Tag Archive: IHT Planning

  1. Utilising the Normal Expenditure out of Income Exemption

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    Inheritance tax is becoming a concern to more and more people. A simple yet effective way of planning is to use exemptions and reliefs and use of the normal expenditure out of income exemption can be particularly useful.

    It is a fact that inheritance tax receipts are increasing and the number of families paying inheritance tax is now at a 35 year high.  In 2009/10 2.6% of deaths gave rise to IHT.  In 2015/16 this was 7.1%.   And the expectation is that the tax receipts will increase still further with a prediction of £5.6 billion from tax year 2020/21.

    Inheritance tax is obviously affecting more estates and will continue to do so.

    Many people will be keen to take practical action that can reduce the impact of the tax without materially affecting their standard of living or financial security.

    One of the accepted forms of IHT planning is to make lifetime gifts.  Provided these are potentially exempt transfers (PETs) and the donor lives seven years these will be totally free of inheritance tax.

    The drawback with PETs is that, in general, they need to be outright gifts and so ongoing control is lost.  This can be overcome by making the gift to a trust (usually a discretionary trust) where the donor can be a trustee and decide who should benefit in the future.  The drawback with discretionary trusts is the need to not exceed the donor’s nil rate band taking account of what has been gifted in the preceding 7 years.

    Many people may not however have assets that they can easily gift to the next generation but do have substantial levels of income – some of which may be surplus to their requirements.

    Income in this respect means earned income and investment income (including buy-to-let income).

    Such people can therefore make regular gifts of income. 

    Provided such gifts are

    • regular; and
    • made out of income; and
    • do not affect the donor’s usual standard of living

    they will be exempt when made.

    This means that there is no requirement that the donor need to survive them by 7 years as with other gifts.

    And that applies if the gifts are outright (PETs) or to a discretionary trust (chargeable lifetime transfers).

    How can an individual utilise such a gifting strategy if he/she has surplus income?

    There are a number of opportunities and here are a few to ponder over:

    • a grandparent (or parent) makes regular payments into a Child Trust Fund/JISA for the benefit of a grandchild;
    • parents paying premiums into a joint lives last survivor whole of life policy in trust for children to provide a lump sum fund to meet IHT on the second death; or
    • parents making a regular (annual) contribution to a single premium bond held in trust for their family.

    The key issue is that the payments must be made regularly.

    Finally, another important point.  On an individual’s death, HMRC may want evidence that the payments did not affect the deceased’s standard of living and this may prove difficult for the executor to demonstrate – given that they will now be unable to discuss it with the deceased!

    To avoid this problem, the donor should keep records of his/her regular gifts and his/her associated financial circumstances as and when he/she makes gifts.  This can be recorded on Form IHT 403 – the normal expenditure form that needs to be completed as part of the estate return on a person’s death.

    Please contact Lexington on [email protected] or 01793 771093 to discuss your Financial Planning and Wealth Management plans.

  2. Rising Estate Taxes

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    According to the Office for Budget Responsibility (OBR) the number of UK families paying Inheritance Tax (IHT) on death has reached a 35 year high. The main driver of this is the surge in UK house prices.

    Almost three times as many families as six years ago are expected to face the tax.

    The OBR estimates that just over 40,000 families will face IHT in the current tax year but that this will rise to over 45,000 in 2016/17. The new residence nil rate band, when it is introduced (gradually) from 2017/18, will have an initial ‘reducing’ effect but it is thought this reduction will be gradually countered by predicted increasing house prices. In 2009/10 only 2.6% of deaths generated an IHT liability. This has risen to 7.1% in 2015/16. The OBR predicted that IHT will affect 8% of estates in 2016/17.

    Another contributor to the increasing number of estates being affected by IHT (in addition to house prices) is, of course, the frozen nil rate band. It has been at £325,000 since 2009 after all.

    The Treasury expects IHT to yield around £4.4bn in 2015/16. So while IHT is not exactly the government’s main contributor it’s creeping up.

    Back to the residence nil rate band. As indicated above, the OBR reckons that once this is in force the number of deaths subject to IHT will fall by a third to £30,000 (around 5.4% of total deaths). But this number will then start to rise again, according to the OBR, to around 6% in 2020/21. Despite cutting the number of estates subject to tax, the RNRB is not estimated to cut the overall tax yield which is expected to grow gradually to £5.6bn by 2020/21.

    In closing this summary, the % of the overall IHT yield, paid by estates worth more than £1m rose from 4% in 2006/7 to 7% in 2012/13.

    IHT continues to be an economically and emotionally important tax.

    The majority of the overall IHT yield is paid by estates over £1m and the majority of these are more likely to be individuals who are or could be the clients of advisers (Wealth Managers, Lawyers and Accountants).

    Effective IHT planning with residential property is notoriously difficult though. The GWR (Gift With Reservation) and POAT (Pre-Owned Asset Tax) rules make sure of that. And for estates worth more than £2m the RNRB will be reduced (by £1 for every £2 of value over £2m) and completely extinguished at £2.35m. Remember, too, that in querying whether your estate is over £2m you ignore business property relief and agricultural property relief. Sneaky!

    For those minded to do something about IHT but where the main asset giving rise to the IHT liability is residential property then (assuming neither paying a full market rent or sharing occupation of the property with the donee is acceptable) it might be worth looking at protecting the liability with insurance where this is commercially viable. For a couple the product to use should be a last survivor plan held in an appropriate trust. Premiums would usually be exempt and the sum assured tax free.

    If the taxpayer(s) couldn’t or didn’t want to pay any or all of the premiums the donees might be prepared to pay or contribute. After all the policy would provide a sum assured that would benefit them.

    Where the liability to IHT is partly or wholly due to an investment property portfolio, an appropriately draft trust would also reduce/negate the liability.

    Lexington Wealth would be happy to discuss you estate planning affairs, please contact [email protected] for more information.

  3. Are you Paying too Much Tax?

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    Following our series last week summarising the highlights from the 2013 budget we thought we would share some quite staggering statistics. Did you know that each year UK tax payers unnecessarily pay away billions in taxation, simply by not taking the right advice, or action, to mitigate the amount of tax they pay?