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Tax Efficient Will Planning

BY: Paul / 0 COMMENTS / CATEGORIES: Inheritance Tax

With the introduction of the Finance Act 2006 the possibility of using lifetime planning for saving inheritance tax was severely restricted using lifetime settlements. By contrast, the use of trusts in Wills still have many of the old tax saving options available to him or her, most of which continue to use settlements. The will draughtsman can make use of these settlements to minimise a family’s tax liability in several ways. Saving tax is normally a concern for families with children, the parents wishing to pass assets on to children or grandchildren as efficiently as possible.

Following the introduction of the residence nil rate band (RNRB) presented fresh problems as the use of many popular forms of settlement could lead to the loss of the RNRB If the will and advice given is not carefully considered.

The following suggestions assume that:

  1. the clients are married or in a civil partnership;
  2. that one or both has children;
  3. both clients have assets in excess of the nil rate band but are not unduly overburdened with wealth, and will have most of their joint assets tied up in the family home;
  4. both clients are concerned that the surviving spouse or civil partner should have enough to live on but are anxious to pass on as much as possible to the children.

Advisers should be cautious common particularly when dealing with the family home. It is important to warn the clients that the tax rules may change and the very few tax saving schemes can be guaranteed.

The use of insurance policies can be used to make funds available to children for paying inheritance tax or to give them a lump sum not liable to IHT. This can be achieved by means of a joint lives policy. The premiums paid will be exempt if the payments fall within the normal expenditure from income exemption s21 IHTA 1984. The policy will mature on the death of the last surviving spouse and provided the benefit of the policy has been assigned to the children, the proceeds will pass directly to them.

When dealing with elderly clients who are accompanied by adult children, it is important to establish what the clients (as opposed to their children) want, and is desirable, if possible to see the clients in the absence of those who may benefit from the settlement or Will. With more complex family arrangements, allegations of undue influence in relation to lifetime gifts are increasing, and solicitors and other professionals have been criticised in court for failure to give independent legal advice to clients in relation to the proposed gifts.

The simplest option is for the first spouse to die to leave everything to the survivor, relying on the survivor to leave the combined assets to the children. The whole of the first estate will be spouse exempt and the survivor’s estate will benefit from the transferable nil rate band.

The disadvantages of such an arrangement are that the survivor may remarry, spend or lose the combined assets or go into a nursing home leading to the loss of the estate in fees. More people than ever before are choosing, therefore, to make use of trusts for asset protection purposes (APT’s). The use of a flexible life interest trust for some or all the assets can be a particularly useful tool, but the clients need to consider carefully what they wish to do in the future.

It is particularly important to advise the clients that by using an APT during their lifetime, they are giving up ownership to the trustees (albeit they may be one trustee themselves) and will incur further costs should they wish to mortgage or seek to release funds through equity release schemes.

Although the use of nil rate band discretionary trusts became less popular with the introduction of the transferable nil rate band, There is still much to be said for leaving a nil rate band discretionary trust with spouse and issue as beneficiaries, and creating the residue on trust (FLIT) for the surviving spouse for life giving the trustees wide powers to appoint capital to the life tenant or to the issue.

Such an arrangement has the following advantages:

  1. the first spouse to die makes use of his or her nil rate band (this is useful both where future growth in the value of assets may outstrip the value of the NRB transferred to the survivor and where the survivors estate may exceed the taper threshold leading to a loss of the RNRB) ;
  2. the trustees can give the surviving spouse all the income of the estate if that is appropriate;
  3. the trustees can appoint all the capital to the estate of the surviving spouse, if appropriate;
  4. the trustees have the flexibility to appoint income and capital to other beneficiaries, if appropriate
  5. the trust capital can be preserved for the issue.

Leaving some or all the estate a surviving spouse or civil partner on a fixable life interest trust

an alternative to leaving property to a spouse or civil partner absolutely is that it can be left to the spouse or civil partner on a flexible life interest trust or flit. The will should give the trustees power to terminate all or part of the life interest.

The advantages of using a FLIT are that:

  1. the residue passes to the spouse or civil partner initially and, therefore, is exempt from IHT using the spouse exemption;
  2. the NRB of the first to die will be transferred to the survivor;
  3. the surviving spouse has the benefit of receiving all the income, but the capital is protected for the issue; and
  4. the trustees have the power to appoint capital to the spouse and/or issue, depending on the individual circumstances.

If the trustees use their powers to terminate all or part of the spouse’s interest in possession (IIP) life interest, to create a discretionary trust, the spouse is treated as making a gift for the purposes of the reservation of benefit rules IHTA 1984 s102ZA. The spouse should not, therefore be included in the class of beneficiaries.

Problems with using the residence nil rate band RNRB

it is not necessary to make a specific gift of a residence to lineal descendants to obtain the RNRB.

It can be left as part of the residue of the estate.

However, even the simplest gifs can cause problems. A straightforward substitutional gift to children of a predeceased child may lead to the loss of the RNRB if the substitutional gift is contained in a trust contingent on reaching a stated age.

The impact of the residence nil rate band (RNRB)

With the introduction of the finance (No 2) in 2015 it inserted several new sections into the IHTA 1984. The effect of the new legislation is to provide an additional nil rate band available for deaths on or after the 6th of April 2017 when a residence is inherited by a deceased’s children or remoter issue or spouses or civil partners of such children or issue. There is also downsizing legislation which was included in the Finance Act 2016 which has made further amendments. Where a person dies without using all or part of his RNRB because he or she died before its introduction the unused portion can be transferred to a surviving spouse or civil partner.

Property left to certain types of settlement are treated as ‘inherited’ under IHTA 1984 Section 8J(4). The settled property must be held in trusts creating one of the following:

  • an immediate post death interest (IPDI) under section 49a; or
  • A disabled person’s interest under section 89; or
  • a bereaved minors or bereaved young person trusts section 71A or 71D.

Very few settlements qualify. The discretionary settlement is not included even if all the beneficiaries are lineal descendants. A typical grandparents settlement,” to such of my grandchildren as reach 21” will not qualify because the trust created is a relevant property trust and so not one of the permitted trusts. However, an appointment from a discretionary trust or advancement of capital to a beneficiary with a contingent interest made within 2 years of death to the lineal descendants will be read back into the will under IHTA 1984 s144 and so trustees could retrospectively secure the RNRB be for the estate.

Testators wishing to leave residential property to adult children with a substitutional gift to children of a deceased child will, therefore, need to consider the form of the substitution gift carefully if they want to secure the RNRB in relation to that gift. The possible options are a bare trust where the grandchildren will become absolutely entitled at 18 or an immediate post death interest.

The latter may be attractive as the trustees can be given overriding powers to appoint capital as they see fit. It is necessary to vary the Trustee Act 1925, s31 to provide that any accumulated income e.g. where the residence has been sold after death and the proceeds invested is held on a bare trust for the beneficiary. If this is not done, section 31(2)ii provides that any accumulated income is held on accretion to capital where a minor beneficiary dies before reaching 18. This has a divesting effect and the settlement will not create an immediate post death interest.

S.W.W Director general

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How and why to support your favourite charities in your will and the tax benefits for you

BY: Paul / 0 COMMENTS / CATEGORIES: Inheritance Tax

Discover the vital importance of gifts in wills to charities, the types of gifts you can leave and the tax advantages of doing so.

This post explains why and how to leave money to charities in your will and how to get yours sorted with zero fuss, today.

 


Why give to charity in your will?

Every year, people in the UK leave £2.9 billion to charities in their wills. These gifts can make a lasting impression on your favourite charities, allowing them to continue to operate and improve their services. In the last 12 months Farewill has raised £40 million in legacy donations.

“It’s incredible how generous the British public are” says Dominique Abranson, Legacy and in Memory Manager for WaterAid, “gifts from wills are absolutely vital in helping us reach everyone everywhere with clean water, decent toilets and good hygiene and transforming lives of the communities we work with overseas”

The charity might be a cause you’ve supported all your life making periodic donations. You might have encountered your chosen charity during medical treatment or end-of-life care for a loved one. Or you may be looking to minimise the amount of tax you pay when you die.

What types of legacy gifts can you give to your chosen charity?

There are three types of charitable legacies that you can choose from.

Pecuniary

A pecuniary legacy gift is the simplest and most common way of leaving a gift to charity in your will. You simply state your intention to leave a specified sum to your chosen charity. The executor of your estate is then tasked with making sure this sum reaches your intended charity.

Specific

A specific legacy gift relates to a particular item that you wish to leave to a charity of your choice. It may be a property, a road vehicle that the charity could benefit from or even shares.

Residuary

A residuary legacy gift is when you leave the whole of your estate or a percentage of your estate, The percentage you choose remains the same regardless of the value of your estate when you die.

While a cash (pecuniary) gift is a simple way to leave a gift to your chosen charity, it’s worth noting that the sum you include in your will today may not have the intended impact when the time comes. £1,000 today is a considerable sum but, in 30 years, it may not stretch as far.

What are the tax advantages of leaving gifts to charity?

Leaving a gift to charity in your will can reduce the tax your loved ones pay on what you leave them.

Inheritance tax is charged at 40% and applies to the proportion of your estate valued above £325,000 (£650,000 for married couples).

You can reduce the inheritance tax rate on the remainder of your estate (above £325,000) from 40% to 36%, if you leave at least 10% of your ‘net estate’ to a charity.

Here’s a worked example, without a charitable gift:

  • Your net estate is worth £425,000
  • You leave everything to your partner (unmarried). £100,000 is liable for inheritance tax (£425,000 – £325,000 tax allowance)
  • £100,000 is charged inheritance tax at 40%, equalling £40,000 due in tax.
  • So, £60,000 is left after inheritance tax has been subtracted
  • Your partner gets £385,000 after tax (£325,000 + £60,000)

Here’s a worked example, with a 10% charitable gift:

  • Your net estate is worth £425,000
  • You leave 10% of your estate (tax free) to charity £42,500 (net estate is now worth £382,500)
  • You leave the remainder to your partner (unmarried), £57,500 is liable for inheritance tax (£382,500 – £325,000 tax allowance)
  • £57,500 is charged inheritance tax at 36% (lower charity rate), equalling £20,700 due in tax
  • So £36,800 is left after inheritance tax has been subtracted
  • Your partner gets £361,800 after tax (£325,000 + £36,800), and the charity gets £42,500.

In the above example your partner gets £23,200 less, but the charity has gained nearly double that – £42,500 for good causes.

How to find details of a charity you wish to support?

Wherever you are based in the UK, these online registers will help you find contact details of the charity you wish to support:

England and Wales

Charities Commission’s register of charities

Scotland

Scottish Charity Regulator’s charity register

Northern Ireland

The Charity Commission for Northern Ireland

Next steps to give to charity in your will

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