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Inheritance Tax & Community Care TaxThe taxman or the Local Council can sometimes the biggest beneficiaries of estates where there has been no planning to avoid tax. Inheritance tax raised about £3.6 billion for the government in 2006/7 according to the Halifax. Community Care Tax (recovering money spent by Councils on your Long Term Care) caused around 70,000 houses to be sold. The Government is raising enormous sums of tax simply because house prices have risen so fast (up until recently). According to IFA (independent financial adviser) Promotion, a trade body for independent financial advisers, people in the UK pay £2.3 billion more in inheritance tax than they have to. Inheritance Tax is payable on the balance of any estate worth more than the prevailing inheritance tax (IHT) threshold (£312,000 in 2008/09) and the balance is taxed at 40 per cent. No IHT is payable between husbands / wife or registered civil partners as long as both partners have UK domicile (broadly born and bred in the UK of British parents – but it gets pretty complicated) and in theory the unused balance of IHT from the first spouse to die can be transferred to the survivor (“the Transferable Nil Rate Band.”) Why in theory? Because the executors of the second to die must have access to all the necessary papers from the first death, which mat have been a decade or more ago – incomplete or lost records mean a potential loss of (currently) £124,800! A lot of money to give to the taxman through poor record keeping or storage. Wills (also see separate Will page) Wills can be written tax effectively so the surviving spouse/ civil partner can continue to enjoy the benefits of the Nil Rate Band assets without significant disadvantage. In theory, this is totally unnecessary with the Transferable Nil Rate Band but spending a little extra just in case (perhaps £200 might save £124,800 even at current rates) seems like a sensible precaution. The extra flexibility which can be allowed in such a trust can allow the flexibility to skip generations and allow loans rather than gifts to be made if a beneficiary is in a rocky relationship – you don’t want the cash to go in a grandchild’s divorce for example. It is also possible to set up more complex tax saving arrangements – as well as some very simple ones: Simple IHT savings: Gifts Gifts of £3,000 a year can be made totally free of inheritance tax and if unused one year can be carried forward for one year only. There is an additional relief for small gifts under £250 a year to anyone (but these must not be to the same people as the recipients of any of the £3,000). There is also general relief on regular gifts out of normal income to the extent that these gifts do not diminish a person's usual standard of living. Those wishing to use this rule should write to their beneficiaries saying "I have more than enough income to meet my normal expenditure and my wish is to give away the surplus on a regular basis. I am enclosing the first instalment of my gift to you herewith". The key point is that the intention is recorded and the gifts should be regular and out of income. Up to £5,000 can be given to a child on its wedding day and £2,500 to a grandchild on its wedding day. Larger gifts of any amount, even including houses are potentially exempt from liability if the donor survives for seven years or more after making them. You should be aware that the date of the gift is the date the money is actually CLEARED through the beneficiaries’ bank account, so last minute giving should be in cash! You can give away any amount you like directly (but not into a Trust) provided you survive 7 years. Whole of Life Insurance It is also worth considering whole of life insurance as a means of paying inheritance tax bills. This form of cover provides for the payment of a lump sum on the death of the policy holder direct to the beneficiaries so they can receive it tax free and use it to pay the Inheritance Tax. Not all policies have a guaranteed death benefit. Some whole of life cover does not guarantee fixed premium levels throughout the term – some do. You should talk to your Independent Financial Adviser (check out www.unbiased.co.uk or www.FindaPro.co.uk if you don’t have one.) Premiums are normally reviewed after ten years and afterwards at even more frequent levels by the insurance company, determined by how many policyholders have died and investment performance. Whole of life policies written in trust can also be used to reduce delays on money left between spouses, bypassing probate and avoiding inheritance tax liabilities which may occur on the second death within a married couple. Many whole of life insurance policies offer a high degree of flexibility, with the opportunity to increase cover levels and to continue cover but cease paying premiums at a certain age, such as retirement. Saving Tax AFTER Death Believe it or not, this is still possible under certain specific circumstances: the amendments must be delivered to the Revenue within two years of the death, every relevant beneficiary must agree (which can be a problem when children are too young to agree formally) everyone adversely affected agrees, there is no reciprocation – no one is compensated for what they give up and none of the assets are affected by a Gift With Reservation. This is a pretty complex issue and is best left to specialist solicitors or Trust Corporations. The net effect is that it may be possible to obtain a tax rebate of up to £124,800 plus interest (assuming that much or more tax was paid). Investments It is possible to organise many investments into special Trusts where you still have access to the capital, but any growth is outside your estate and thus not liable to IHT when you die. There are enormous variations, and you should speak to your Independent Financial Adviser for more information. Mortgages Taking out a Home Income Plan can, for the right people, is a great way of spending some of the kid’s inheritance enjoying life now, and reducing the tax later. You can even give the money to the children early, and with a “SHIP” approved plan, still be secure in your own home until you no longer need it. These plans need to be carefully organised and are usually quite inappropriate for those on State benefits. IFAs will also be able to tell you about a cunning plan from Close, which effectively puts your home into an investment bond, but it is not cheap! Past Legal Planning Many previous legal plans designed to save inheritance tax have been overturned by the Revenue changing the rules or the Government changing the Law. It is therefore essential that all such plans be reviewed, at least informally, on a regular basis. We would recommend annually. Sadly most lawyers are just not geared up for that. More Information Article written by Stephen Pett of http://www.APWW.co.uk A guide to Inheritance Tax Planning written for the layman is available from http://www.Inheritance-Tax-Secrets.co.uk A similar guide for those focussed more on Asset Protection is: http://www.Asset-Protection-Secrets.co.uk A more general guide to Legal and Financial Planning is: http://www.LegalPlanning.co.uk For domicile issues download the Revenue leaflet: http://www.hmrc.gov.uk/cto/customerguide/page20.htm A list of Safe Home Income Plan providers, and general information is available from: http://www.ship-ltd.org/ You should consult a specialist Independent Financial Adviser before taking any action. Inheritance tax information is available from; Inland Revenue Probate and Inheritance Tax Office, Ferrers House, PO Box 38, Nottingham NG2 1BB Tel: 0845 3020900 (local rate number) www.hmrc.gov.uk/cto Alternatively, a number of financial advisers offer free, helpful guides. It is recommended that when considering these issues, you contact a recognised professional. |
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