Are your life insurance policies in trust
Most people are advised to take out life insurance when they buy a home to cover the mortgage and also ensure their children are protected in the event of early death. However, more than half a billion pounds is set to be wasted this year in inheritance tax as individuals fail to place their life protection policies “under trust”.
The figure, which is up £58m on last year, also found that only a quarter of consumers would be confident in tackling inheritance tax planning without the help of a professional independent financial adviser. However. many people now take these plans out on the phone or online without advice and end up making a big mistake.
If you fail to put a policy “under trust” could reduce a £100,000 life insurance pay-out by up to £40,000 if an individual’s estate is worth more than £325,000. It said that this could leave families at risk of a “sizeable tax bill”.
The problem gets more serious on the deaths of both husband and wife if they leave children under 18. Not only is the estate significantly reduced but the children inherit all the money at age 18 which most parent consider far too young.
The government is not helping as recently HMRC recently proposed a limit to the amount an individual can transfer into a series of trusts tax free.
In a paper, the government body suggested that each settlor be entitled to a tax free “settlement” nil-rate band that runs separately from, and in line with, the IHT nil-rate band.
If the proposals become law, trustees of all trusts set up by an individual settlor will have one nil rate band (currently £325,000) to share between them in proportions chosen by that settlor. This will inhibit IHT planning strategies, based on the “Rysaffe principle”, which use multiple trusts to reduce the IHT charge on each tenth anniversary of the trust, and on distributions to beneficiaries.
Inheritance tax and estate planning is getting more complex with every passing year and should only be undertaken with experienced advice – call us today
The Effect Of Increased House Price On Inheritance Tax
The boom in house prices across the UK and particularly in London may be making many home-owners feel better about their growing wealth. With the value of the average London home set to breach the inheritance tax threshold of £325,000 next year and homes in the South East likely to follow suit by 2019, many people will become higher rate taxpayers for the first time on their death.
Irrespective of other assets UK, home-owner can expect to see their homes exceed the current IHT threshold by 2025. The price of the typical property in London will reach £331,000 in 2015 and homes in the South East will cost £239,575 triggering the tax bills, according to new analysis.
The findings come as average residential property prices continue to rise while the IHT threshold remains fixed for the sixth straight year at £325,000.
Since 1986, the IHT threshold has risen by an average of 5.4 per cent a year, but has remained at £325,000 since the 2010/11 tax year and will be frozen at this rate until at least April 2019.
However, house prices have risen by 7.5 per cent across the UK and by 15.4 per cent in London. If IHT thresholds had continued to rise in line with its historic average it would currently be £401,442 in 2013/14 rising to £423,212 in 2014/15.
There are now more property millionaires in the UK than ever before, and current economic conditions have created a situation for massively rising house prices. This increase will deal their owners a severe blow if they have not planned ahead to save their families from this punitive tax. Inheritance tax can significantly reduce the value of an estate, so it is vital to take evasive action as early as possible.
The typical age for people arranging IHT strategies in around 70, but research suggests that age tag is now going down as more and more people find themselves likely to be affected by this punitive tax.”
As always with any complex tax planning experienced advice is essential so please call us today.
Using The Value Of Your Business To Reduce Personal IHT
If you spend most of your working time running a small business it is very easy to ignore, or to delay, putting in place suitable provisions to ensure that maximum value can be passed on to your heirs when you are no longer able to run the business.
One very important point to check is that your interest in the business will qualify for business property relief (BPR) from inheritance tax.
For your shares to qualify for BPR your company must be wholly or mainly a trading entity. So, if the pendulum has swung too far towards lrge cash holdings investments or investment properties HMRC may, on your death, want to tax the entire value of your shares at 40 per cent, including that attributable to the trading elements.
If you are married then you may have a straightforward will leaving everything to your spouse if you die first. There is nothing wrong with that – or is there? It does have the advantage of simplicity, but you run the risk of wasting the IHT relief. Everything you leave to your spouse is exempt from IHT anyway assuming that you are both domiciled in the UK. So, by leaving your relieved shares to your spouse you waste the relief.
Suppose your spouse then sells the shares, the cash sale proceeds will be fully chargeable to IHT and so your children will bear IHT at 40 per cent on your spouse’s subsequent death on value which you could have passed on at no cost.
Including a specific gift in your will to pass your shares to a discretionary trust for your spouse, and your children can have the best of both worlds – your estate can claim the BPR and your spouse can still benefit from the shares themselves or from the proceeds of their sale. If the shares have been sold then their cash value should be ring-fenced from any charge to IHT on your spouse’s death.
Leaving your business interests to the next generation under a trust structure introduces a number of additional factors to consider.
Absolutely key to making this structure work is your choice of trustees. While trustees do not necessarily need to have any legal or accounting knowledge, as they can pay professionals for this, they do need to have a healthy quota of common sense, and it is imperative they are able to work well with each other.
Using a trust structure also means you can keep your shares together as a single holding and still benefit a large group of people – usually your spouse, children and grandchildren.
The role of trustee is not one to be accepted lightly. It can bring with it some onerous duties and responsibilities. In particular, the trustees’ duty is to maximise the benefit their beneficiaries receive.
How is it done?
A Business Trust is set up for each shareholder of a trading LTD company during life time at a minimum fixed fee of £1700 for each trust.
The executors use BPR to gift shares into the business trust on first death and then give the shares to spouse in exchange for an interest free IOU payable to the trustees on demand. As the value of the company is based on the value at death if there is a sale soon after there would be no real CGT issue.
The surviving spouse may sell the shares or the trustees could sell the shares. If the surviving spouse holds the shares until death BPR could again be claimed on the value
This creates a debt on the surviving spouses Estate based upon the value of the shares on the first spouse death. (Valuation is done by the firm’s accountants and charged to the estate).
If the company is worth several hundred thousand pounds this will create a debt on the surviving spouse’s personal estate thus saving a significant amount in IHT for a very low upfront fee.
There are a range of additional asset protection benefits of a discretionary trust to keeping the money in the family bloodline on divorce or bankruptcy of children or grandchildren.
This planning is useful to all clients whose Limited companies value exceed £100,000.
As always experienced advice in this area is essential
Business Property Relief (BPR) was introduced in 1976, but over the past decade it has become an increasingly mainstream option. With the Inheritance tax allowance still stuck at £325,000 and house prices rising, more and more people are finding it can give them a way to reduce or eliminate the inheritance tax (IHT) bill their families are going to have to pay on their estate.
BPR was originally designed to ensure that family businesses can be passed down the generations without being sold or broken up to pay tax. Over the years there have been numerous changes to the finer points of the BPR regulations but the basic principle is that ‘relevant business property’ will receive full relief from inheritance tax (IHT).
Today a new market has emerged which is designed to give a broader range of retail investors access to BPR-qualifying products run by professional fund managers.
This type of service means that a wider range of investors can take advantage of the clear advantages that BPR plans give when it comes to managing IHT liabilities.
Firstly it can give IHT exemption in two years, rather than seven years needed for most gifting and trust arrangements to become fully effective. This means BPR options may be worth considering when someone may not live for another seven years.
Unlike gift assets away BPR qualifying investments will allow people full access to their capital, and control over it.
A further advantage of a BPR-qualifying investment is that it will be simple to set up. There’s no need for a solicitor and no medical underwriting as for life insurance..
BPR-qualifying investments will only be exempt from IHT if they are still owned at the time of their death. However, there is some flexibility about rolling plans over within 6 months to three years after the two-year qualifying period and moving it into another plan.
This concession provides flexibility for all investors in BPR qualifying investments.
If someone dies before they have had their BPR investment for two years, they can leave it to their spouse without interrupting the period for IHT-effectiveness.
Clients who may want to make withdrawals also need to bear in mind that they may not be able to sell their BPR investments as quickly as they would like to. Shares listed on AIM, for example, can take longer to sell than shares listed on the main stock exchange.
Few investors will want to rely on a BPR solution in isolation. They are much more likely to see it as part of a joined-up estate planning strategy that might also incorporate trusts, gifts and an element of life insurance. Naturally, different options will be suitable for different assets.
As always experienced advice is essential in this area.
Up until now it has been relatively unusual for people to use bare trusts, as discretionary trust offer the trustees significantly more control over the trust assets . However, now that a person is only allowed a lifetime limit equivalent to the Nil rate band before the total value of discretionary trusts they have settled in lifetime or on death are liable to a potential income tax charge on the 10 year anniversary bare trusts are likely to make a comeback.
This is because a gift into a bare trust is treated as a Potentially Exempt Transfer and so the gift can be unlimited and provided the settlor lives a full 7 years after the gift no IHT will be due. In addition no income tax is chargeable on the trust if the value exceed the Nil rate band on the 10 year anniversary and it does not count as part of the total amount gifted into trust. A further advantage is the trust has the full allowance benefit for capital gains tax and not half the exemption as is applied to discretionary trusts.
Bare trust s are part way between a full trust and outright ownership. The trustees have the usual trustee responsibilities but for tax the liability arises on the beneficiaries and not the trustees. The reason bare trust are not used often is that once the beneficiaries have reached 18 years of age they can demand the transfer of all the capital. Also if the beneficiary dies the assets form part of their estate for IHT purposes.
Usual uses in the past
Grandparent setting aside money for grandchildren’s education is quite a common use. The CGT arising on the beneficiaries is advantageous and the grandparents may also want to use their full discretionary allowance for other purposes like inheritance tax planning.
For the very wealthy, gifts may want to be made into a discounted gift trust using a bare trust arrangement which retains the right for up to 5% return of capital tax free yearly to the settlors and cannot be wound up by the beneficiaries during the life of the settlor . This enable a large gift to be made which not generating an immediate income tax charge on the trust if the gift exceeds the current Nil rate band allowance (£325,000 in tax year 2013/14).
This means the wealthy settlor can also gift £325,000 into a discretionary trust at the same time thus reducing the value of the estate after 7 years and making a large saving on Inheritance tax.
Like all inheritance tax planning it can be complex and expert advice should always be sought as mistakes can have serious financial consequences.