Author: Charles de Lastic

Who’s Going to Pay for Social Care?

In this current turbulent political landscape, certain issues are being overshadowed.  Something under the radar has recently been highlighted by the Centre for Policy Studies.  The Rt Hon Damian Green has put proposals forward to address the issues of the ongoing social care crisis.  As a politically toxic topic, with various possible remedies branded as dementia or death tax, there seems an impasse on how best to address it.  Given the resulting uncertainty, what can anyone do to minimise the potential impact of the current care crisis lottery?

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Estate Planning Myths That Just Won’t Die!

Estate planning remains probably the most misunderstood area of Financial Planning.  Some clients think they just need a little Financial Planning but not any Estate Planning.  Some consider themselves too old or too young to even think about it.  Policy changes from HMRC that hit the headlines do nothing to inspire confidence in a notoriously complex system.

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The Proverbial Elephant In the Room?

Inheritance tax (IHT) receipts are predicted to reach a staggering £10bn annually by 2030, almost doubling the current figures, according to analysis from leading financial institutions.

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Controversial New Probate Fees Imminent?

 

 

Controversial New Probate Fees Imminent

With the continuing issue of Brexit still hovering over the Government, the less urgent approval motion to controversially increase probate fees has been delayed.   It had been suggested that the new probate regime would be introduced this month.  Then 21 days after the order has been made the new fees will come into force unless MP’s strenuously object to the approval motion.  In this case, the issue would have to be debated in full and put to a vote.

Surprisingly, HMRC has introduced a temporary process for probate applications as it is preparing to switch to this new fee structure.   It has announced that it will accept applications for probate before an Inheritance Tax (IHT) account has been processed.  Currently to get Probate the Executor must first submit an inheritance tax account, which must then be processed by HMRC before any further application can be accepted.

The rationale behind the fee hike is the Lord Chancellor seeking to generate revenue. He is striving to improve the Court and Tribunal Services in order to provide a “world class courts service”.  Estimates anticipate around £155m will be raised annually by the new fees charged on higher value estates.   In February MPs of the delegated legislation committee which had probed the nature of the fee agreed with the Ministry of Justice that the mandatory charge on the Estates of the deceased was a fee for the provision of services, and not a tax.

Dubbed a stealth tax and an abuse of power by critics, this bill ensures probate costs are subject to sliding scale of fees.   Currently fees are £215 for personal applications and £155 for solicitor applications.

These new fees mean Estates are effectively being double taxed, once for Inheritance Tax (IHT) of 40% above the nil rate band, and then again through tiered probate fees.  This is of course on the understanding that the contents of the Estate were taxed at source to begin with.

The fees are linked to the gross value of an Estate and the smallest estates will avoid fees entirely. In fact according to the Ministry of Justice this new lower threshold will exempt around 25,000 Estates annually from any fees.    The fee breakdown is as follows:

Estates less than £50,000 are unchanged

Estates worth £50,000-£300,000 will pay £250 a rise of £95

Estates worth £300,000 up to £500,000 will pay £750 a rise of £595

Estates worth £500,000 up to £1 million will pay £2,500 a rise of £2,130

Estates worth £1 million up to £1,600,000 will pay £4,000 a rise of £3,845

Estates worth £1,600,000 up to £2 million will pay £5,000 a rise of £4,845

Estates worth over £2 million will pay £6,000 which is a rise of £5,845

These increased fees are potentially going to leave bereaved families struggling.  Many banking institutions will allow access to the deceased accounts for funeral expenses and inheritance tax bills.  The real concern is that there may not be sufficient capital available to meet all of these expenses.  If that is the case, the executors could have to fund the probate fee personally or take out a loan, the latter of course causing additional fees and interest.

We could see families considering life policies written in Trust to cover probate fees.  This is something common practice to either cover or assist with the burden of payment of IHT.  This will involve the payment of premiums which will be an added expense for families.  Another solution is for appropriate amounts of cash to be put into joint family accounts for ease of access.

An option available for married couples is the simplification of their Estates such as unravelling property ownership to reduce the value of their Estates.  This may seriously impact on tax planned Wills and the protection under those Wills for spouses with children from different relationships.  Aside from gifting and joint ownership, there is limited action that can be taken.

Given the changing landscape of probate and IHT it is crucial that you speak to an experienced professional and impartial financial expert.  Contact us now for the complete peace of mind that efficient financial planning brings for you and your loved ones.

 

 

 

 

 

 

 

 

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What is Inheritance Tax?

 

What Is Inheritance Tax?

Inheritance Tax (IHT) is a tax on the transfer of assets from one person to another.  It is usually encountered when someone dies, and they leave their Estate to either one individual or a range of beneficiaries.  However, lifetime gifts also have IHT consequences.  The rate of IHT is generally 40%.

Not everyone has to pay Inheritance Tax.  The principal deciding factors are:

  • What is the value of your Estate at the time of your death?
  • Did you make any lifetime gifts within 7 years of death and if so what was the value of the gift and who received it?
  • Do any of your assets have relief from, or are they exempt from, IHT at the time of your death?
  • Who are you leaving your Estate to? Are any of the beneficiaries exempt from IHT?
  • How much “nil rate band” and “residence nil rate band” do you have available at the time of your death?

 The Nil Rate Band

The first £325,000 of every Estate is entirely exempt from Inheritance Tax.  This is referred to as the nil rate band and it applies to everyone in the UK.  It’s called a nil rate band because assets up to that value are taxed at 0%.  If one spouse doesn’t use or only partially uses their nil rate band at the time of their death (for example if the value of their estate is less than the nil rate band or all their assets are passing to the surviving spouse who is an exempt beneficiary) then the unused proportion can be transferred to the surviving spouse and is available at the time of death.  This is known as the transferable nil rate band.

Generally speaking if you have made no substantial gifts in the last 7 years and your estate is worth less that £325,000 (for an individual) or £650,000 (for married couples) it is unlikely that there will be an IHT charge at the time of your death.  If the value of your estate is worth less than £500,000 (for individuals) and £1,000,000 (for married couples combined) again it is unlikely that there will be an IHT charge at the time of your death (after 2021) if you qualify for the residence nil rate band.

The Residence Nil Rate Band

This is an extension of the nil rate band and is available to homeowners who leave their house to their direct descendants, typically children and grandchildren.  It is being phased in over time and by 2021 will provide an additional £125,000 of nil rate band.  However, the extension starts to be withdrawn if your estate exceeds £2,000,000 at the time of death.

Exempt Beneficiaries

Any transfer of wealth during lifetime or on death from a person to their spouse is exempt from Inheritance Tax.  There is an exception to this where the recipient spouse is not domiciled in the UK, in which case the spouse exemption is capped at £325,000.

Any transfer of wealth during lifetime or on death to a UK charity is exempt from IHT.  If you decide to leave at least 10% of your estate to a UK charity on your death any IHT is payable on the remainder of your estate it is paid at 36% (instead of the usual 40%).

Are Some Assets Exempt from IHT?

There are 2 main classes of assets that are exempt or partially exempt from (or technically have relief from) IHT.

  • Interests in businesses that have been owned by you for more than 2 years and qualify for “business property relief”. This may include interests in sole-trader businesses, interests in trading partnerships and unlisted shares in trading companies.  Investment businesses do not qualify.
  • Interests in agricultural property that have been owned and occupied for the purposes of agriculture by you for more than 2 years or have been owned by you but occupied by someone else for the purposes of agriculture for more than 7 years. This relief only extends to the agriculture value so if the market value exceeds the agricultural value, APR doesn’t provide relief for the excess value.

Some assets are not technically part of an Estate and although they may provide valuable payments on death, they are not usually subject to IHT.  These may include life assurance payouts on your death, pension death benefits and death in service payments through your employment.

Can you Use Financial Planning to Avoid IHT

Yes, IHT planning is lawful but care must be taken to engage a professional and experienced Independent Financial Advisor to assist with this.  The legislation sets out a number of reliefs and exemptions that can help to mitigate the liability.  There are a variety of ways and the traditional ones are:

  • Lifetime giving to reduce the Estate on your eventual death. Many gifts can be made without incurring any IHT consequences providing that you survive the gift by 7 years.
  • For married couples making use of the spouse exemption, to prevent any IHT being payable on death of the first member of married couple to die.
  • Taking out life assurance to provide funds on death to pay or help towards paying the IHT liability.
  • Investing in various financial products that provide a form of investment but also seek to secure an IHT benefit. These include Discounted Gift Trusts, Loan Trusts and flexible Reversionary Trusts Lifetime giving to reduce the Estate on your eventual death.   Many gifts can be made without incurring any IHT consequences providing that you survive the gift by 7 years.
  • Considering the use of Deeds of Variation and other methods to reduce and IHT bill even after a person has died.

It’s worth remembering that individuals who are domiciled in the UK are subject to UK IHT on their worldwide assets.  It is UK domicile rather than residence that triggers UK IHT.  Domicile is more a concept of the country your regard as your home and is not necessarily the country you live in.  There are also rules that deem you to be domiciled in the UK based on your pattern of residence.

For the peace of mind that efficient estate planning brings you need to ensure you engage an experienced, professional and impartial expert.   Contact us now and take the first step in ensuring you leave your loved ones the legacy you worked hard for.

 

 

 

 

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Tough New Tactics from HMRC

‘Open Sans’

Tough New Tactics from HRMC

Getting people to pay HMRC the money they owe has always proved to be tricky.  In 2016 it spent £24m on private sector debt collectors but in 2017 the figure soared to £39m.   HMRC now has a new, more aggressive tool at its disposal, known as an Attachment of Earnings Order.  These are being used alongside the feared Accelerated Payment Notices (APNs).

APNs are issued to people that HMRC believe owe them money.  They are an upfront demand for immediate payment without the need to actually prove through the courts that the money is owed.   Reliable data sources illustrate that use of APNs has more than quadrupled since January 2017.

It’s clear that the tax office isn’t troubled by making individuals bankrupt or forcing companies to cease trading in order to get hold of disputed funds.  APNs have given HMRC the power to create an environment best described as tax now, ask questions later.  Taxpayers are routinely remortgaging their homes or selling all their assets to pay these tax bills that often HMRC has not proved in court.

An Attachment of Earnings is a new method that HMRC will be using to retrieve money.   It is designed to retrieve unpaid maintenance payments, county court judgements, or benefit overpayments. Both the individual concerned and their employer will receive a document from the courts, detailing what is owed and how much the employer will need to deduct from the salary each month in order to repay that money.

The Court will assess the individuals financial situation to deduce what they need to live on (this is referred to as the protected earnings rate) and then deduct the owed money from whatever is left.  Data obtained by a national accountancy firm reveals that 428 people had money ‘recovered’ directly from their earnings by the taxman in 2017/18.

This new ploy ensures that HMRC gets the money it is owed conveniently and without the hassle of repossessing the debtors goods and selling them through auctions.  This is always a lengthy process and sees those goods sold for far less than they are really worth.   The Attachment of Earnings has the additional advantage of being completely non confrontational as there is no interaction with the debtors.   It’s a tried and tested method that the Student Loan Company has been using for some time, collecting about 9% of graduates earnings every month, provided their earnings remain above a specific threshold.

Despite the ongoing disputes about unpaid tax whether from reluctant individuals or expert evaders that are giant multinational companies, HMRC have published an analysis of income tax paid in the UK by salary band, region and gender.  In total 2016-17 saw £174 billion paid in income tax, which is the latest year for which figures are available. Of that amount, almost a third of it (£52.6bn) was paid by the 381,000 taxpayers who earn more than £150,000 per year.  The tax paid by those overwhelming male individuals was more than all the income tax paid by the first 20 million taxpayers.

Unsurprisingly, London has 4.2m income tax payers but just the 87,000 earning over £200,000 paid nearly half of the £43.8billion that was raised.  It is awkward to admit it, but if we really do lose all these high earners to Brexit, the hit to the Treasury will be significant.  After all, these bankers, lawyers and accountants paid more income tax in 2016-17 that the entire sum raised from every taxpayer in Scotland and Wales combined.

Thinking about your next tax bill?  Tax planning advice should only be taken from a professional experienced and impartial advisor.  Call us now for the peace of mind that efficient and lawful tax planning brings.

 

 

 

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Why Are Death Bed Marriages Fashionable?

Why Are Death Bed Marriages Fashionable?

As drastic as it sounds, statistics show that more cohabiting couples are deciding to marry when one partner is literally on their deathbed.  Evidence from the Home Office and the Passport Office shows a significant rise in the number of urgent marriages, often from people in heath service providers.  In fact there was an 11% increase in the number of urgent applications for a Registrar General’s Licence to get married or enter a civil partnership.  The marriage can then take place in any location, 24 hours a day.

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Increase In Investigations Into Inheritance Tax

 

 

HMRC Investigations into Inheritance Tax up by 5%

In 2015-16 24% of all taxable estates were investigated by HMRC. With rapidly increasing prices in the property market, the amount of IHT potential is very significant. Figures just released show that HMRC made 5,400 estate investigations last year. This is a year on year increase of 5%. Challenging the value of estates and investigating IHT figures in tax returns is a lucrative method for HMRC of reaping extra tax.

Interestingly the House of Lord’s Sub Committee for the Finance Bill 2018 has recently revealed that they want to investigate the amount of power HMRC currently possesses, so statistics such as these are being increasing scrutinised.

The Report detailed that the area HMRC is querying in greatest detail is the valuation of residential property that is passed onto heirs. HMRC may argue that much higher value be attributed to land which has the potential for development or to properties that have potential for refurbishment.

If an HMRC investigation concludes that IHT has been underpaid, the estate may have to pay all the tax that is owed plus a hefty penalty. This could even be 100% of the tax at stake in the estate.

Areas of particular interest to HMRC in relation to IHT include the validity of claims for business or agricultural reliefs, omitted assets and whether submitted figures accurately reflect the current market value.

Currently, when assets of an estate are in excess of £325,000 IHT is payable. As of June 2018, 24,500 estates are now liable, compared with 23,200 June 2017. This chiefly reflects the increase in average house prices in the UK.

Property prices have soared particularly in the South East. The average property in London five years ago cost £324,518 whilst elsewhere in the country the average was £172,655. This year however the London average is £476,000 and the rest of the UK £245,076. Unfortunately HMRC have chosen to leave IHT frozen at £325,000. This goes some way to explaining why there has been an increase in investigations.

Of course there is a huge temptation to undervalue residential property to save IHT as it is likely that property is the biggest figure on a tax return. The increased scrutiny and rise in investigations means that HMRC could fine more beneficiaries and estates who may not necessarily be cash rich. These fines are life changing amounts of money in some cases.

The crux of the investigation is that HMRC may deem that there has been a lack of care in carrying out property valuations. Given the power they have to impose fines, taking professional advice around IHT is absolutely critical.

By choosing a professional, experienced and impartial expert to guide you through the minefield of IHT you and your loved ones are guaranteed the peace of mind that financial planning brings. Don’t put it off.  Contact us now,

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A Sea Change for Landlords?

 

 

Areas Bluebond ServiceA Sea Change for Landlords?

The Government is determined to build a housing market fit for the future.  It  aims to make the private rental market fairer and more transparent for tenants.  In doing so, it will reduce the number of private landlords in the UK by making it less lucrative.  Landlords across the country are now resigned to the fact that due to more new legislation their profits will be reduced.   A stamp duty surcharge was introduced 2 years ago, and the 10% wear and tear allowance has been discontinued. Landlords can now claim only actual costs spent on repairs, rather than a blanket 10% reduction for wear and tear.

The latest attempt by the government has been to phase out tax relief on mortgage interest.  Higher taxation is forcing many landlords to rethink their strategy, and in some cases to sell up.  The gradual loss of tax relief from now until 2020 will hit higher rate and additional rate taxpayers.  Indeed the loss in tax relief is also likely to push around 450,000 lower rate tax payers into a high band, according to the National Landlords Association.

Until April 2017, Landlords could deduct all their mortgage interest payments before calculating their tax bill, meaning they would be taxed purely on their profits rather than their overall turnover.  With the majority of landlords utilising interest only mortgages, this meant the savings on offer were potentially significant.

However mortgage interest tax relief changes will be phased in soon and Landlords 2017-18 tax returns will be the first to fall under new government regulations.  Originally announced in the 2015 Budget, this means the amount of mortgage interest landlords can offset against their tax bill will be reduced.

This figure is set to drop each tax year until it is fully replaced by a tax credit for mortgage interest in 2020-21.  Investors could see thousands of pounds of potential profit wiped out.   When tax returns are filed for the 2017/18 tax year (due January 2019) they will only be able to claim tax relief on 75% of their mortgage interest.  They will get a tax credit on the rest of their mortgage interest payments.   The following year, the relief will only be available on half of their interest and they will get 20% credit on the rest.

Some are calling this latest move from the government the end of Buy to Let for all but the richest.  The number of new Buy to Let borrowers plummeted from 29,100 in March 2016 to around 4,000 the following month when the stamp duty surcharge was introduced.  According to the Council of Mortgage Lenders it has struggled to pick up substantially since.

New rules are also on the way to stop landlords and property owners pocketing tax-free cash on holiday let income.  Rent-a-room relief was aimed at helping home owners let their space rooms in a bid to reduce the housing crisis.  Instead, many are using this as an opportunity to rent out their homes to tourists while they moved out and claimed up to £7,500 a year in tax free income.   In an attempt to stop home owners from profiting from websites like Air BnB, the Government has stepped in with new legislation.

It will be introducing a new “shared occupancy clause” for rent a room relief, which will require the individual to be resident in the property and physically present for at least some part of the letting period.  Doing so will return the relief to its original purpose of incentivising the letting of spare rooms.

For example a home owner letting their main residence during the Wimbledon tennis tournament to a visiting player whilst they go on holiday for the whole rental period is not eligible for rent a room relief.  This is because there is no shared occupancy so it is taxable rental income and must be declared. However a landlord renting a room to a student for an entire term who goes on holiday for a week during that period is qualified for rent a room relief as occupancy is shared for part of the rental.

A final concern for landlords is the new Government bill to ban letting fees across England.  Unexpected letting fees and high deposits can cause a substantial affordability problem for tenants and are often not clearly explained.  This leaves many residents unaware of the true costs of renting a property.

A recently introduced bill will bring an end to costly letting fees and save tenants around £240m annually, according to government figures.  The Bill will also give tenants greater assurances that the deposit that they pay at the start of the tenancy cannot exceed 6 weeks’ rent.

The Tenant Fees Bill will stop letting agents from exploiting their position as intermediaries between landlords and tenants and prevent unfair practices such as double charging for the same service. It will also help to increase competition between agents and landlords, which could drive lower costs overall and a higher quality of service for tenants.

The Tenant Fees Bill builds on the government’s work this year to protect tenants and landlords through the introduction of new rogue landlord database, banning orders for rogue landlords and property agents as well as new code of practice to regulate the letting and managing agents sector.

For all landlords who already abide by the current legislation and who treat their tenants fairly the changes will unfortunately only be visible in their year end profits.

For all landlords, tax and financial planning and the peace of mind that it brings is paramount.  Contact us now for professional impartial expert advice.

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What Exactly Are the Tax Implications of a Civil Partnership?

 

 

What are the Tax Implications of a Civil Partnership?

Rebecca Steinfeld and Charles Keidan are celebrating their recent win in the Supreme Court.  By a unanimous vote, the 5 judges ruled that the Government’s refusal to allow opposite sex couple couples to have civil partners was ‘incompatible’ with human rights law.

Everyone agrees that this is discrimination, but the Government says it’s acceptable to treat different groups of people in different ways while they make up their minds, over a number of years.  If this case can establish that a “wait and see” policy is a breach of rights, it could help lots of other people facing discrimination to challenge unfair delays by the Government.

So what’s all the fuss about?   A civil partnership ceremony does not require vows to be exchanged and civil partnership certificates include the names of both parents of the parties, not only the fathers of the parties.  There is no mention of consummation of a civil partnership.  The dissolution of a civil partnership is also not the same as a divorce in that civil partners cannot rely on adultery as a factor for the irretrievable breakdown of the relationship.

In this remarkable case, Rebecca and Charles wanted to cement their commitment to each other and wanted to strengthen the security of their family unit.   They wanted to do it in a way which reflected who they are, how they see their relationship and also their roles as parents.  They wanted, in their words, a partnership of equals, without the negative connotations of marriage.

Since the landmark legal victory, the idea that a civil partnership could be available to heterosexual clients, as well as same sex couples is looking likely.    The case has proved to be of real significance to family and human rights law practitioners.

Currently there are over 3 million cohabitees in the UK with virtually no legal protection.  The opportunity that they could possibly be able to formalise their relationship with a civil partnership will automatically provide the same protections that marriage does.  Family law specialists will be keen to see people being removed from a legally problematic area.  Providing a way for couples to commit in a formal and legal way has a drastic impact on their long term financial situation.  Significant tax savings can be made which cohabiting couples simply don’t qualify for.

People who live together are taxed separately and each person has their own personal allowance entitlement.  However married couples can qualify for the Married Couples Allowance which entitles them to an unused Personal Allowance of up to £1,190 to be transferred to their spouse or civil partner if they earn more.

Transfers of assets between cohabitees are subject to Capital Gains Tax.  However, a spouse or civil partner doesn’t have to pay CGT on the transfer of assets between them because they are able to claim spouse exemption, provided that they are living together.

The most significant tax saving is likely to be Inheritance Tax.  Assets left by one spouse or civil partner to their surviving partner or spouse are not subject to Inheritance Tax, because spousal exemption can be claimed.  There is no limit to this exemption where both spouses are domiciled in the UK, although there are limits if one member of the couple is not domiciled in the UK.   Cohabiting unmarried couples or those not in a civil partnership on the other hand, have to pay Inheritance Tax on everything over the Nil Rate Band (£325,000) passing to their cohabitee.  Married couples and civil partners can transfer their unused allowance to be used on the second death, as well as transferring the new Residence Nil Rate Band.

In a situation of Intestacy, a married couple or civil partner will automatically inherit from their spouse or partners estate, although this will be limited if the deceased has children.  A cohabitee will not automatically inherit, unless the property is jointly owned.

Surprisingly there are some negative considerations to marrying or entering into a civil partnership.  For example a married couple or civil partner can only nominate one main residence for principal private residence tax exemption if sold.  Cohabitees each owning a property would not have to do this.

Charles and Rebecca have achieved their aim of receiving a declaration that the Civil Partnership Act is not compatible with sections of the European Convention on Human Rights.  It is now up to Parliament to act upon this declaration and take action to rectify the situation.

If you are a cohabitee unsure of your personal financial situation now is the time to obtain professional impartial advice from an experienced financial planner.  Contact us now https://www.bluebond.co.uk/directions/.

 

 

 

 

 

 

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