Ways to reduce your IHT liability

“IHT is a voluntary Tax, paid by those who distrust their heirs more than they dislike the Inland Revenue!” – Lord Jenkins

Inheritance Tax (IHT) is usually payable on an Estate in the event of someone’s death. The current IHT threshold, also known as the 'Nil rate band', stands at £325,000. If your overall Estate is above this level, any excess amount will be taxed at 40% (although there are some exceptions in respect of charities etc).

Since October 2007, any late spouse’s or civil partner’s unused nil rate band can be transferred to the second spouse or civil partner when they die. This will mean that currently on second death the IHT threshold will be £650,000.

Example – Husband & Wife

Private property	£900,000
Bank accounts	£50,000
Investments (incl. ISAs)	£200,000
Other assets (e.g. cars)	£25,000
Total assets	£1,175,000
Combined Nil rate bands	£650,000
Liable to IHT	£525,000
Taxed at 40%	£210,000	tax liability to pay

               

To find out how to reduce your potential IHT liability, Ward Williams Financial Services Ltd will be holding a free seminar on Thursday 27^th February 2014 at Wentworth Club  – if you would like to attend please telephone us on 01344 624114 and speak to Clare or Hannah to reserve a place.

Loan Trust / Inheritance Tax Planning

 

Background

The inheritance tax (IHT) ‘gift with reservation’ rules have made it difficult for clients to achieve an inheritance tax saving whilst retaining an income or future benefit from their assets. However, there are accepted measures that can be used to solve this difficulty.

Suitability

A loan trust may be suitable for:

•    Individuals who have total assets in excess of twice the nil rate band of inheritance tax, and who are already using the nil rate band in their wills on the first death,

•    Individuals who wish to reduce the future growth of their estate so as not to add to the IHT liability, but who do not wish to gift assets,

•  Individuals who have surplus capital which is not currently needed to support their life-style, but to which access may be needed in the future.

Mechanics

Under the Loan Trust the individual is able to make an interest free loan repayable on demand to the Trustees. The Trustees then place the amount of the loan into a single premium life assurance bond which is written in trust for the chosen beneficiaries. As the bond grows in value (assuming that it does) the growth will fall immediately outside the settlor’s estate for the benefit of the chosen beneficiaries. There is no requirement to survive for any period of time.

As the interest free loan is not a gift for inheritance tax purposes there is no potential inheritance tax charge on setting up the trust. However, it needs to be remembered that the outstanding value of the loan will remain inside the estate.

Under the trust that the settlor (who would typically also be a trustee) can make withdrawals from the bond in order to repay the loan made over a period of time. These regular withdrawals could be used to provide an ‘income’ each year (return of original capital).

Recalling the Loan

An clear advantage of this planning is that if the capital is required at any point, the settlor can ask for the loan to be repaid.

Tax

On death any outstanding loan will form part of the settlor’s estate for IHT purposes. For example;

•   Original loan = £100,000.

•   5% ‘repayments’ taken = £60,000 has been ‘repaid’.

•   Value of Investment £90,000.

•   In this example £100,000 - £60,000 = £40,000 remains in estate – therefore the growth on the investment (£90,000 - £40,000) is outside of the estate.

 

Additional Advantages

If the bond under the loan trust arrangement had been written on the settlor’s sole life, then the bond would automatically encash. The executors would then repay any outstanding loan to the settlor’s estate (using the example above this would be £30,000), whilst the balance would be payable to the beneficiaries under the trust.

However if the bond under the loan trust arrangement had been written on lives assured other than the settlor, it could then continue after the settlor’s death.

For further information and discussion about Inheritance Tax planning please contact one of the team.

Spousal By-Pass Trust

For many of us our property will be the largest asset that we will be able to leave for the next generation and with prices once more rising, the probability will be that the majority of our Nil Rate Band (the amount free from Inheritance tax that can be passed on) will be used up by the value of one’s home.

The thought therefore of un-necessarily adding to a future tax bill for our children with hard earned pension savings may come as a shock. This is precisely what could happen when pension benefits are paid to a surviving spouse upon death before drawing a pension. Careful planning can reduce or even remove future tax burdens. By creating a bypass trust and registering it with the pension provider the fund is ring-fenced from future potential inheritance tax (IHT) liabilities.

Upon death the pension amount is paid by the pension provider not to a surviving spouse, but into a Trust. It is important to note that the Spouse can still access the funds through loans or income, however the capital amount never ‘enters’ the estate. Upon second death (the point that IHT is calculated) the monies pass freely onto the named beneficiaries.  

With the removal of the need to secure a pension with your benefits, and individuals working on beyond normal retirement ages, a relatively small and inexpensive amount of planning now can assist with future financial planning.

begin_of_the_skype_highlightingend_of_the_skype_highlightingTo discuss this and how Ward Williams Financial Services could help you, please call (01932) 830664 to organise a no obligation, initial meeting. 

Auto Enrolment Capacity

 

Auto-enrolment is upon us and already there appears to be a number of sizeable obstacles in an employer’s path which either have not been fully considered or are not being addressed.

Obstacles

·  It is estimated that current mainstream pension product providers can support the setting up of around 2,100 new pension schemes each month.

·   It is believed that, at its peak, capacity for around 70 times this amount might be needed.

·  Many have assumed that product providers will be keen to accept increasing numbers of new schemes; however as with commercial organisations in other sectors, providers will only be keen to take on new schemes which they believe will be profitable. This could adversely impact upon small to medium sized companies who have a low to medium average wage structures or have high staff turn-over.

·  This ‘cherry picking’ is likely to come into full effect in 2014/2015 as the main bulk of UK businesses start to implement their auto enrolment.

·  The result could be that those deemed not profitable may be forced to use NEST, as their pension scheme provider. 

Whilst there is nothing inherently wrong with NEST, unlike other providers, NEST provides no administrative support to employers and so small companies, who are more likely to have limited  internal HR resource, will be very much left to their own devices.  Missing your auto-enrolment staging date could result in a sizeable fine being levied, with few, such as lack of administrative support, excuses being acceptable.

Answers

·   Employers must start planning as soon as possible.

·  The Pensions Regulator suggests this should be at least 6 months, Ward Williams Financial Services suggest 9-12 months to ensure everything is in place well in advance.

·  Early establishment will not cost anything extra and contributions need not be started prior to staging date, however with the potential ‘rush’ to enrolment likely to happen in the later stages of 2014, could your business afford to meet the penalties?

To discuss the implications of auto-enrolment and how Ward Williams Financial Services could help you with meeting your obligations, please call (01932) 830664 to organise a no obligation, initial meeting.