Introduction about the Inheritance Tax
Inheritance tax (IHT) and Capital gains tax (CGT) are tricky taxes, each of them having their own different methods of calculation, exemptions and reliefs. As a result, in respect of the same trisection it seems like a step too far to deal with both of them (Investment Guide, 2013). It is a detailed, lengthy and technical task to administer an estate after someone has died. In present scenario the higher numbers of complaints about administration of estates are being received by solicitors than any other single issue. According to HM Revenue and Customs in the middle of past decade about 6% of the total complaints were liable to inheritance tax. But the number of such complaints has fallen since the fall in property values and introduction of transferable nil-rate band in 2007 (HM Revenue & Customs, 2013).While administering an estate there are three principles that must be considered for UK taxes Income tax, inheritance
Capital Gain Tax: The capital gain tax is payable on the basis of gain or profit that someone has made by selling, giving away or otherwise disposing of something. It applies on assets owned by someone such as property or shares. The bill of capital gain can be reduced by the help of a tax-free allowance and some additional reliefs. Most of the assets are liable to capital gain tax on sell either they are in UK or overseas. Some Assets are exempt such as personal possessions disposed for £6,000 or less, main home and car. Making a gift to a child or to any other company or individual will lead to capital gain tax but on the other hand gift made to spouse, charity or civil partner won’t (Booth and Copper, 2011). Any inherit asset is not liable to tax under the head of capital gain tax until the asset is disposed or sold. The assets can be transferred between partners on divorce, separation or while dissolving a civil partnership. The liability of Taxation law is depends on whether the person is living together at the time and the date of transfer.
The annual tax free allowance for capital gains tax for the year 2012-13 is: £10,600 for each individual and £5,300 for most trustees.
Inheritance Tax: Replacing the Capital Transfer Tax the Inheritance Tax was introduced with the effect from 18 March 1986 in UK. When a person’s estate including possessions and property is worth more than the threshold that is £325,000 on their death the Inheritance tax is due (Butler, 2009). For anything above this threshold the rate of Inheritance tax is 40%. But if more than 10% of the estate is left to charity then the rate can be reduced to 36%. This tax is paid by personal representative or executer for the person who has died by using the funds from the estate (UK Inheritance Tax Guide, 2012). The interest is has to be paid if the tax is not paid within six months form the end of the month in which the person died. Anything that is left for civil partner or spouse who has their permanent home in the UK is not taxable including any gift given whiles the person was alive. Any gifts that are made to museums, universities, charities, the National trust and Community Amateur Sports club are exempt (Prabhakar, Rowlingson and Sruart, 2008).
Capital gain tax deals with the transfer of any kind of assets worldwide on the other hand Inheritance tax deals with what a person leave in their will after death and lifetime transfer of the assets and wealth. This present study is going to deal with the interaction of inheritance tax and capital gain tax. This study will provide the comprehensive understanding of situations when both taxes interact.
Structure of the Research: As all the chapters are interconnected this present research will progress in a sequential manner.
The structure of research is as follows:
- Introduction – This will be the very first part of the research that will provide the overview of entire study. Along with overview this part will also provide the brief introduction of focus and purpose, significance of the research and framework of analysis.
- Literature Review – This part of the study will provide the introduction with previous studies that have been conducted on this subject matter. This chapter will present research results of different researchers and views of different authors about this field of study. A number of Tax journals and Tax websites would be used for proving better understanding of study.
- Research Methodology – This phrase of the report will present the various methodologies that have been applied for data collection and their analysis. It will also include the aim and objective of the research along with research questions, techniques of data collection, and methods of data analysis, research approach, possible limitations and ethical considerations (Scandura and Williams, 2000).
- Data Analysis & Findings – In this section of research collected data would be analysed. In order to generate the inferences this part basically involves the assessment of results (Heeks and Bailur, 2007).
- Conclusion & Recommendations – This would be the final chapter of the research that will indicate the conclusions based on findings and recommendations.
Focus and Purpose of Research
Focus: The major focus of this research is on interaction between capital gain tax and inheritance tax. The research will focus on analysing the situations when both these taxes interact. Capital gain tax deals with the transfer of assets worldwide but Inheritance deals with the transfer of wealth and assets due to death. Sometime when there is interaction between both the taxes it becomes hard that which implication works better (Geursen and Ethrenreich, 1998).
Aim: To analyse the situation when both the taxes interact along with analysing the need of Inheritance tax in existence of Capital gain tax.
The objectives of this research are as below:
- To analyse the occasions when both CGT and IHT arise.
- To analyse the situations when both taxes interact.
- To find out the reasons why CGT could not be extended to remove the complex from cases when both these taxes interact.
- To analyse the implication of IHT during the instalment when the asset is sold or taken out of the trust.
- To analyse the treatment of taper relief.
Research Questions: The major research question is Do we really need Inheritance Tax? As the deal with transfer of assets and wealth worldwide during life time is done by capital gain tax on the other hand Inheritance tax deals with the both death and lifetime transfer then. So the capital gain tax could be extended in order to escape complicated situation which arises when both the taxes interact.
In order to achieve above objectives the research will try to find the answer of following questions:
- On what occasions both IHT and CGT arise?
- What are the situations when both the taxes interact?
- After dealing with the transfer of assets in lifetime why CGT could not be extended to deal with transfer of assets of death?
- In IHT during the instalment what if the asset is sold or taken out of the trust?
- Why taper relief is too complicated?
Framework and Analysis: This section of the report will provide the detail about steps in which the research will be carried out. This part provides the explanation of various strategies and methodologies that will be used for research purpose.
- Research Design: There are three types of research designs descriptive, exploratory and casual. As there are particular research questions in mind so the descriptive research design will be used.
- Research Philosophy: a specific investigation pattern is recognized by the help of research philosophy. In present research both Interpretivism and positivism research philosophy will be employed.
- Research Approach: The inductive research approach will be used for this study as the research will from specific observations to broader generalizations and theories.
- Research Type: The qualitative research type will be employed for this study.
- Data Collection Method: The entire research will be based on secondary data which will be collected from various tax journals, websites, books and publications of different professional accounting bodies (Linderoth, and et.al., 2006).
- Sample Technique: As the entire research will be based on secondary data no sampling technique will be used.
- Data Analysis Technique: The collected data will be analysed by using qualitative method. As the key purpose of research is to analyse the situation of both taxes arising the qualitative technique will best fit (Denscombe, 2002).
Potential Significance of Research
This present research holds both academic as well as practical significance. Firstly the situations will be analysed when both the taxes arises individually. Then in order to identify the similarities and differences the comparative analysis of both taxes would be done. The analysis of secondary data will provide the various figures of both taxes that will indicate the public willingness to pay both of them. It is very important to compare both cases so that effective results can be found. A big part of population pays tax in different heads. This present research will help them in knowing the situations when the IHT as well as CGT arises together. This research will help in knowing that which implication works better in cases when there are interaction in between both taxes (Pring, 2004).
This research will also have academic significance. This research will provide a comprehensive value addition in knowledge of accounting students. The study will provide the answers of research questions that will help students in making in-depth understanding of Inheritance and Capital gain tax. This research will specifically be more significant for accounting professionals as it will help them in knowing the best fit for cases when both the taxes aeries together.
LITERATURE REVIEW: Rather than being left to grieve many people worry that their loved ones will be hounded for cash by the tax man when they pass!
There is no doubt that Inheritance tax is one of the most unpopular taxes in UK. It is regularly debated in different news that Inheritance tax is one of the most loathed taxes in UK. The reason behind being so unpopular is a basic human instinct to provide for our children. By doing so the parents try to give a better start to their children then they had. The inheritance tax yield has been negative for most of its 120 year history. In order to avoid IHT people shuffle round their finance greater than the revenue it brings in (butler, 2009). Even after having so many negative aspects the threshold is frozen at £325,000 for three years from 2015. According to financial times the average expected inheritance tax bill for middle class is £ 4,000.
Implication of IHT
Many parents find the best way to help their child financially by gifting money but there is tax implication to consider while there’s no limit to how much they can give. Facing an inheritance tax bill by the children after they pass away has become the major concern for many parents. Before passing the estate to the loved ones of an individual the government takes a slice by inheritance tax. Any monitory gift given by the individual in the seven years proceeding to death is also included. All the estate including property, savings and possessions that he leaves behind is valued on death. Any amount over £325,000 is taxable at the rate of 40%.
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