Category Archives: Tax Planning

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.

How Can Trusts Help With Inheritance Tax Burdens?

There are few taxes more unpopular than inheritance tax. A poll by the financial website, loveMONEY last year found that an incredible 90% of Brits believe it is unfair.

However, there are a number of perfectly legitimate ways to reduce the amount of tax your estate will have to pay. One of those is making use of a Trust.

What is a Trust?

A Trust is a legal arrangement where your assets – such as property, cash or investments – are given to trustees, who will oversee them for the benefit of a third person. For example, you might want to put some savings into a Trust which your children can then benefit from at a later date.

When you place items into a Trust, they technically no longer belong to you. As a result, when it comes to working out the inheritance tax due on your estate, they aren’t included.

Instead, the assets belong to the Trust. The trustees are charged with managing those assets in the interest of the beneficiaries you have named, until some time when those beneficiaries can take control.

The many different types of Trust

Trusts come in a variety of different forms, which will suit different circumstances.

The simplest form is a Bare Trust – this basically hands over ownership of the assets to the beneficiary immediately, so long as they are over the age of 18.

Alternatively, there is an Interest in Possession Trust. This gives the beneficiary income from the assets held within the Trust, but they don’t have a right to the assets generating that income. An example of this is that you might put shares in this form of Trust which would pay an income to your partner, but your children would get ownership of the shares themselves once your partner died.

Then there is the Discretionary Trust, which is where the trustees have responsibility for deciding how the assets within the Trust are distributed. You could therefore leave assets in the Trust for your grandchildren, with your children named as the trustees. They could then determine who gets what at a later date.

Dividing your assets

Trusts are a useful way to take control of passing on your assets to your loved ones and can serve as a complement to a comprehensive Will. Without a Will in place, you have no say on who will get your assets and could put your loved ones through further heartache after your passing.

To discuss your Will and estate planning needs today, call us on 01243 216900 or email us at info@legalmatters.co.uk.

HMRC Loses Tribunal Over Pension Transfer Rule

Changes might be on the horizon for the rules surrounding inheritance tax (IHT) on pension transfers, after an appeal from HM Revenue & Customs (HMRC) was recently rejected.

The case centred on a Mrs Staveley, a woman who did not want her former husband to benefit from a pension she had originally set up with him. Following a bitter divorce, she transferred a portion of this pension into a new, personal one.

Mrs Staveley sadly died a few weeks after making the transfer.

She had been terminally ill at the time, so the transfer was classed by HMRC as a “chargeable lifetime transfer”. This meant that IHT was applied and can arise where the individual is aware that their life expectancy is impaired and they then die within two years of making the transfer.

After challenging the tax and in another follow-up appeal, HMRC lost the case.

It was held that, if any IHT benefit had been gained from the transfer, it was “not intended to confer gratuitous benefit”.

Commenting on the case is *NAME OF PERSON* from *NAME OF COMPANY*:

“*QUOTE – OPINION, DO YOU THINK THE HMRC NEED TO ISSUE NEW GUIDANCE?*”

In order to properly clarify the situation, more of a substantial overhaul of HMRC guidance may be needed. This is because the specific circumstances of Mrs Staveley’s case do not automatically set a precedent for all other pension cases.

The intention behind her transfer was clearly to prevent her ex-husband from accessing pension money. In other cases, the motivation might actually be to avoid IHT.

Although HMRC might publish guidance on this in the future, it’s important to know where you stand now.

The law around IHT can seem complicated, but talking to an expert can make things much clearer. When it comes to the future of you and your loved ones, it’s essential that you get the best advice.

We at legalmatters are experts in helping you make plans for your future. With issues like this, it pays to use a professional. Talk to us today by calling 01243 216900 or emailing us at info@legalmatters.co.uk.

New rules to help reduce IHT bills

The new Residence Nil Rate Band (RNRB) which comes into effect this April means that you can now plan to hand down your family home with either a zero bill or a significantly reduced one than the current inheritance tax (IHT) rules permit.

There are various restrictions to how this will work in practice. In simple terms, it means that the current IHT threshold of £325,000 for a single person and £650,00 for a married or civil partnership couple will remain but that there is an additional (and separate) allowance of £100,000 (available per person, provided that certain requirements are met

This additional allowance will increase year-on-year by £25,000 until it reaches £175,000 and then continuing in line with inflation.

It’s important though to understand when and where it can be applied.

There are three key criteria to meet:

  • The property must form part of the deceased’s estate;
  • he or she must have lived in it at some point (there is no minimum period in which they must have lived in it, but this may rule out buy-to-let properties for example);
  • and the property or a share of it must be passed to direct descendants.

For those with children of their own, this quite obviously includes children, grandchildren and great-grandchildren. However, it is not limited to blood relations and so also includes step-children, adopted or fostered children, or any children that the deceased had been appointed guardian of, even if they are now over the age of 18.

Widening the net even further, the spouses and civil partners of any of these descendants are also included, even if the descendant themselves has died.

Siblings, nephews or nieces of the deceased are not included. They may still be included in the will, perhaps receiving a part share of a property, as the RNRB applies to the value of the share that’s inherited by the direct descendants.

The new RNRB is only applicable for deaths on or after 6th April 2017. The rate is, however, transferable between married and civil partners and if one partner has already died prior to this date, their unused RNRB will be available to be carried forward to the estate of the surviving partner.  However, the allowance must be claimed and it isn’t automatically available.

There are many other points to consider with RNRB, although they won’t apply to everyone.  For example, the value of RNRB tapers away where the estate is worth more than £2 million. That’s straightforward but it can become tricky where the deceased sold their property prior to their death to downsize or gave it away and continued to live in it. The key point here is that they must have done this since 7th July 2015 to qualify. It becomes increasingly complex as to whether RNRB will apply where trusts are involved.

For advice on preparing or changing a will to maximise the tax efficiencies that can be made, please call our team at legalmatters on 01243 216900 or email us at info@legalmatters.co.uk.

Blended Families and Succession Planning

More than 40% of marriages in the UK end in divorce, according to the Office for National Statistics. With many of those divorcees remarrying, ‘blended families’ – bringing together each parent, as well as children from previous relationships – are not uncommon.

As this type of family structure has increased, so too have blended family businesses, with members of the second family invited to take up senior positions within the company. There are many high profile examples of such businesses, for example Rupert Murdoch’s News Corporation. Succession planning can be difficult at the best of times, but with the added complexity of a blended family, it can be even more problematic. Nonetheless, the fundamentals of good succession planning still apply.

Start early.

Getting a plan in place as early as possible is always a good move. Try to identify who it is you want to take over when you step down. It may be that restructuring the business, so your responsibilities are picked up by more than one member of the family, is the best move both politically and for the good of the business. It may be useful here to determine separate areas of responsibility for each successor, and have in place formal dispute resolution procedures in case of any issues.

Be sure to speak to them about their own ambitions and how they see their role in the business developing after you step down. Don’t just assume they will want a position of responsibility.

As an alternative, you may feel that the best option for the future of the business is to recruit externally. For example, if you feel that nominating a family successor or successors will cause conflict within the business. You may even want to consider other exit options such as a trade sale or management buy out.

Hands on training.
Once you have worked out who will be taking over, you need to get them ready for the role. That doesn’t just mean the day-to-day tasks of the job, but also the skills they need in order to run the actual business. Will they need specialist training or additional qualifications?

Be open.
It is important to communicate your succession plan to everyone in the business. You’ll need to be able to explain why you have chosen them to succeed you – this can be particularly tricky in a family business, so be prepared. Setting out a clear timetable for the change is a good idea too.

What will you do next?
Stepping down from a business is not easy – it can be very difficult to let go. This process will be made easier if you clearly determine any future role you will have in the business. If you want to truly distance yourself, then you should consider a family management buyout, where the succeeding family members buyout any shareholding you may have.

No matter what your family make-up, it’s crucial to plan for the future and establish exactly what you want to happen with your business, your home or your assets should you pass away. For advice on making a will and matters relating to the structure and disposal of your business, contact legalmatters today on 01243 216900 or at info@legalmatters.co.uk.