Arford Henderson Law

financial security

How you can increase your ISA allowance

financial security, Wills /

Did you know that you can inherit your partner’s ISA tax free allowance savings?

The new rules mean ISA assets can now be passed on to spouses or civil partners and retain their tax-friendly status.

THE REASON FOR THE CHANGE?

Under the previous system, when someone died, any savings held in an ISA automatically lost their tax-free status. This meant that the surviving partner would have to start paying tax on any returns or income earned from it, which could add up to a significant sum if the ISA holder had been saving for many years.

The tax system was inherently unfair, particularly given the fact that couples tend to save from joint incomes – they’d have to pay tax on money they thought was protected, and thousands of people were caught by these unexpected tax charges every year.

PASS ON THE BENEFITS

The rules mean that if an ISA holder dies, the surviving spouse or civil partner will be able to inherit the ISA and retain its tax benefits. This is in the form of an additional allowance – the surviving partner is given an ‘additional permitted subscription’ (APS), a one-off ISA allowance that’s equal to the value of the ISA at the date of the holder’s death, which won’t be counted against the normal ISA subscription limit but will instead be added on to the survivor’s own ISA limit.

In other words, you’ll be entitled to an additional allowance that would cover the value of your partner’s savings as well as your own. For example, if your partner had £50,000 in ISA savings, your ISA allowance for the year would be £65,240 (the value of your partner’s savings and your own ISA allowance for the 2016/17 tax year, which stands at £15,240).

Essentially, the rules mean that the tax-efficiency of the ISA won’t be lost, and that you’ll be able to benefit from the money that could well have been saved together. The changes have been specifically designed to ensure that bereaved individuals will be able to enjoy the tax advantages they had previously shared with their partner, offering more flexibility and a much fairer outcome.

There are approximately 150,000 married ISA holders die each year, so these changes will benefit spouses or civil partners by increasing the amount that they can save by offering the tax advantages in an ISA wrapper. Surviving partners could have lost out significantly under the previous rules whereby investments held by deceased ISA savers lost their tax-free status. Allowing ISA savings to be transferable will enhance flexibility and will act as a further incentive to save within these vehicles.

BRIEF LOOK AT THE RULES

•   Eligibility: Anyone whose spouse/civil partner died on or after 3 December 2014 is eligible, and the APS could have been claimed since the start of the 2015/16 tax year.

•   Pot size: The rules apply irrespective of the size of the deceased’s ISA pots. No matter how much they had saved in an ISA, you’ll have that amount as an additional allowance. In the event that more than one ISA was held by your partner, the pots will be combined to give an overall additional subscription amount that you can claim.

•   Subscriptions: APS allowance subscriptions (referred to as payments) can be made to a cash ISA and/or a stocks & shares ISA, either with the deceased’s ISA provider or with an alternative that will accept APS subscriptions (not all will). Some ISA providers will allow payments to be made in instalments whereas others only allow a lump sum, so make sure to check.

•   Time limit: Chances are, arranging your new allowance won’t be at the forefront of your mind on the death of your partner. In most cases, at least for subscriptions made in cash, the allowance is available for three years after the date of death.

•   Process: ISA providers will require key information and personal details from the spouse/civil partner to open a qualifying ISA, and they’ll also require an application form to use the APS allowance.

•   Transfers: The APS allowance can be transferred to another ISA provider, subject to the new provider’s acceptance. It can only be transferred once and only where no subscriptions have been made under the allowance. But, after an APS allowance payment has been made, the cash and/or investments related to that subscription can be transferred to another ISA.

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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IHT-FREE allowance

The £1m IHT-FREE allowance explained!

financial security /

The impression the law was set out to give was that couples could leave behind £1m inheritance tax free.

What actually happened was that there was an introduction of a £175,000 nil rate band which will apply to the value of your main residence and will be in addition to your £325,000 personal nil rate band allowance.  The effect is to give the impression that an individual could leave up to £500,000 and a couple £1,000,000 before IHT becomes chargeable.  However, the allowance will not be available until 2017 when it will be introduced at a lower £100,000 level and then slowly increased by £25,000 per year until the full £175,000 is claimable in 2020/21.

This new allowance will also only be available when the deceased has bequeathed their property to ‘direct descendants’.  Direct descendants are described as children, grandchildren, step-children, adopted and foster children and, and following an amendment, now also includes a spouse or civil partner of a direct descendant or a surviving spouse or civil partner if they have not remarried or formed another civil partnership.

However, a Will which provides for your estate (including your interest in the property) to pass into a Discretionary Trust (even if the only beneficiaries are you children and grandchildren) may not qualify for the relief.

The amount of main residence nil rate band will also be reduced if the value of your combined estate exceeds £2.m.  The allowance will taper by £1 for every £2 that your estate exceeds this sum, thus meaning that when the allowance is fully in force then it would not be available once the joint estate exceeds £2.7m.

The relief can also only be claimed against a freehold or leasehold residence, and therefore unless your estate includes a property which you used, or intended to occupy as your home, the main residence nil rate band cannot be claimed.

If the property value does not equal or exceed the amount of main residence nil rate band allowance then any ‘unused’ allowance’ cannot be applied against the value of other assets comprised within the estate.

An illustration would be a couple leaving their estates (on second death) to their children have a property worth £200,000 and cash/investment assets of £800,000.  The maximum amount of main residence nil rate band claimable would be £200,000 and the maximum amount of nil rate band claimable against the cash assets would be £650,000, leaving in this example £150,000 subject to Inheritance Tax.

Therefore, for those who thought they would no longer have an IHT liability, there may be disappointment. It has never been more important to have a well thought out estate plan, complete with an appropriate Will and supporting documentation, to ensure your assets can pass to your loved ones in a tax efficient manner.

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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share of the house

Your share of the house is at risk despite you writing a Will

financial security, Wills /

If you own a property with your partner or wife, it is important to know how it is being ‘owned’ at the Land Registry. Is it being held as Joint Tenants or Tenants In Common.

For instance, if you are owning the property as Joint Tenants and one of you dies, then the other person will become the owner of the property regardless of what it says in your Will.

When property is owned jointly by 2 or more people they are said to own the property either as “joint tenants” or as “tenants in common”.

How do I know whether I am a joint tenant or a tenant in common?

If you are unsure whether you own property as joint tenants or as tenants in common, if the property is registered with the Land Registry, as most properties are these days, confirmation can be obtained by obtaining “office copies” of the register from the Land Registry. If the property is held as tenants in common the office copies will contain what is known as a “Form A restriction” which reads as follows:

“No disposition by a sole proprietor of the registered estate (except a trust corporation) under which capital money arises is to be registered unless authorised by an order of the court”.

The title documents relating to the property will also record whether the property was purchased or transferred to the co-owners as joint tenants or tenants in common. However, the manner in which the property is owned may have changed since the title documents were prepared.

For this reason it is usually necessary, in the case of registered property, to obtain clarification by obtaining office copies from the Land Registry.

What happens when one of the tenants in common dies?

Where property is owned by tenants in common each co-owner is free to leave his or her share of the property to who ever they wish when they die. If they do not make a will their share in the property will pass to their relatives in accordance with the rules of intestacy.

This is in contrast to the position relating to joint tenants where their share in the property passes automatically to the other joint tenant or tenants upon their death.

From an inheritance point of view is a tenancy in common better than a joint tenancy?

The question as to whether a tenancy in common is better than a joint tenancy, from an inheritance point of view, will depend upon the circumstances of each individual.

Unmarried couples may, for example, prefer to hold property as joint tenants to ensure that if one of the parties dies the surviving party will inherit the deceased’s share in the property.

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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How to use Trusts to ensure your estate is protected

How to use Trusts to ensure your estate is protected

financial security, Wills /

There are various kinds of Trust. You can write a Trust into your Will, while others you can set up as a separate entity.

Some trusts will have to pay Inheritance Tax in their own right rather than as part of your tax bill; others might have to pay Income Tax or Capital Gains Tax.

The kind of trust you choose depends on what you want it to do. Here are some of the most common options:

  • Bare trust – the simplest kind of trust, a bare trust just gives everything to the beneficiary straight away (as long as they’re over 18).
  • Interest in possession trust – the beneficiary can get income from the trust straight away, but doesn’t have a right to the cash, property or investments that generate that income. The beneficiary will need to pay income tax on the income received. You could set up this kind of trust for your partner, with the understanding that when they die the investments in the trust will pass to your children.
  • Discretionary trust – the trustees have absolute power to decide how the assets in the trust are distributed. You could set up this kind of trust for your grandchildren and leave it to the trustees (who could be the grandchildren’s parents) to decide how to divide the income and capital between the grandchildren. The trustees will have the power to make investment decisions on behalf of the trust.
  • Mixed trust – combines elements from different kinds of trusts. For example, a beneficiary might have an interest in possession in (ie a right to the income of) half of the trust fund and the remaining half of the trust fund could be held on discretionary trust.
  • Trust for a vulnerable person – if the only one who benefits from the trust is a vulnerable person (for example, someone with a disability or an orphaned child) then there’s usually less tax to pay on income and profits from the trust.
  • Non-resident trust – a trust where all the trustees are resident outside the UK. This can sometimes mean the trustees pay no tax or a reduced amount of tax on income from the trust.

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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share of the estate

I don’t want my wife’s new husband to have my share of the estate!

financial security, Wills /

Q: My wife and I want to write our Wills. We have two young children.

I want to make sure that if I die before my wife that she gets the money but if she remarried and then died, my half would end up with my children and not with any new spouse or children that he had either with her or previously.

She does not want to put the half in trust as this could stop her moving house and she could need it. I am concerned that if she became incapacitated that a new spouse could gain power of attorney. 

How can I safeguard so that any new husband would not take advantage of the rewards of what we have accumulated and at some point my children will get at least the share from my estate?

A: Despite your concerns about trusts, the best way to achieve your objective is by the use of protective and flexible trust structures incorporated into your Wills.

If you were to arrange for your assets to pass into a life interest trust for your wife’s benefit, this would ensure that she has the right to the income generated by any funds as well as to occupation of any property held in trust. The underlying capital would be protected for the benefit of your children.

To achieve maximum protection, you should ensure that any joint property is held as tenants in common so that your share passes according to the terms of your Will and into the trust structure.

This of course means that your wife’s main residence is likely to be owned partly by her personally and partly by the trust. This poses no problem for her ongoing occupation but she may of course want to move properties at some point in the future.

You should choose trustees who would understand  your wife’s wishes and able to work with her, but robust about protecting your children’s interests

She can be assured that this is entirely possible within this type of structure and shouldn’t cause any undue difficulties. The trustees of the life interest trust can purchase a smaller property for her occupation, thereby freeing up some of her own funds or could continue to part own an appropriately chosen property.

In this situation your wife will not be able to make the sole decision about the future of the property but she can be one of the trustees and therefore involved in the decision making process.

This type of trust can also contain flexible powers so that the trustees are able to make capital distributions to your wife if appropriate (and bearing in mind your own wishes) or advance capital to the remainder beneficiaries.

This should give her some comfort about her future financial security.

Alternatively, the trustees could appoint capital during your wife’s lifetime to the residuary beneficiaries. This would of course be subject to your wife’s approval if she was one of the trustees.

If you choose not to incorporate trusts into your Wills but instead make an absolute gift to your wife on your death, the assets will be added to her own estate. Once that has happened, it will be nearly impossible for you to exert any control over their eventual destination.

If your wife remarries, any existing Will would be revoked and she is free to make a new Will giving whatever she pleases to her new spouse. If she dies without a Will, the intestacy provisions would give the first £250,000 of her estate (and personal belongings) to her spouse, with only half of the residue going to the children and the remaining half to the spouse.

Your wife may also wish to protect the capital for your children in these circumstances and could take steps to do so, such as entering into a pre or post nuptial agreement but this does depend on her taking positive action at the appropriate time.

If your wife became mentally incapacitated, any power of attorney (whether an old style Enduring Power of Attorney or a new Lasting Power of Attorney) would dictate who would manage her financial affairs.

If none, an appropriate person could apply to the Court of Protection for a deputy order. While this may undoubtedly give a new spouse acting in this capacity a level of power over your wife’s finances, the use of such power is restricted and heavily scrutinised for any abuse.

The ability to make gifts or distribute assets is limited. If your children suspected that the new spouse was using the funds for his own benefit and against the wishes of your wife, they could take action to prevent this abuse.

To conclude, the use of appropriate Will trusts is likely to be the best means of achieving your aim of providing for your wife for the remainder of her life but protecting the funds for your children in the long term.

Most importantly, Where a testator gives a life interest in a property to a spouse, then no IHT will be due upon first death due to the spousal exemption under section 18 IHTA 1984, and tax may be due upon second death as the property/share of the property will be treated as part of their estate for tax purposes.

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 financial advisors who wish to offer this service to their clients as an added value and opportunity to increase their fees.

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.

I don’t want my wife’s new husband to have my share of the estate! Read More »

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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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.

IFAs: Business Property Relief and Inheritance Tax Read More »

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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