Category Archives: Inheritance Tax

How to avoid Inheritance Tax

Politician Roy Jenkins in 1986 stated “Inheritance Tax, is broadly speaking a voluntary levy paid by those who distrust their  heirs more than they dislike the Inland Revenue.”

Like our friend Boris, I would say he liked to be controversal! The point he was making is that there are a multitude of different ways to avoid Inheritance Tax if you are thoughtful enough to plan ahead.

I recently acquired a great handbook published by SIFA called “Financial Solutions for Estate Planning” 2017. This is designed for financial advisers and it details all the financial products and schemes available to legally avoid Inheritance Tax. I would point out the booklet is over twice as thick as my 2011 version, so there is no shortage of choice.

Whatever your views, it happens, and on an industrial scale.

My point is, you should talk to a financial adviser because the money you spend on advice can return to you or your ultimate beneficiaries 100 fold.

Before you start any financial engineering, you should write a Will or update your Will with a will writer that considers these aspects. There are mechanisms that you can use in your Will that can potentially save huge amounts of Inheritance Tax.

 

 

 

 

 

Inheritance Tax planning after loss of mental capacity

Many advisers ask this question, and the truth is that planning is severely restricted but sometimes possible.

 

Large lifetime gifts

Firstly the advise6498081_sr must consider the position of the person who has lost capacity, let’s call them P. Do they have a Power of Attorney in place? If not, has anyone been appointed as a deputy by the Court of Protection? To what extent have they lost mental capacity?

For example P may still have the mental capacity to understand and approve a simple lifetime gift, but not have the mental capacity to understand and approve a sophisticated investment such as a Discounted Gift Trust. As such, it would be prudent to request and record a mental capacity test prepared by a professional at the point of making such a gift. Of course, P could fail the test.

Hereafter we will assume that P does not have any remaining mental capacity and that they have an appointed attorney under a Lasting Power of Attorney for property and affairs.

The attorney must act in Ps best interests. So it would appear to be logical that there is no way that gifting monies or assets to others could possibly be in P’s best interests. However if an attorney or deputy want to present a case to make a lifetime gift or a specific investment for Inheritance Tax planning they can ask the permission of the Court of Protection.

The Court of Protection will take into account the following:

  • The information presented to them
  • How much the gift is in relation to the size of their estate
  • Will there be enough financial resources remaining for P for the rest of their life?
  • Will the gift change the treatment of beneficiaries bearing in mind the contents of the last Will?
  • Had P done any Inheritance Tax planning before loss of mental capacity?

The Court may agree that making a gift is in P’s best interests, bending the “best interest” principle somewhat. However there may be situations where it is not worth making an application to the Court, for example where P’s wealth has been derived from a successful personal injury payment which was meant to provide for them only.

What if the attorneys just go ahead and make lifetime gifts?

In serious cases this may be regarded as fraud and a matter for the police. Alternatively the attorneys may be asked to pay the money back personally, or at least have their appointment as an attorney revoked. Not good options if the gift is likely to be contentious.

 

How can an attorney create, change, or update P’s Will for Inheritance Tax planning?38697289_s

Answer, they can’t. The attorney cannot create, change, or update a Will. However once again an application can be made to the Court of Protection for what is known as a Statutory Will. This can be a new Will that can take advantage of IHT planning.

The Court takes this very seriously and is likely to involve the Official Solicitor. The fullest information should be presented similar to the bullet points above for lifetime gifts. However anyone who may be disadvantaged by such a Statutory Will that would benefit under the previous Will or intestacy can object to the application.

Incidentally all these actions involve expense, and you should consider the legal costs and where the burden of the costs will fall. In some cases however it will definitely be worth the trouble.

So in conclusion, the moral of the story is to ensure that elderly clients act while they have their full mental capacity and deal with these issues as urgent before it becomes impossible.

 

Radical changes to Inheritance Tax-The Family Home

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

31906447_s

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.

33280979_s

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