, of This is Money, replies: Moving in with family can help people see enjoy their later years in comfort, with the help they need along the way from loved ones. Having grandparents on hand can also be a vital help for working parents too. Intergenerational living won't be without its tricky moments but it is a great way to spend precious years together as a family and see more of your grandchildren. It also allows families to pool their financial resources and potentially get a home, space or location, that they might not be able to alone. You are right to check up on the tax implications though, as this kind of joint ownership can have an impact on everything from stamp duty to inheritance tax. You don't state how much your existing home is worth or what the new one will cost. The financial advisers we spoke to explained this will make a difference to whether you need to worry about inheritance tax and how complicated things may be. Ian Dyall, head of estate planning at Evelyn Partners, replies: The two taxes you need to be aware of are inheritance tax and a form of income tax called 'pre-owned asset tax', which was introduced in 2005 as an anti-avoidance measure to target people who were managing to sidestep the inheritance tax rules. Let's talk about the principles of inheritance tax first and then we can apply it to your case. If you reduce the value of your estate by making an outright gift, that will only be effective in reducing your inheritance tax liability if there is no 'reservation of benefit'. You also generally need to survive the gift by seven years before it ceases to be included in your estate unless it is covered by one of the exemptions. A reservation of benefit occurs where you continue to use or benefit from an asset that you have given away, for example giving away a property but continuing to live in it. In your case, whether there is a deemed lifetime gift for inheritance tax will depend on who pays for the new property and how it is owned. If you take the proceeds of your current home and use it to help purchase the new property, but the property is owned solely by your son and his wife, then a gift has happened for inheritance tax purposes. However, if you then live in that property rent-free, it is likely to be treated as a reservation of benefit for inheritance tax purposes. The value would remain in your estate and will be liable to IHT on death, irrespective of how long you live after making the gift. If the new property is co-owned with your son in proportion to how much each of you have contributed, then there would be no gift and only your share of the property would be liable to inheritance tax on your death. If the property were solely owned by your son and his wife, you could avoid the reservation of benefit by paying a market rent for your use of part of the property. You would need to get a professional to determine a fair rental value of your use of part of the property, and your son would be liable to income tax on the rent, but in some cases that may be worth paying if you think you are likely to live seven years but not an excessive period beyond that. If you no longer own a share of a property on death, you may be worried that you will lose the 'residence nil rate band', which is an inheritance tax allowance that can be used if you leave your home to your children and grandchildren on death. However, 'downsizing provisions' exist to allow people to downsize or sell their home later in life without losing the allowance, so you should not lose any of the allowance that you would have been entitled to. Make sure you get ownership set up properly Patrick Haines, partner at Partners Wealth Management, replies: There should be no tax issues (other than potentially stamp duty) on the planned move to the new 'family home'. For inheritance tax purposes, you may have available a tax-free nil rate band each of up to £325,000 and an additional tax-free residence nil rate band each of up to £175,000 (certain conditions apply to the latter). This can provide a tax-free estate of up to £1million. Where your estate is valued within the above limit, there may potentially be no inheritance tax due on your estate on the last to die and your son and family could ordinarily live with you in the meantime without any tax implications. A properly drafted will should be arranged. For larger estates, inheritance tax is usually payable at 40 per cent on your estate in excess of these allowances. In this case, there are further considerations and these relate to how the property is legally owned from outset and also your life expectancy. To meet your objectives, the ownership of the property in this case could be arranged as tenants-in-common where you will typically own 50 per cent and your son would own the other 50 per cent. We would recommend an equivalent sharing of the running costs as well. You could then take advantage of a co-ownership discount, which HMRC permits where the co-owner is not a spouse or civil partner. Your son can remain in occupancy for a discount to apply. On the successful application following the death of the 50 per cent co-owners, a discount of up to 15 per cent of the value of the deceased's share can be applied. The other 50 per cent owners would continue to own their share. In our example, if you as parents pass away within seven years, the 50 per cent share you have given to your son on the purchase of the new property would fall back into your estate. Where the total estate value exceeds the available nil rate bands, then inheritance tax may be due on the excess. The gift to your son of the 50 per cent share is called a potentially exempt transfer (PET) and this gift will fall outside your estate for inheritance tax if you survive a seven-year period. For 'failed PETs' where the 50 per cent gift to your son is in excess of the available nil rate bands of £325,000 each, taper relief may apply to the excess which can reduce the tax payable. Be mindful that the inheritance tax on any failed gifts might need to be met by the beneficiaries. Inheritance tax on jointly owned property is rarely straightforward and whether or not tax has to be paid will depend on several factors, including the status of the person inheriting and their relationship with the deceased, how the property was jointly owned, the type of the property concerned and details of occupancy. Caution: tax planning around the main residence and joint property ownership can be fraught with danger, particularly where circumstances change or relationships deteriorate so professional legal advice from a qualified solicitor is strongly recommended. Help with financial advice and planning Financial planning can help you grow your wealth, sort your pension, or make sure your finances are as tax efficient as possible. A key driver for many people is investing for or in retirement and inheritance tax planning. If you are looking for help sorting your finances and want to work out whether you need advice, planning, or coaching, the following links can help you understand more: >Do you need financial planning or financial advice - and is it worth it? > Financial advice: What to ask and how much it might cost > Are you retirement ready? Take our quiz and get financial planning help > Inheritance tax planning - what you need to know to protect your wealth What is pre-owned asset tax? Ian Dyall adds: If you sell your property and give the cash to your son who uses the money to buy a property in his name, which you then live in, there is an argument that the reservation of benefit rules do not apply. In this case you could be liable to pre-owned asset tax. This is an income tax charge paid annually on the perceived value of your occupation of the property. You can avoid it by electing to have your contribution towards the property treated as a reservation of benefit, or again by paying a market rent. Its application is complex and it is easy to unwittingly fall within the scope of the tax through actions driven by motives unrelated to tax planning. The bulk of UK wealth is held in people's homes, so successive governments have made it difficult to mitigate the inheritance tax liability on your main residence, introducing new legislation to block loopholes when necessary. If your share of the new property is worth less than the proceeds from your existing home, then planning with the funds you have released by downsizing may be the simplest approach to mitigating inheritance tax. Get your financial planning question answered Financial planning can help you grow your wealth and ensure your finances are as tax efficient as possible. A key driver for many people is investing for or in retirement, tax planning and inheritance. If you have a financial planning or advice question, our experts can help answer it. Email: financialplanning@ Please include as many details as possible in your question in order for us to respond in-depth.
Yahoo
19-05-2025
- Business
- Yahoo
Workers turn down £100k salaries to avoid tax trap
Higher earners are working four-day weeks, stuffing their pensions and taking more holidays to avoid tax 'cliff edges'. New data suggests more workers are deliberately limiting their salary growth in order to avoid tax traps that kick in at certain income thresholds. The number of taxpayers earning just below £100,000 has soared by 60pc in five years to hit 117,000, according to a Freedom of Information request seen by The Times. Meanwhile, the number of taxpayers earning just below the higher-rate tax band of £50,271 has hit nearly one million, an increase of 50pc. Robert Salter, of accountancy firm Blick Rothenberg, said taxpayers were saving more into their pensions while others were reducing their hours by working four-day weeks or taking an extra 10 or 15 days of annual leave per year. He said he had also seen employers providing workers with electric cars as part of a salary sacrifice arrangement. 'Rather than paying someone say £105,000 cash in a tax year, it might be better to offer them a salary of £95,000 and a Tesla or similar e-car.' Economists have warned that cliff edges in the tax system undermine Rachel Reeves's mission to drive economic growth. Even a small pay rise can lead to a significant tax rise or the loss of valuable benefits for workers who cross certain earnings thresholds, thereby incentivising workers to cut their hours or turn down opportunities. For example workers lose their personal allowance of £12,570 at a rate of £1 per every £2 once they earn over £100,000 a year. This creates an effective 60pc tax trap on income of between £100,000 and £125,140. On top of this, parents earning over £100,000 can miss out on thousands of pounds worth of childcare support due to the removal of free childcare. Mr Salter said: 'If you earn £1 above the £100,000 threshold and are presently getting free childcare, you lose that benefit fully – so in effect, it is akin to a 100pc tax charge.' Lucie Spencer, of wealth manager Evelyn Partners, said she regularly spoke to clients about keeping their taxable income below the 40pc, 45pc and 60pc threshold – as well as the £60,000 band at which entitlement to child benefit is gradually eroded. The Government starts to claw back child benefit where one parent earns more than £60,000 before it is then withdrawn completely from £80,000. Ms Spencer said: 'Making additional pension contributions is one option available. You can pay up to £60,000 per year into a pension and can carry forward unused allowances in previous years. She continued: 'Salary sacrifice can also be used to purchase other non-cash benefits such as cycle to work schemes, low emissions cars, or childcare vouchers.' Nimesh Shah, also of accountancy firm Blick Rothenberg, said tax cliff edges had become a bigger problem in recent years due to the freeze on tax thresholds and wage inflation. A phenomenon known as 'fiscal drag' means that four million of workers will be dragged into paying the 40pc or 45pc rate by 2027-2028, according to estimates by the Office for Budget Responsibility. Mr Shah said: 'Earning £100,000 is quite a milestone for someone, but the higher tax burden makes it increasingly less attractive. 'I think there is a sentiment now that frozen thresholds are killing the aspiration of workers.' Rachel Reeves has vowed to end the freeze in 2028 by raising income tax thresholds in line with inflation. But there are growing concerns the Chancellor could be forced to extend the freeze in order to help plug a multibillion-pound hole in the public finances. Sign in to access your portfolio
