Arford Henderson Law

Taxes

Why tax and social services are among the 7 reasons you should make a will today!

Taxes, Wills /

It is relatively easy to make a Will – and it will ensure your family is saved from unnecessary anxiety at an already distressful time.

Below are 7 reasons why your family will thank you for making a Will.

1. How Much Inheritance Tax Can You Save?

You can easily ensure that no IHT is paid on your death and that it is deferred to the death of your spouse, allowing your family to plan their wealth planning with this in mind.

2. Do You Have Young Children?

If you have young children and both you and your partner were to pass away, you can not determine who will look after your children and how they will be brought up and at what age they inherit your estate. The Social Services will get involved and this will inevitably cause unnecessary trauma to your children.

3. Do You Want To Avoid A Dispute? 

A Will makes it much easier for your family or friends to sort everything out when you die – without a Will the process can be more time consuming and stressful. This will also mean that solicitors and the courts will have to get involved.

4. What Happens If You Don’t Write a Will?

If you don’t write a Will, everything you own will be shared out in a standard way defined by the law – which most likely isn’t the way you might wish. You may not have thought of this, but your siblings could end up with part of your Estate.

5. Is Your Family Financially Secure? 

A Will is especially important if you have children or other family who depend on you financially, or if you want to leave something to people outside your immediate family.

6. Are You Married or Single?

If you are unmarried, your partner will receive none of your estate, this could mean them becoming homeless and without any financial support.

7. Ways To Eliminate The Tax!

There are many ways in which you can eliminate IHT tax, which you can do in your lifetime and still maintain control of your assets.

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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potentially exempt transfer

How to get the most from a ‘potentially exempt transfer’?

Estate Planning advice, Taxes /

This is a common way of gradually reducing your IHT liability. You don’t immediately incur Inheritance Tax when you make certain gifts while you’re alive. And if you continue to live more than 7 years after you’ve made the gift, it becomes fully exempt from Inheritance Tax.

However, you must be sure that you can ‘afford’ to give the asset away to your beneficiaries. You should not have to rely on the income that the asset produces.

You must also be aware that the asset now belongs to the beneficiaries. So if the beneficiaries were to divorce or become bankrupt then the asset is at risk.

During that 7 year period, your gift is known as a ‘potentially exempt transfer’ or PET.

If you do not survive the gift by 7 years, the exemption fails. The PET is counted as part of your estate, and is subject to Inheritance Tax. How much tax is due depends on when it was given – the rate of tax is lower for older gifts.

You must ensure that you do not have an interest in the gift that you have ‘given’ away. Gifts where you still have an interest in it – no matter when you’ve given it – don’t qualify as a PET. For example, if you continue to live for free in the house you gave your child more than 10 years ago. The house would still be considered part of your estate and therefore subject to Inheritance Tax. This is known as “reserving a benefit” in the property which you gave away.

There is a smart way of giving away a gift but ensuring that the gift is safe from divorce proceedings and bankruptcies. Creating a discretionary trust ensures that the gift is ring-fenced. You still keep a control of the asset, insofar as the Trustees can ensure that the asset is not sold off or squandered by the beneficiaries.

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

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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Inheritance tax

7 Ways to save Inheritance tax

Taxes, Wills /
  1. Make a Will

An important element of sound estate planning is to make a Will – unfortunately 70 per cent of adults with children under 18 fail to do so.

This is mainly due to apathy but also a result of the fact that many of us are uncomfortable talking about issues surrounding our death. Making a Will ensures your assets are distributed in accordance with your wishes.

This is particularly important if you have a spouse or partner as there is no inheritance tax payable between the two of you but there could be tax payable if you die intestate – without a will – and assets end up going to other relatives.

2. Make allowable gifts 

You can give cash or gifts worth up to £3,000 in total each tax year and these will be exempt from inheritance tax when you die.

You can carry forward any unused part of the £3,000 exemption to the following year but then you must use it or lose it.

Parents can give cash or gifts worth up to £5,000 when a child gets married, grandparents up to £2,500 and anyone else up to £1,000. Small gifts of up to £250 a year can also be made to as many people as you like.

3. Give away assets

Parents are increasingly providing children with funds to help them buy their own home. This can be done through a gift and provided the parents survive for seven years after making it, the money automatically ends up outside their estate for inheritance tax calculations – irrespective of size.

4. Make use of trusts 

Assets can be put in trust, thereby no longer forming part of the estate.

There are many types of trust available and can be set up simply at little or no charge. They usually involve parents (called settlors) investing a sum of money into a trust. The trust has to be set up with trustees – a suggested minimum of two – whose role is to ensure that on the death of the settlors the investment is paid out according to the settlors’ wishes. In most cases this will be to children or grandchildren.

5. The income over expenditure rule 

As well as putting lump sums into a trust you can also make monthly contributions into certain savings or insurance policies (not Isas) and put them in trust.

The monthly contributions are potentially subject to inheritance tax but if you can prove that these payments are not compromising your standard of living they are exempt.

6. Invest in Business Property Relief Products

These are very effective and can save your estate a great deal of IHT. Unfortunately they are not great for capital growth but they are useful for capital preservation. You can also give these directly to your children or grandchildren without attracting IHT. In effect taking them out of your estate without any liability.

However, you can not raise debt on other assets in order to invest in a BPR product. You should talk to your IFA to find out which are the best products in the marketplace, which have consistently done well.

7. Provide for the tax

If you are not in a position to take avoiding action, an alternative approach is to make provision for paying inheritance tax when it is due.

The tax has to be paid within six months of death (interest is added after this time). Because probate must be granted before any money can be released from an estate the executor – usually a son or daughter – will often have to borrow money or use their own funds to pay the inheritance tax bill.

This is where life assurance policies written in trust come into their own. A life assurance policy is taken out on both a husband’s and wife’s life with the proceeds payable only on second death.

The amount of cover should be equal to the expected inheritance tax liability. By putting the policy in trust it means it does not form part of the estate.

The proceeds can then be used to pay any inheritance tax bill straightaway without the need for the executors to borrow.

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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Inheritance Tax liability

Why it is important to think about your Inheritance Tax liability

Taxes /

The tax is usually paid out of the funds in the estate, or from money raised from the sale of assets if the estate has no cash. However, you may not want your beneficiaries to sell the assets as it maybe difficult for them to purchase another similar property due to the size of the Stamp Duty.

Sometimes, the deceased has left money in their estate to pay this tax. They may also have arranged for a life insurance policy to cover this bill. This is is an important consideration.

If there is a Will, it’s usually the executor of the will who arranges to pay this tax.

If there isn’t a Will, it’s the administrator of the estate who does this.

Once the tax and debts are paid, the executor or administrator can distribute what remains of the estate to the heirs.

When is the tax paid?

Inheritance Tax is normally paid within six months after the person’s death. If the tax is not paid within six months, HMRC will start charging interest.

HMRC can give the executor of the estate more time to pay the tax if certain assets in the estate, such as property, take a while to sell.

In this situation, your executor can ask to pay the tax in yearly instalments. But the outstanding amount of tax will still get charged interest.

If your estate is likely to incur Inheritance Tax, it’s a good idea for your executor to pay some of the tax even before they finish valuing the estate.

This will help the estate avoid getting charged interest if it takes longer to sell the assets to pay off the debts and taxes.

If the executor or administrator is paying the tax from their own account, they can claim it back from the estate.

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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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 »

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