Is It Time to Review Your Estate Plan?

Estate Planning

Planning to minimise the inheritance tax (IHT) due on your estate is always important, but the recent introduction of the residence nil-rate band (RNRB) means now could be the ideal time to review your existing plans.

What is the RNRB?

IHT is charged at 40% on estates worth in excess of the nil-rate band, which is currently £325,000. Married couples and registered civil partners can pass any unused nil-rate band on death to one another.

However, 6 April 2017 saw the introduction of an additional nil-rate band – the RNRB – which is intended to take the family home out of IHT for all but the wealthiest. The RNRB is set at £100,000 for deaths in 2017/18, rising to £125,000 in 2018/19, £150,000 in 2019/20, and £175,000 in 2020/21. It is then set to increase in line with the Consumer Prices Index from 2021/22 onwards.

The introduction of the RNRB means that up to £1 million of a married couple’s estate could eventually be taken outside the scope of IHT if the full nil-rate bands (£325,000 + £175,000 x 2) are available to each spouse.

The RNRB is also available when a person downsizes or ceases to own a home on or after 8 July 2015 where assets of an equivalent value, up to the value of the RNRB, are passed on death to direct descendants.

It is important to note that the additional band can only be used in respect of one residential property, which does not have to be the main family home but must at some point have been a residence of the deceased.

There will also be a tapered withdrawal of the additional nil-rate band for estates with a net value of more than £2 million (at a withdrawal rate of £1 for every £2 over this threshold).

Reviewing your estate plan

It is always advisable to review your Will and planning strategies on a regular basis, but it is particularly pertinent following changes in your personal or family circumstances or significant new tax rules. The introduction of the RNRB is one such example.

The additional nil-rate band will only apply when a main residence is passed on death to one or more descendants (including a child, stepchild, adopted child or foster child) of the deceased and their descendants. In order to utilise the RNRB, you may need to review your Will to check that the property is being bequeathed to the correct beneficiaries. The home doesn’t have to be specifically mentioned in the deceased’s Will, as long as it has at some point been a residence of the deceased.

It is also important to review your Will where property has been left in trust, as certain types of trusts may not be eligible for the RNRB. This is a complicated area and we suggest that you consult an expert for further advice.

If downsizing is contemplated, special care is needed to include provisions in a Will which will satisfy the conditions of obtaining the additional band.

For more information on the RNRB or for advice on other tax-efficient estate planning strategies, please contact us.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

Are You Affected by Inheritance Tax?

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The Inheritance Tax (IHT) collected by HMRC for the year June 2016 to May 2017 saw an increase of 9% on the previous year, rising to over £5 billion for the first time.

According to law firm Wilsons, this is attributed to rising property values and the freezing of the basic Inheritance Tax allowance, which has remained at £325,000 since the 2009/10 tax year.

It will be interesting to see how the new family home allowance (officially known as the main residence nil rate band) impacts on these figures. This relief was introduced in April 2017 and, according to HMRC, is intended to ‘reduce the burden of IHT for families by making it easier to pass on the family home to direct descendants for all but the largest estates.’

As well as this, there are other allowances which can reduce an individual’s exposure to inheritance tax and now, more than ever, it is important to assess how best to align your IHT position with your expectations for the future.

Green & Co have an Inheritance Tax and Care Home Review service that we run in conjunction with a local solicitors. If you’d like to discuss this service or any related matters please contact Green & Co.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

Don’t Be a Lottery Loser – Protect Your Syndicate Winnings

 

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If you and your employees club together to take a chance on the Lottery by operating a workplace syndicate, but you do not have a formal agreement in place, a large win could cause tax issues in the future.

If ever you are fortunate enough to win the jackpot, the winnings will undoubtedly be collected and distributed by a nominated individual, normally the same person who buys the tickets.  However, if by some stroke of misfortune, that person dies within 7 years of the win, HMRC could argue the distributions were technically gifts, particularly if no written agreement exists.  In that event the gifts would be treated as failed Potentially Exempt Transfers (PETs) and therefore subject to Inheritance Tax.

Admittedly this is not an everyday occurrence, but it can happen, and HMRC are likely to chase all those who shared in the winnings for any resulting liability.

Verbal agreements can of course be valid, but they are much more difficult to prove, so if you are a part of a syndicate, it is wiser to draw up a document, showing all members, the amount of the stake each pays and how any winnings are to be shared.  It should always be updated when new members join to ensure they don’t get caught out by the IHT trap.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

Rules Surrounding New Inheritance Tax Relief Deemed Too Complex

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In the Summer 2015 budget the Government announced plans for a main residence nil rate band (RNRB) to be introduced from 6 April 2017. Currently, individuals have a nil rate band (NRB) of £325,000, which is the threshold up to which their estate and taxable gifts are exempt from inheritance tax.

Subject to qualifying conditions, individuals will have a main residence nil rate band in addition to the NRB when they pass a residence onto a direct descendant on death. As with the NRB, any unused RNRB can be transferred to a surviving spouse.

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, subject to certain qualifying conditions, and there will be a tapered withdrawal of the RNRB for estates with a net value of more than £2 million. There is further detail on the measure, but this summarises the key features.

The proposals however have come under attack from the chair of the House of Commons Treasury Select Committee, Mr Andrew Tyrie, who feels that they are so complex that individuals affected will be unable to understand them. He said that “traps lie everywhere in the detail” and “tax policy must be made more practicable and coherent”.

Indeed there have been many calls to scrap the RNRB and instead increase the NRB. Mr Osborne has however rejected this call from Andrew Tyrie, stating that the UK tax system is “no more complex than comparable systems”. So with any changes to proposals unlikely, individuals are encouraged to consider how they will be affected by the measure.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

Image courtesy of David Castillo Dominici at FreeDigitalPhotos.net

Family Home Allowance – The New Inheritance Tax Relief

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Currently, Inheritance tax is paid if a person’s estate (their property, money and possessions) is over £325,000. This is known as the inheritance tax threshold. Any assets that are above this amount incur an Inheritance Tax charge of 40%. Married couples or civil partners are able to double their allowance up to £650,000 before tax is payable.

However, from April 2017, an additional “family home allowance” is being introduced for people owning a home. It will eventually be worth an extra £175,000 per person – meaning the tax free band can be up to £1m for couples. It can even be transferred between married couples and civil partners if one dies before it is introduced in 2017.

The existing £325,000 nil rate band is frozen at its current level until 2021.

In order to qualify for the family home allowance, the property must have been the main family home at some point and be left to one or more direct descendants, including children, step children, adopted children, foster children and even grandchildren. However, it will not include other family members such as nieces and nephews.

If there is more than one property in the estate, only one will qualify for the new allowance. If a home is sold or downsized any time from 8th July 2015, the family home allowance will still be allowable as long as assets of an equivalent value are passed to the descendants instead.

For estates with a net value of more than £2m, the family home nil rate band is withdrawn at £1 for every £2 over the £2m threshold.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

New Pension Rules – The Downside

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New pension rules came into effect on 6 April 2015 which have brought many welcome changes. But what about the changes which are not so good? Careful consideration needs to be made with regard to how the changes may affect you.

The most significant change is probably the removal of pension funds from Inheritance Tax. This, together with the ease with which tax relief can be lost, means that individuals will need to seek financial advice.

So what are the pitfalls?

Certain events, including a payment from a flexi access draw-down, will trigger the “money purchase annual allowance rules”. Triggering these rules will reduce the annual allowance on which pension tax relief can be claimed from £40,000 to £10,000 and will also result in the loss of any unused relief from earlier years. Clearly, if you intend to make pension contributions in excess of £10,000 in future years, you will need to take financial advice before making any alterations to your existing pension provisions.

From the age of 55, you used to be able to take 25% of your fund tax-free but under the new rules you are able to draw the whole of the remaining fund in one lump. This will be taxed as income and could push you into the higher rate tax bracket or even worse push your income to such a level that the personal allowance is no longer due. Careful consideration needs to be given to when and how much income is withdrawn at any one time in order to minimise the amount of tax due.

If you spend all your pension savings in the early years, you could run out of money long before you anticipated. This could also be the case if the fund does not perform as well as expected. Again financial advice needs to be taken before any decisions are made.

Please contact Green & Co for further information.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

Image courtesy of Steafpong at FreeDigitalPhotos.net