Category Archives: Technical

Lasting Powers of Attorney and Investments

If you have invested funds with a bank or investment house you may well have given them authority to buy and sell shares or funds, much in the same way an old fashioned stockbroker may have acted for you.

These are known as discretionary fund managers or DFMs. Examples are firms such as Charles Stanley, Brewin Dolphin, Seven Investment Management, Rathbones etc.

However the problem comes if you lose mental capacity. Paragraph 7.38 of the Mental Capacity Act 2005 Code of Practice states that “the attorney must make these decisions personally and cannot generally give someone else authority to carry out their duties.

If the donor wants the attorney to be able to give authority to a specialist to make specific decisions, they need to clearly state it in the Lasting Power of Attorney document (for example, appointing an investment manager to make particular investment decisions).”

So advisers need to be clear that their client does not have any schemes such as discretionary fund management, investments held by nominees or the managers of the scheme, and perhaps also need to ensure that they are unlikely to have such an arrangement in the future. Don’t forget that DFMs can also be managing pension funds within Self Invested Pension Plans.

In addition, it would be nice to allow the attorneys the possibility of investing in such a way. So in cases where the client has investments, it would be prudent to include the special wording in the Lasting Power of Attorney for Property and Affairs, just in case. Otherwise it may be necessary to rearrange long standing investment arrangements so there is no “discretionary” element involved in investment decisions.

However, when you deal with a company like Will You Ltd you would expect them to have a conversation around this to ensure your interests are protected. If you are concerned about this, please do not hesitate to contact us for advice.

 

 

Income Withdrawal and Powers of Attorney

The recent stockmarket volatility after the referendum has focused the importance of active management of investments and pension funds to maximise returns and prevent losses.

Annuities rates are now very low and the trend is downwards. This means that many more retirees are creating Income Withdrawal accounts with their pension funds.

However in order to manage your investments and pension income it is a good idea to have good brains at work and that is not possible if you have lost mental capacity in retirement. Unlikely as you may think now, do you know that you will never be affected by stroke or dementia?

To avoid the problem you should consider setting up a Lasting Power of Attorney now for your property and affairs if you haven’t already done so. You can appoint in the document a person (known as an attorney) to act for you, and you can choose someone with investment expertise or your trusted adviser. Or more simply when you draw up the document you can express your wish that with regard to any Income Withdrawal accounts that your chosen attorneys review your pension fund each year with your financial adviser.

How do we know this is a problem?

Because we have seen situations occuring where there is no Lasting Power of Attorney in place. The alternative which is an application to the Court of Protection is expensive and time consuming and you will not get a chance to choose the attorneys who act for you. We would recommend you take control and act now.

Radical changes to Inheritance Tax-The Family Home

The summer Budget introduced a new Family home allowance to start in April 2017.

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Key points

  • The new allowance that is in addition to the existing nil rate band will be phased in from 2017 eventually giving an extra £175,000 allowance to those that qualify.
  • The inheritors must be your children, step-children, or their descendants. Included also are adopted children (as you would expect) and foster children.
  • Wealthier multi-millionaires may not benefit as the allowance is reduced if the net estate (after qualifying liabilities are deducted) is over £2 million. It is reduced by £1 for every £2 that the estate exceeds £2 million. So if an individual had a net estate of say £2.5 million they would not qualify.

 

So here is how it looks for each person:

Existing nil rate band allowance £325,000. (This is transferable between couples.)

From 6th April 2017 additional allowance will be £100,000.

From 6th April 2018 additional allowance will be £125,000.

From 6th April 2019 additional allowance will be £150,000.

From 6th April 2020 additional allowance will be £175,000.

Thereafter it should increase in line with the Consumer Price Index.

So using simple maths you can see that the total allowance for a couple will reach £1 million from 6th April 2020.

 

So what qualifies as your home or the “qualifying residential interest”?

  1. Your interest in a home that has been lived in as your main residence.
  2. If you have more than one residence then your executors or personal representatives can elect which one is to qualify.
  3. A “Buy to Let” property for example would not qualify unless it had been your main residence at some time.
  4. There are various other minor provisions for those living away from home in job-related living accommodation.

 

Example

In 2020, Dave & Samantha jointly owned a home worth £900,000 and had two grown up children. Dave died in May 2020 and he willed everything to Samantha. Because he had not gifted monies in his lifetime or in his Will, he had the full nil rate band (NRB) of £325,000. In addition he has the new residence nil rate band (RNRB) of £175,000. However there is no Inheritance tax to pay at this time because everything has passed to Samantha.

Sadly Samantha died soon after. Happily for the children Dave’s NRB and the newRNRB are transferable to Samantha’s estate. So in total the allowance was £1 million.

Samantha has spent all the remaining family cash on nursing care. Despite the fact that she died in a nursing home and had not lived at home for 6 months, the full allowance was available.

When Samantha’s estate was concluded HMRC collected no Inheritance Tax at all from the estate.

 

Very nice, but what are the problems?

Apart from the political nature of this concession which we shall leave aside, most commentators feel all this is unnecessarily complicated.

As an example, “The additional nil-rate band will also be available when a person downsizes or ceases to own a home on or after 8 July 2015 and assets of an equivalent value, up to the value of the additional nil-rate band, are passed on death to direct descendants.”

This point alone will employ lots of folk in HMRC in lengthy correspondence with executors and PRs who incidentally will need to know about this in order to claim it!

There is much to be ironed out in the legislation, too much to mention here.

One issue that is notably important is that some may have discretionary trust arrangements in your Wills passing family homes and other assets via this route. It looks likely that if you continue to use that route you will NOT qualify for the allowance. Other types of trusts such as life interest trusts and trust for minors and under 25s will be okay.

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Picture :  Executor who missed out on the family home allowance.

 

Pilot Trusts

The other names for this type of trust are Family Trusts or Spousal By-pass Trusts. It’s nothing to do with airline pilots!

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A Pilot in this sense is the one that goes before, the forerunner, like this tug guiding the Concordia. Hence the Pilot Trust is set up during your lifetime with a notional £10, say, attached to it as the asset. This is the forerunner, as it is added to later on. Maybe on death, from a Will, a life cover, or a pension plan death benefit.

What is the point of a Pilot Trust?

The Pilot trust is a discretionary trust with a list of potential beneficiaries contained within. So the assets of the trust do not belong to any one individual beneficiary.

Say you are traditionally married with a wife and children, but your wife is unlikely to need all the life cover or pension fund on your death. You can arrange for the life cover or pension to be directed to the trust on your death. This could save the monies going to your wife’s estate and increasing the Inheritance Tax bill on second death should you die first. She could however still benefit if she was a potential beneficiary. The monies could be distributed or held depending on circumstances. The children could benefit immediately on your death free of Inheritance Tax or monies could be held for wife, children, grandchildren etc.

There are many other circumstances and reasons where this makes sense and it’s not always to save Inheritance Tax.

This is where you need to concentrate. Each trust created on a different day has it’s own Nil Rate Band (currently £325,000). Any assets over that value will be subject to the 10 yearly inheritance tax charges under the “relevant property” tax regime.

So if you had a pension Death in Service benefit to redirect to a trust like this of £900,000 you are likely to be advised to create 3 trusts on different days so as to avoid the 10 yearly inheritance tax charges. So £900,000 divided by 3 = £300,000 into each trust and a little space to allow for some growth. If it grows beyond the Nil Rate Band any excess will be subject to the 10 yearly charges.

 

 

 

New EU Succession Regulations

Let’s assume you live in England and have a villa in Spain. Like all things from the European Union you know it’s going to be complicated. However this is good news for UK residents. It will allow you to avoid Spanish succession law and choose the law of, say, England and Wales.

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The impact is enormous. Succession Law in much of continental Europe is based on Napoleonic Law which means that any children must inherit, whereas in the UK we largely have testamentary freedom to benefit whoever we wish.

These regulations have been brewing for some time and (EU) 650/2012 came into effect from 16 August 2012 and apply from 17 August 2015.

So how do you choose to elect UK law for the Spanish villa?

You can make a declaration of choice under EU regulation 650/2012 choosing the Laws of England and Wales for example.

If you have an English Will covering worldwide assets and no Spanish Will then you can include it in your English Will.

If you have both an English Will for your UK property and a Spanish Will for your Spanish property you can include it in your Spanish Will or make a declaration in Spain. You should take advice from your Spanish lawyer.

“Just a minute”, I hear you say,  the UK opted out of this regulation along with Ireland and Denmark, so it doesn’t apply.

This is where many people are confused. The UK opting out means that the Spaniard with habitual residence in London cannot elect in his Will for his London property to be administered in Spain, or at least it is not binding on the UK to allow this.

Conclusion: This is a complex advice area and much is uncertain as no one has tested it in practice. Are some European Courts going to dispute cases? This will need time to settle down before the muddy waters clear.

Footnote: This does NOT affect Inheritance Tax which for UK domiciles is payable on your worldwide assets.