Category Archives: Tax Planning

Inheritance tax

Understanding Inheritance Tax…

Inheritance tax is a tax that, if due, is payable upon a person’s death. Whether it needs to be paid depends on how much the deceased person’s estate is worth, and who is inheriting.

When does inheritance tax need to be paid?

If the total value of an estate is over £325,000 (nil rate band), then inheritance tax will need to be paid. It is charged at 40% on any amount over £325,000.

What is included in a person’s estate?

An estate includes all of the assets which the deceased owned or was entitled to on the day they died. This can include things like property, money, shares, investments, pensions, and possessions.

How can you reduce inheritance tax?

There are exceptions which can help to reduce inheritance tax. For example:

Spouse exemption

Spouses and civil partners are exempt beneficiaries. So inheritance tax does not need to be paid, regardless of how much an estate is worth.

Charity exemption

Where at least 10% of an estate is left to charity, inheritance tax can be paid at a reduced rate of 36%. Where the whole estate is left to a charity, inheritance tax does not need to be paid at all.

Transferable nil rate band

Everyone is entitled to a nil rate band for inheritance tax. Assets that pass from one spouse or civil partner to another are exempt from inheritance tax. So, if someone dies and leaves everything to their spouse or civil partner, they won’t use any part of their allowance. This can be transferred to the second person’s estate leaving a nil rate band of up to £650,000 when they die.

Residence nil rate band

This is available in addition to the inheritance tax nil rate band. It is possible when a home is passed on death to a direct descendant. In 2018-19, if a property is left to children or grandchildren a residence nil rate band of £125,000 can be added to the original nil rate band. So the total threshold will increase to £450,000.

Transferable residence nil rate band

The residence nil rate band can also be transferred between spouses and civil partners. This only applies if the deceased had a spouse or civil partner who died before 6 April 2017, or if they died after this date but did not use all their available residence nil rate band.

Inheritance tax comes out of the estate funds. It is payable by the person who is dealing with the estate (the executor or administrator), and they can be held responsible for any errors in payment.

Find out about our Inheritance Tax Planning service on our website here: https://www.legalmatters.co.uk/inheritance-tax-planning.php. Call us on 01243 216900 or email us at info@legalmatters.co.uk.

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Critical Event Protection…

What is Critical Event Protection and is it relevant to me?

If you are a member of a Death in Service Scheme, if you have a separate Critical Illness and Life Insurance Policy or even if you have a Pension Plan, you should look at Critical Event Protection.

What are these schemes and policies for?

Death in service schemes are often part of your employers’ group policy scheme which provides a lump sum for family or to cover the death of a shareholder in a business.

Critical illness policies produce an income supplement in the event of a critical illness and on death there is usually a lump sum paid.

Life insurance policies may make provision to cover inheritance tax, provide a lump sum for family or to cover the death of a shareholder in a business.

An occupational or self-invested pension plan may have a lump sum which will be paid on death.

What happens to these assets when I die and why would I need Critical Event Protection?

These valuable assets usually only pass to your next of kin if you’ve nominated them. If you haven’t, they go into your estate and may then become subject to Inheritance Tax at 40%. In this way, sometimes funds are wasted or end up with people you don’t even know yet, for example if your current partner or next of kin starts a new relationship.

How can I protect these assets for my dependents?

Using a trust preserves the use of these funds for your dependents, avoids direct ownership, can avoid the need to incur estate administration costs and may save inheritance tax. A trust protects and ringfences these lump sum proceeds and means a quick claim by the trustees upon your death can make the funds available in a protected trust environment to meet family costs.

At legalmatters, we have put together a simple solution, which will enable you to deal with these valuable assets, called Critical Event Protection.

To find out more, download the Critical Event Protection Guide or speak to one of our legal team on 01243 216900 or e-mail info@legalmatters.co.uk.

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What can legacy giving do for your tax bill?

Who are you going to leave money to in your Will? Your spouse or partner is probably first in line, any children or extended members of the family may pop up here and there too.

But what about charity?

Thousands of people every year choose to leave a gift to charity in their Will, whether it’s a fixed amount, a fixed percentage of their estate or even just what’s left after other gifts have been handed out to their surviving loved ones.

It doesn’t have to be a charity that you’ve been particularly involved with during your life either – you can leave money to any registered charity.

There’s another bonus to doing this, besides simply helping a good cause. Legacy giving – where you leave money to a charity – can also reduce your inheritance tax bill.

With inheritance tax, you – or rather your estate – is charged a rate of 40% on every £1 that the estate is valued above the nil rate threshold, which currently stands at £325,000 (though couples essentially enjoy a £650,000 threshold).

However, when you leave money to charity, it won’t count towards the value of the rest of your estate, giving you the opportunity to reduce the value of your estate below that threshold, ensuring no further tax is payable.

Even if your estate is still valued about the threshold, charitable giving can help reduce your tax bill. If you leave 10% of your net estate to charity, then the inheritance tax charged on the remainder of your estate falls from 40% to 36%, a reduction which could see the estate save thousands of pounds in tax.

Many of us regularly give to charitable causes while we’re alive. To do so after your death will not only help support good causes with some of your estate, but for your beneficiaries there are tax benefits that can come with it. Obviously, you should discuss this carefully with your loved ones and your will writer when drafting your Will.

It’s important for you to be clear when drawing up legal documents. Legalmatters can help, we’re always happy to discuss your needs or answer your questions. Call us today on 01243 216900 or email us at info@legalmatters.co.uk for further details.

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Grandparents and gifting options…

Many grandparents are intending to gift their grandchildren financially, with recent research from Saga suggesting that more than £37bn has passed from grandparents to their grandchildren.

Part of this is down to the fact that older people are worried about their grandchildren’s future. The increase in cost of houses, cars and the day to day necessities mean they’re likely to suffer financially and be much worse off than those of generations gone by.

So how could you go about helping out your younger relatives?

Skipping a generation

According to the research, around 14% of parents are skipping a generation and are instead looking to leave assets to their grandchildren.

Making use of a gift allowance

In certain scenarios, grandparents are choosing to give money without causing a tax event such as a £3,000 annual gift allowance. This can cover financial gifts which can be passed over each year, free of Inheritance Tax. Additionally, grandparents can also give away up to £250 to any number of people each year.

Putting it in a trust

With a discretionary trust, it is up to the trustees to determine how and when any potential beneficiaries may be able to access the cash. You can appoint yourself as the trustee, so that you have final say over where the money goes, or you can go for an independent trustee. What’s more, the money within the trust is classed as separate from your estate, so it’s free of Inheritance Tax.

There are also bare trusts, which mean the grandchildren would be completely entitled to whatever is in the trust once they reach 18. Unlike the discretionary trust, the beneficiaries are fixed, so once the trust is declared it is not possible to add (or remove) beneficiaries.

It’s important that you consider where and to whom you want your assets to go to – a comprehensive will is the only place where you can formally set this out.

Don’t keep putting it off. Speak to legalmatters today to make sure that your final wishes are carried out. Call us on 01243 216900 or email us at info@legalmatters.co.uk

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Importance of business succession planning…

You’ve spent years building up your business, but have you given any thought to what will happen when you die?

Do you have an exit plan, and if not, how do you go about building one?

First of all you must decide what you want to happen.

Do you want it to be sold? If that’s your goal then how do you make it as healthy and profitable as possible to get the best price when the time comes to sell?

If you have children, do you want them to take over your business, are they able to and do they want to? If you have more than one child, do you want all your children involved; should they own it and someone else manage it?

If you are handing the business on, then you still want it to be in good shape but you also need to think about who will take it over, what training they might need and whether you need to mentor them.

It’s obviously very important to have a Will in place which will detail how you want the business to be passed on and to protect it from inheritance tax. Your business assets may qualify for relief from inheritance tax or there may be things that you can do to reduce the impact of the tax.

For instance, did you know that business relief for inheritance tax reduces the value of a business or its assets for inheritance tax purposes when you die?

The proceeds could one day become taxable for your beneficiaries, so it may well be wise to establish a Business Property Relief Trust which will ensure that the relief is protected.

If you’d rather your family receive money than the responsibility of taking over your company, then have you considered a share purchase agreement? This allows surviving business owners to buy your shares when you die.

To find out more about the different approaches to ensuring your business is protected for your beneficiaries, contact legalmatters. Call us on 01243 216900 or email us at info@legalmatters.co.uk to discuss your particular situation.

Business Property Relief; none of your business

Tax. Famously one of life’s inevitabilities, it is a necessary evil that can’t be avoided (just ask Al Capone).

Rightly or wrongly, inheritance tax is often named as one of the UK’s most hated taxes. Thankfully, with the introduction of the Residential Nil Rate Band earlier this year, we are in a much more fortunate position than we have been previously. Theoretically, a married couple can now leave up to £1 million pounds to their descendants without paying a penny to HMRC, but is there anything else you can do to avoid your estate going to the tax man? If you have a business interest or run your own company then indeed there is. So sit down at the back and pay attention.

If you have owned a business for at least two years prior to your death, your executors will be able to claim Business Property Relief (BPR) on certain business assets. Good news, huh? It gets better. Qualifying assets can obtain relief of up to 100%. That means that even if the assets are worth £1 billion, you can give them away without paying a penny in tax.

You can get 100% business relief on a business or interest in a business, or shares in an unlisted company, while 50% relief is available on:

  • shares controlling more than 50% of the voting rights in a listed company;
  • land, buildings or machinery owned by the deceased and used in a business they were a partner in or controlled; and
  • land, buildings or machinery used in the business and held in a Trust that it has the right to benefit from.

It’s important to be aware that you can’t claim business relief if the asset is not needed for future use in the business.

What’s more, business assets can actually be given away while the owner is still alive and qualify for business relief. However, certain criteria need to be met – for example, the recipient must keep them as a going concern until the death of the donor.

Despite the booming buy-to-let industry, it should also be clarified that rental property does not qualify for the relief, as it does not meet the criteria of ‘trading’. A business which only generates investment income will not attract BPR, so this excludes:

  • A residential or commercial property letting business
  • A property dealing businesses
  • A serviced office business.

Some business activities are borderline: whether they will qualify for relief depends on the nature of services provided, typically these include holiday businesses, property management and caravan parks – where there is letting, holidays and caravan sales.

Business property relief can make a huge difference to the eventual inheritance tax bill of your loved ones and can also help with succession planning. But it requires careful planning in order to ensure it is available when you need it. Dictating exactly what happens to your assets after you die is incredibly important, whether you own a business or not, and a Will is the best way to do that. It is a terrific way to reduce the uncertainty and upset your loved ones face after you pass away.

If you own a business, or are interested in becoming a business owner, and would like advice on how to include this within your Will, talk to legalmatters. Check your eligibility and ensure that what HMRC is entitled to, is none of your business.

How Pensions Have Changed

It’s just over two years since the pension reforms were introduced to give people more choice in accessing their pensions. One of the benefits it’s brought is that it is encouraging people to think more about their pensions when they’re younger.

According to research by Aegon, 15% of people have realised they need to plan more for their retirement. The number of people talking to an advisor has almost doubled in the last 12 months.

What is particularly good to hear is that since the reforms, 14% of working age people are saving more in their pension pot. As a result, there has been a big jump up since April 2015 in the average amount that people have saved, from £29,000 to £50,000.

Just as it’s important for people to seek advice on how to grow their pensions, the new freedoms mean that people should equally take advice to manage when and how much they take out at retirement.

There may be a temptation to withdraw a large sum and leave yourself with too little to enjoy in a long retirement. Before splashing out on a long, exotic holiday, it pays to take a moment to think about some of the costs you may need to prepare for now.

When planning for your future, you may need to consider funeral and possible future care costs, as well as any outstanding debts. If you have built up a large pot and plan to invest it, you will need solid financial advice to ensure you get the best return.

Figures from HMRC show that many people are taking advantage of the freedom to withdraw money from their pension pot after the age of 55. During the last year, an average of 164,000 people withdrew money each quarter. The average withdrawal per individual was nearly £9,900.

The beauty of the pension reforms is that people have more choice to decide what to do with their pension pot. There are 6 options once you get to age 55:

1. Leave the pot until a later date
2. Buy an annuity
3. Invest the pot to produce an income
4. Withdraw cash in chunks
5. Withdraw the whole pot in one go
6. A mix of the above

Many people are still following the traditional route of buying an annuity, but as the figures go to show, many are also enjoying their new-found freedom. But the choices you make at retirement may have a big implication on the inheritance tax your dependents will need to pay.

It is worth discussing this with both your financial advisor and your Will writer. It’s a complex area and in some situations, it may be advisable to set up a Trust.

For advice on planning your Will please contact legalmatters today on 01243 216900 or email us at info@legalmatters.co.uk.

The Forsyth Saga

Last Friday, news broke of the sad death of Sir Bruce Forsyth. The former Strictly Come Dancing host and all round National Treasure passed away at the age of 89, following a lengthy battle with illness. 

Reports in various national papers have since detailed the star’s alleged estate planning which, according to ‘a friend’, was done in an effort to “avoid it being gobbled up by the taxman”. By all accounts, Sir Bruce has left all of his £17million estate (didn’t he do well?) to his wife outright where it has then been widely reported that his widow Wilnelia will then “be able to transfer up to £650,000 to each relative tax free to avoid inheritance tax”.

Whilst is it true that legacies to spouses are free from inheritance tax by virtue of the spousal exemption, legalmatters shakes its head at the level of misinformation reported. Quite frankly it doesn’t even know where to start with dissecting what a flawed and short-sighted piece of alleged tax planning this represents, but here goes.

So what is the actual position (if indeed these were his wishes) and why might it be regarded as a potentially reckless and ineffective idea?

First of all, the tabloid press have been quoting the figure of £650,000 supposedly available for Wilnelia to generously distribute ‘to each relative’ once Sir Bruce’s legacy has been transferred. Each relative!?! If this was the case, then the majority of estate planners would be out of a job and considered, surplus to requirements.

It would appear that the press have confused the level of transferrable nil rate band available to the surviving spouse on death with what an individual is able to give away tax free during their lifetime. Whilst Wilnelia would indeed be able to benefit from her late husband’s inherited nil rate band of £325,000 to combine with her own on her death, her late husband’s nil rate band is not something that she would be free to make use of during her lifetime. The articles also totally disregard the newly established ‘residential nil rate band’ that this tax year alone would have increased the late entertainer’s tax free allowance by an additional £100,000 (but latterly would allow a combined nil rate band of £1,000,000 if left to lineal descendants).

Any legacy left to a spouse is free of tax by virtue of the spousal exemption. Wilnelia is, of course, free to make gifts to whoever she likes during her lifetime. As long as she were to live another 7 years following such gifts (of any monetary value) these would also be inheritance tax ‘free’. Quite honestly, she could gift the full £17 million equally amongst his 6 children (or whoever she so wishes) as soon as she had received the monies from probate, should she be so inclined, but therein lies the issue.

If indeed this is the arrangement, there is NOTHING obliging Wilnelia to carry out the ‘wishes’ of her late husband. Outright gifts by their very nature, leave the recipient free to do whatever they like with the legacy. Despite ‘wishes’ or ‘instructions’ from the deceased, there is nothing legally binding to see that these are fulfilled. The deceased is simply requesting the recipient to make distributions and is hoping that this will be carried out. Whilst this level of trust is admirable, the private client practitioner knows more than most that trusting your relatives to ‘do the right thing’ on your death is a dangerous assumption.

Let us assume that, despite having no legal obligations to do so, the recipient of the legacy has every honourable intention of making these posthumous gifts. They themselves would need to survive another 7 years which is always a risky proposition. What instead, if they were to lose mental capacity and unable to make such transfers? Michael Schumacher’s tragic accident and resultant circumstances have shown that age, wealth and level of fitness have nothing to do with a lack of mental capacity and inability to manage your own affairs. How can we be sure that Wilnelia shall live a long and untroubled life, free of illness and incapacity? Her ability to make gifts from her late husband’s fortune and to therefore share the wealth and to reduce her own liabilities to inheritance tax is dependent on her being mentally fit and well; certainly, any attorneys that she may have appointed won’t be able to undertake such tax planning ventures without court authority (another common misconception).

So what might Sir Bruce have done to make provision for his children and grandchildren (and indeed he could well have done, because we are commenting on the reporting, not on actual events)?

Lifetime gifting would have been the best starting point. If carried out wisely and cautiously, after careful advice and taking all needs of the parties into due consideration, then lifetime gifting is an excellent way of reducing your tax bill.

And what about the use of trusts? Despite trusts having their own particular tax regimes, they are immensely useful structures to protect and preserve assets against unknown circumstances. Tax shouldn’t necessarily always be the driver, particularly where significant wealth is concerned.

Finally, any charitable giving would have the double benefit of not only being exempt from IHT for the legacy itself, but it could also have reduced his IHT rate to 36% if he had left 10% or more of his total estate to charity. A Brucie bonus if you will.

For the papers to glibly report that Sir Bruce has ‘in one fell swoop’ cannily avoided inheritance tax and at the same time ensured that his wealth lands where he would wish is, in our humble opinion, grossly underestimating the risks and potential issues at hand and is in any event based on apparent mis-reporting of the facts.

Make sure that your wishes are adequately enshrined in the correct, binding, legal documents as the road to court is paved with good intentions. Nice to sue you, to sue you, nice. Speak to a member of the team at legalmatters on 01243 216900 or email us at info@legalmatters.co.uk to find out more.

What Happens when the Queen Dies?

Queen Elizabeth II has been alive for longer than most of us and yet it seems hard to believe that she will one day die. However, there are many plans already in place to deal with this eventuality.

The responsibility for dealing with the news first falls to the Queen’s private secretary, who will inform the Prime Minister. From there, the Foreign Office will notify the Commonwealth nations.

The national and world press will also be told and shortly afterwards a footman at Buckingham Palace will pin a notice to the gates announcing her demise. This will be replicated on the Palace website too.

Television and radio programmes will be interrupted with an announcement of her death. Similarly, to the deaths of Kennedy and Princess Diana, you will undoubtedly remember where you first heard the news.

Social media will likely erupt and you may well hear it here first.

The country will enter into an immediate period of mourning. Parliament will be recalled and Charles will become King – unless his mother outlives him and then it will fall to the next in line, William.

Under common law, the wife of a King is automatically referred to as Queen, so despite any question marks over Camilla’s role, she will become Queen Camilla.

In the event that the Queen dies abroad, she will fly home by an RAF jet. From Balmoral, she will travel back on the Royal Train.

She will return to Buckingham Palace, flags will lower and bells will toll across the nation.

In the time between her death and funeral, thousands of people will be involved in the myriad of activities surrounding a monarch’s death.

Invitations will be issued for her funeral. Government departments will coordinate with the police, security, armed forces and transport to ensure the safety of the politicians, heads of state and public that will be attending and lining the streets.

The words to the National Anthem will be amended and new postage stamps and currency will be created.

Charles will be expected to make his first address as Head of State on the evening of his mother’s death. He will be proclaimed King the following day and will then commence a tour visiting Edinburgh, Belfast and Cardiff to attend remembrance services.

Television schedules will change. Some sporting fixtures may be cancelled and books of condolence will appear in town halls nationally and embassies around the world.

The Queen will be moved to Westminster Abbey to lie in state for several days. Four soldiers will guard her at all times and it’s thought the Queen’s children and grandchildren will arrive unannounced to stand vigil as well.

The day of the funeral will be a national day of mourning and a public holiday. The Archbishop of Canterbury will lead the service and afterwards her coffin will be taken to Windsor to be interred in the royal vault.

These plans will ensure the event will occur as smoothly as possible. If you’d like to ensure you have the right plans in place for after you’re gone, call us on 01243 216900 or email us at info@legalmatters.co.uk.

Retirees Seek Advice After Brexit

When the UK made the decision to depart the European Union last year, the actual departure seemed a long way off. Although the thought of leaving loomed, the process of exiting was thought of as distant – simply another thing for politicians to worry about.

As we begin to enter the negotiations, however, it seems that the ‘keep calm and carry on’ attitude is faltering, especially among retirees.

According to recent research, 14% of those who have retired are worried about the impact of Brexit on their pension, with 19% saying they are now much more likely to seek financial advice.

Although market volatility was almost certain in the initial aftermath of the referendum, most believed that the markets would calm after the storm. However, retirees believe that the clouds haven’t cleared just yet; over one in four predict that any negative impact on their pension will be for the long-term.

It’s obvious that people are worried about the consequences of leaving the EU, but some have gone further than just expressing their concern. Due to Brexit anxieties, just over one in ten of those who had made plans to retire in 2017 have actively postponed their retirement, with 6% even changing the country that they planned on retiring to.

Having looked at these figures, you might be under the impression that just about everyone is worried about the impact of Brexit on their pension. It is though important to balance the numbers of those who are concerned, against those who are less so. In fact, the figures show the majority of people (67%) felt their retirement plans had not been affected by Brexit at all. One in eight even thought that leaving the EU would impact their pensions in a positive way.

Retirement expert at Prudential, Kirsty Anderson, commented on the concerns of retirees, as well as the importance of seeking advice:

“As you would expect, for many people who have been planning and saving for their retirement for most of their working lives, even the biggest of political upheavals won’t make a difference to their long-term plans. But with one in three new retirees telling us that their retirement plans have been affected by the referendum result, it is clear that uncertainty is having an impact for some.”

Although worrying is a natural reaction to being unsure about something, it’s rarely helpful. Rather than providing an answer, it just allows the concern to escalate and often causes us to worry even more. It might be impossible to know how Brexit will affect you exactly, but adequate planning will at least make your financial future a little more certain.

As well as guiding you through the process, talking to an expert at legalmatters can help clear up any concerns you may have. Be more certain about your future by speaking to one of our professional team today – call us on 01243 216900 or email us at info@legalmatters.co.uk.