Arford Henderson Law

Author name: Nadeem Afzal

Pensions and Inheritance Tax

IFAs: Pensions and Inheritance Tax?

financial security, Taxes /

It is important when giving advice on Pensions that the client is aware how this sits with Inheritance Tax Planning.

Regulations concerning pensions have changed. Many of the changes concern Income Tax but the subject of Inheritance Tax (“IHT”) is something that should not be overlooked.

Pension policies where benefits have not yet been taken?

Under the new rules it is worth considering that leaving funds in a pension fund at your death could improve your Inheritance tax situation, particularly in comparison with taking out the pension where it could be subject to 40% IHT.

Would Inheritance Tax have to be paid on a payout, if you should die before pension benefits have been taken?

Generally, pension death benefits paid out – including under “Drawdown facilities” – will not be subject to Inheritance Tax in the Estate of the Scheme member where they are payable under an Occupational Pension Scheme or a “Personal Pension Scheme”.  This is provided lump sum benefits are paid out within two years of the death, or any Drawdown has commenced within that time.

Under these schemes, the Pension Scheme Administrator normally has an element of discretion as to the recipient of the Death Benefits (often backed up by a non-binding nomination or “letter of wishes”).

However, the pension benefits could be caught for Inheritance Tax in the following circumstances:

The Pension benefits have to be paid into the Estate of the pension scheme member; for example if the only “person nominated” has already died before the Scheme member; or

The pension scheme document gives the member the power to make an irrevocable “binding nomination” to direct where the proceeds will be paid.

The element of discretion will not in that case be available to the Scheme Administrator, and the death benefits will potentially attract Inheritance Tax.

What about “Retirement Annuity” Pension schemes

Lump Sum Pension benefits from “Retirement Annuity” Schemes taken out prior to 1 July 1988, and “Section 32” deferred annuity contracts are usually paid into the Estate of the pension scheme member, and will then be subject to Inheritance Tax.

What can I do if I am caught by this?

A way out of this is to set up a separate trust, perhaps using a solicitor, and the Pension Scheme death benefits would be paid into this trust.  The member would choose the trustees, and would specify their own preferred beneficiaries. The pension benefits can then be passed to the next generation free of Inheritance Tax.

If this applies to me, can I make a change at any time?

HMRC generally accept that changing the Pension Death Benefits has a nominal effect for IHT purposes if they are in good health when the transfer or assignment takes place.

If the pension scheme member dies within two years of making such a change, the Personal representatives will have to report this to HMRC on form IHT409, and IHT may become payable.

Please contact me on [email protected] or 0207 041 6069 to find out how I can best help you protect your family and your assets.

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Joint Tenants or Tenants in Common?

Joint Tenants or Tenants in Common?

Tenants /

In 2007 the Chancellor of Exchequer changed the law so that it became easy for married couples to transfer their Nil Rate Band (NRB) to each other on the first death.

There are distinct advantages in having the property held as Joint Tenants and/or Tenants in Common.

Property ownership is registered with the land registry and you can own your property as either :-

  • Beneficial Joint Tenants (or as)
  • Tenants in common.

Tenants in Common

Owning property as Tenants in Common means you jointly own the property but as co-owners you are regarded in law as having separate shares. Normally the shares are held on a 50/50 basis, but if one person is putting more of their money in than the other, the shares can be more specific. In the event of the death of a Tenant-in-Common their share of the property passes to the beneficiary in their Will.

Joint Tenants

Owning your property as beneficial Joint Tenants means the property belongs to you and the other owner or owners jointly. There is no separate distinction between tenants. You must all act together as a single owner.

You will not own any specific shares in the property and you cannot give away a share of the property in your Will. In the event of death of one of the joint tenants, legally your interest in the property automatically passes to the surviving owner or owners.

Often this is the form of ownership is chosen by married couples or civil partners, where these parties are content for the survivor to be the absolute owner. A Will cannot alter the ownership of the property held on a Joint Tenants basis. A Will made by a Joint Tenant, which tries to leave the property to anyone other than another legal Joint Tenant would be ineffective.

Can this affect my Will?

If two people own a property as “Joint Tenants” and one of them dies, the other will automatically become the owner of the whole property, regardless of the any requests or wishes laid out in the deceased owner’s Will.

On the flip side if two people own their property as “Tenants in Common”, each person only owns a share in the home. When one Tenant in Common dies, their share will pass into their estate and be dealt with by the personal representatives. If a Will has been put in place this would be their chosen Executors, if no Will is in place then the rules of intestacy would apply.

Summary

“Joint Tenants” is common between most married couples where there is not an advantage to defining separate shares in a property and where they would want the property to automatically pass to the surviving spouse.

“Tenants in Common” is often used to ensure that one half of a married couple can pass on their share to their children, while the other person can continue living in the property, passing on their remaining half only on their death. Often “Tenants in Common” is used for Inheritance Tax planning and can also be used to prevent having to sell your home if you need to go into long-term care and is also a way for couples to protect their share in case of separation or divorce.

A Tenant in Common can gift their share of the property in their Will. A Joint Tenant cannot gift their share of the property.

What are the main benefits of owning property on a Tenants in Common basis?

  • Protect your children’s and your bloodlines future inheritance in the event that the surviving partner should remarry.
  • It can help protect you from paying long-term care home fees.
  • Your wishes for your property are written into your Will so only you can change it. (More control as life changes)
  • It can help protect you from inheritance tax.

Changing ownership from Beneficial Joint Tenants to Tenants in Common often referred to as “Deed of Severance” or “‘severance of the joint tenancy’ this is normally done by one of the owners by serving notice of severance on the other(s) or by a new or amended trust deed entered into by all the owners. If you want to sever your joint tenancy, you must apply to the Land Registry using form SEV. This application can be made by all of you or by one of you. The application form must be signed by the applicant(s) or their Solicitor.

Please contact me on [email protected] or 0207 041 6069 to find out how I can best help you protect your family and your assets.

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IFAs: Business Property Relief and Inheritance Tax

IFAs: Business Property Relief and Inheritance Tax

financial security, Taxes /

There are so many different facets to Estate Planning that clients just have not thought about.

Why would your clients want to invest and save all their lives and then have 40% of it to go into inheritance tax and the rest of it divided amongst people they didn’t intend to.

Let me tell you of a horror story: Ms. Money-bags had built up a fabulous business and it generated a substantial amount of money. She allowed the profits build up in the company bank account because she didn’t want to pay the higher income tax rate that extracting the profits would cause.

Sadly, Ms. Money-bags became ill and passed away – without doing any IHT planning. When the executors submitted the IHT account, HMRC asked them to pay inheritance tax on the £1 million bank balance that Ms. Money-bags had let build up in the company.

Her children were not impressed at all. They thought that the entire value of the company should be free from IHT, under the Business Property Relief (BPR) rules.

Unfortunately, the IHT rules say that if a company holds assets, including cash, that are not used in the company’s trade, that proportion of the company’s shares are subject to IHT.

In some cases, it is possible to claim business property relief where it can be shown that the cash is required for the trade or is being retained for future investment in the business, but it is not always possible, so it is best to obtain professional advice.

And the moral of this story is…

  • If there is a lesson to be learned from the above tale, it is this:
  • It is a good investment to obtain sound Estate Planning advice.
  • I have been a qualified solicitor since October 2003, and solely work in Estate Planning law.

Please contact me on [email protected] or 0207 041 6069 to find out how I can best help you protect your family and your assets.

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IFAs and WHY Estate Planning Law is Critical!

financial security /

You value your client’s financial well-being. That is because you value the financial advice that you give and hope that you have a long lasting relationship.

Your clients prosper and you have a long term client. That’s the ideal way of building an IFA business with an established trail business.

What goes hand in hand with your financial advice that your client will be indebted to you for arranging for them?

Estate Planning! – Your clients will forever be grateful that not only have you sorted out their long term financial plan but you also helped them ensure that their assets are protected when the they pass from this world.

There are so many different facets to Estate Planning that clients just have not thought about.

Why would your clients want to invest and save all their lives (with your help) and then have 40% of it to go into inheritance tax and the rest of it divided amongst people they didn’t intend to.

Let me tell you of a horror story. Mr. Thrifty married to Mrs. Thrifty  has ensured that he has paid off his mortgage on his £1m home (with your help) and hopes that one day his daughter Lucy will inherit the home. You have advised them to get a mirror Will that they did on the Internet.

However, Mr. Thrifty dies a year later in an accident. The home transfers to Mrs. Thrifty who marries her tennis coach, Mr. Opportunity a year later. They have two children. She makes a new will, leaving everything to her children.

Unfortunately they divorce ten years later, and Mr. Opportunity receives half the value of the house (£500,000) in the divorce settlement. Mrs. Thrifty dies in shock and the rest of the estate is divided amongst the three children. Lucy receives £166,000.

This is not what Mr. Thrifty had intended when he was setting out his long-term financial plan with you.

And the moral of this story is…

 If there is a lesson to be learned from the above tale, it is this:

It is a good investment to obtain sound Estate Planning advice.

I have been a qualified solicitor since October 2003, and solely work in Estate Planning law. I work with IFAs who wish to offer this service to their clients as an added value and opportunity to increase their margins.

Please contact me on [email protected] or 0207 041 6069 to find out how I can best help you protect your family and your assets.

IFAs and WHY Estate Planning Law is Critical! Read More »

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