Twitter Facebook LinkdIn
Posted on

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

Read More
Posted on

Residential Nil Rate Band

BY: Paul / 0 COMMENTS / CATEGORIES: Will Writing

The residence nil rate band – do I qualify and should I change my Will?

A key promise in the Conservative Party’s manifesto prior to the last election was an increase in a married couples’ “nil rate band” (the amount they can ultimately pass to their children or others free of inheritance tax ) from £650,000 to £1 million. The Party had picked up on a growing disquiet that the nil rate band hadn’t kept up with house price increases which were pushing more and more families into the inheritance tax net. The standard nil rate band has been capped at £325,000 per person until 2021.

On the back of that promise, for deaths on or after 6 April 2017, the new, additional “Residence Nil Rate Band” (RNRB) will be available where the estate contains a family home (“a qualifying residence”) left to children or other “direct descendants” .

A maximum RNRB amount of £100,000 per person is available for deaths this year, increasing to £175,000 in 2020. If you double these figures for a married couple, the magic £1 million figure is reached by 2020.

A “qualifying residence” is any home that an individual lived in before they died (so buy-to-let properties, for example, are not included). If you own more than one residential property when you die, your personal representatives will need to nominate which property the relief should apply to.

At the end of the day, the property needs to end up in the hands of “direct descendants”. They are defined quite broadly in the legislation and include children (including adopted, foster and step-children), grandchildren, together with the spouses and civil partners of children and grandchildren. It does NOT include nieces and nephews, siblings or other relatives.

There are three main ways a property can be “inherited” by direct descendants. These are:

  1. Under the terms of a Will;
  2. Under the intestacy rules; and
  3. By survivorship.

The main perceived difficulty arises when the property is left to a trust, for example a discretionary will trust. In these circumstances, the property will NOT be treated as having being inherited, even if the class of beneficiaries is made up entirely of direct descendants. It should however be possible to appoint the property out of the discretionary trust to direct descendants within two years of death, so that the RNRB can be captured. Where the direct descendant has an absolute entitlement to the property (for example, under a bare trust), the property will be treated as inherited.

For estates with a net value of £2m or more, the RNRB will taper away £1 for every £2 over £2m. Therefore currently, the RNRB will not be available for an individual estate over £2.2m. There may be cases where lifetime gifting is appropriate to ensure the estate is within the limits.

Where the family home has been sold (perhaps to move into a smaller, rented property or a retirement flat or nursing home) “downsizing relief” means that the RNRB can still be claimed. The calculations involved in downsizing relief are complicated, but the essence of the relief is that you can still clam the benefit of the RNRB where you disposed of a qualifying residence on or after 8 July 2015.

Where does this leave us now in terms of estate planning; should we all be changing our Wills to ensure that the RNRB is captured? The short answer is “no”. I have already mentioned that in the case of a discretionary trust, it should be possible to appoint the property out within two years to take advantage of the RNRB. A deed of variation within two years of death, if appropriate, will achieve the same result. In any event, if you have left the property under your Will to individuals who are NOT direct descendants, I doubt those wishes will have changed by reason of the introduction of the RNRB.

Specific provision can be made for the RNRB in the Will, if this gives the testator some peace of mind. One option would be to leave assets equivalent in value to the maximum available residence nil rate band on discretionary trusts, with an accompanying letter of wishes to trustees requesting that they exercise their powers to ensure that any qualifying residential interest is inherited by direct descendants to take advantage of the residence nil rate band.

While a change in inheritance tax reliefs might be a trigger to pull our Will out of the drawer, my guess is that most Wills should prove compliant with requirements for the relief unless, of course, there was never any intention of leaving the estate to children or other “direct descendants” anyway. Only, perhaps, where (rarely) the whole estate is left to a mixture of direct descendants and others, might some redrafting be necessary to ensure that the RNRB will apply to the qualifying part.

Please contact us for more information 01325324515

Read More