Estate Planning Workshop
10th December 2015
Agenda

-
Session 1
Inheritance Tax: What’s changed?
Allowances & exemptions
Main residence nil rate band
The inter-generational pension plan?

-
Session 2
Trust solutions – protecting future financial security
Investment solutions – qualifying relief after 2 years
Wills, deeds of variation, powers of attorney (POA)
Q&A
Inheritance Tax (IHT): What’s changed?
Q. What are your thoughts about IHT?
1. “The government are doing a good job and are generous with helping
estates mitigate this tax”
OR
2. “The taxation levels on estates are extortionate! ”
Inheritance Tax (IHT): What’s changed?
Q. Why are the HMRC inheritance tax receipts continuing to increase?
 Increases in house prices
 A recovery of household savings
 Nil rate band frozen
£3.8
bn
2014/15
Allowances and exemptions
 A starting point..
Q. What allowances & exemptions can you think of?
Allowances and exemptions
Allowances
 Inheritance Tax Threshold (Nil Rate Band) - £325,000 per person
 Transferring Inheritance Tax Thresholds
 Spouse or civil partner exemption
 Main Residence Nil Rate Band - £175,000 per person
 Potential Couple Nil Rate Band - £1 million
Allowances and exemptions
 “Surely I can then just gift the excess of my taxable estate when I am
on my deathbed?”
 7 year survival rule – Potentially Exempt Transfer
 32%, 24%, 16%, 8% and then 0% - ‘Taper Relief’
Allowances and exemptions
Exemptions

£3,000 Annual gifting allowance

£250 gifts

Wedding gifts

Regular gifts from net income

Payments to help with living costs

Charitable donations

Political party donations

KEEP RECORDS!
Allowances and exemptions
Worked Example:
 Mr & Mrs Jones - age 80 with a £1.3 million estate
 2 married sons
 4 grandchildren
 Annual exemption £3,000, plus carry over of 1 year
 Surplus income, university / school fees
 Marriage gifts
 Charity
 Political party
 £100,000 gift to each son
Allowances and exemptions
 Both die January 2021, with £1 million estate. £650K IHTNRB + £350
MRNRB = £1 mil NRB taxed at 0%
 Gifting exemptions totalled £100,000 taxed at 0%:
- annual exemption (£36K); grandchildren fees (£24K); wedding gifts
(£10K); charitable giving (£25K); political donations (£5K)
 £200,000 PET taxed at 16% = £32,000 tax liability
 Versus: Original £1.3 million estate with £300K taxed at 40% = £120,000
 A saving of £88,000 over only 5 years using standard gifting allowances
and exemptions!
Main residence nil rate band
Summer Budget 8th July 2015
“from 2017 there will
be a new £175,000
allowance on homes
left to children and
grandchildren,
allowing £1million to
be passed on tax
free”
“wanting to pass
something onto
your children is
the most basic,
human and
natural aspiration
there is”
“Promise made, promise delivered”
Confused clients ?
 Daily Telegraph 8th July 2015
“If you own a property worth up to £1m you will be able to leave it to
children or grandchildren completely free of inheritance tax from April
2017”
Confused clients ?
But not if you….
Are single/unmarried/divorced
Don’t own your house
Don’t have children/direct descendants
Don’t leave your house to your children
Have an estate greater than £2 million
Die before April 2020
“£1 Million Nil Rate Band”
• Main Nil Rate Band (NRB) will remain frozen at £325k until
2020/21
• New “residential enhancement” (RNRB) phased in over 4 years
from April 2017
• Available against NET value of one residential property
• Transfers on death to direct descendants only
• Transferable to surviving spouse / civil partner
• Protection for downsizers
• Tapered withdrawal at high estate values
IHT main residence relief
Phased in from April 2017
RNRB per individual
2017-18 : £100,000
2018-19 : £125,000
2019-20 : £150,000
2020-21 : £175,000
Taper threshold
 Estates worth more than £2 million
 Tapered withdrawal
 £1 reduction in RNRB for every £2 over £2m
 Single person – zero RNRB at £2,350,000
 Couple - zero RNRB at £2,700,000
The inter-generational pension plan?
Charlotte Eleanor Davey
Scenario: Widower at age 65 with 2 grown up children and a house
value £1m
 You are imminently about to retire, you have a personal pension
fund of £700,000 and £400,000 in savings and investments.
 You will have a £20,000 income shortfall in retirement after taking
into account your state pension and final salary pension.
Q. Where would you draw these funds from and why?
Why pension may be the last to access?





Outside estate for IHT….
If (nomination)
Tax efficient growth
Tax free to beneficiaries on death before age 75
Marginal tax only on beneficiaries on death from age 75
Planning considerations
 Nomination choices
 Pension commencement lump sum at age 75
 Taxable income for remainder
 Continual review
The inter-generational pension plan
Case study example: Our client dies age 85. Drawings for income
£20,000 x 20 years = £400,000
1. Taken from pension
Taxable estate £400k savings and investments
IHT = £160k
 Pension £300k left to children and taxable in their hands at their
marginal rate
2. Taken from savings and investments
Taxable estate £NIL
IHT = £NIL
Pension £700k left to children and taxable in their hand at their
marginal rate
Inherited pension
Benefits






Stays pension (tax free investment)
Outside beneficiaries estate
Can be accessed at anytime – no minimum age
Tax free if death before age 75
Marginal tax if death from age 75
Benefits may be taken as income or lump sum
“Thank you grandad!!”
Break
Trust solutions – protecting future financial security
Q. Who do you think trusts are suitable for e.g. everyone or the
wealthy?
Your
Estate
Your
Beneficiaries
Trust
Your
Estate
Gift or
Loan to
Trustees
The Right money
In the Right hands
At the Right time
With no TAX
Your
Beneficiaries
Gift and Lend
to beneficiaries
Settlor
access
Trust
Lump sum - 7 year clock
Excess income - no 7 year clock
Access & Control of Assets
•
•
•
•
Control of assets
Access to Capital
Access to Income
Flexibility
•
•
•
•
Liquidity
Changing needs
Lifestyle choices
Earmarked for.. X
Protection from Inheritance Tax
Nil Rate Band recycles every 7 years !
Age
60
70
80
Source: GAD E&W Interim Life Tables
2010-12
Life Expectancy
Male
Female
4x NRB22.3
= £1,300,00
3x NRB14.6
= £975,000
2x NRB 8.2
= £650,000
25.2
16.8
9.6
Flexible reversionary trust
Settlor
Trustees
10%
2%
0%
10% 18%
3%
10% 28%
££
Capital
Lump
Sum
8%
18%
25%
10% 35%
10%
10%
10%
10%
10%
10%
Gifts or Loans
to beneficiaries at any
time
The WAY Inheritor Plans
Flexible Inheritor Plan
Flexible Reversionary Trust
Interest In Possession Trust
Relevant Property Regime
Chargeable Lifetime Transfer
NRB Planning (£325,000 max)
Single Settlor
Collective investments
Way Flexible Inheritor Plan
Complex and comes at a cost
 2% initial charge on amount invested
 0.3% pa trust charge
 1% pa annual management charge
 0.7% pa fund charge
 £600 pa professional trustee services
Investment £200,000
 Initial charge £4,000
 Annual charge £4,600
Trust solutions – protecting future financial security
 Trust planning case study
What difference could be made by putting money into a flexible trust
for George and Mary?
...and is it worth the cost?
George & Mary
Aged 70 and 68 and in good health
• Own their house
• Adequate pension and investment income
• Emergency cash
• What if money (invested)
• Wealthy children (beneficiaries)
IHT planning requirements
• Moderate risk investors
• Occasional access to extra income
• Desire to assist beneficiaries with ad hoc gifts
• Pass capital IHT free to beneficiaries (with control)
• Care Concerns
2015 – current position
George70
Mary 68
2015
House
£340,000
‘What If’ Money
£400,000
Cash
£25,000
Assessable Assets
£765,000
Joint NRB
£650,000
Subject to IHT
£115,000
IHT Payable
£46,000
2033
Post July 2015 Budget
2015
2033
£340,000
£400,000
£957,376*
£883,392**
Cash
Assessable
Assets
Joint NRB
Joint RNRB
£25,000
£765,000
£50,000
£1,890,768
£650,000
£899,447
£484,318
Subject to IHT
£115,000
£507,003
IHT Payable
£46,000
£202,801
George lives
House
until 2029
What If Money
Mary lives
until 2033
Assumed compound annual growth rates:
*5.92% Source: Land Registry E&W house price index 1997-
**4.5% Source: Standard FCA projection mid-rate.
The figures shown are not indicative of any actual fund performance.
2015
Planning
2015
House
£340,000
What If
Money
Cash
£400,000
Assessable
Assets
Joint NRB
£765,000
Subject to
IHT
IHT Payable
£115,000
£25,000
£650,000
£46,000
2015
2015
Planning
‘What if’ money
into Flexible Trust
House
£340,000
What If
Money
Cash
£0
£25,000
Assessable
Assets
Joint NRB
£765,000
Subject to
IHT
IHT Payable
£115,000
£650,000
£46,000
Flexible
Trust
£400,000
2033
No
Trust
Flexible
Trust
House
£957,376*
£957,376*
What If
Money
Trust
Cash
£883,392*
£0
*
£0
£883,392**
£50,000
£50,000
Assessable
assets
£1,890,76 £1,007,376
8
Planning
‘What if’ money
into Flexible
Trust
Position on 2nd
Death
Assumed compound annual growth rates:
*5.92% Source: Land Registry E&W house price index 1997-
**4.5% Source: Standard FCA projection mid-rate.
The figures shown are not indicative of any actual fund performance.
2033
No Trust
Flexible
Trust
Planning House
What If Money
£957,376*
£883,392**
£957,736*
£0
What If Money
£0
(£883,392**)
Cash
Assessable
Assets
Joint NRB
Joint RNRB
Subject to IHT
£50,000
£1,890,768
£50,000
£1,007,736
£899,447
£484,318
£507,003
£899,447
£484,318
£ Nil
£202,801
£ Nil
‘What if’
money into
Trust
Position on
2nd Death
IHT Payable
Trust solutions – protecting future financial security
….back to the first question relating to this area, are trusts complex and
expensive?
….Yes, but can be very beneficial in the right circumstances.
Investment Solutions
What do we mean by “tax efficient investments”?
 Investments that have a tax benefit – incentives, not loopholes
 ISAs
 Pensions
 Business property relief (BPR)
Business property relief
 Alternative Investment Market (AIM)
 AIM market 1000 companies
 500 of these will qualify for business property relief
 AIM portfolio becomes exempt from IHT after just two years, as long
as investors still hold the investment when they die.
Investments using business property relief
Who might consider them?




Those with IHT concerns
Those who are looking for a spread of IHT-efficient investments
Those who would like the potential for growth
Those who do not wish to gift capital to their heirs or into trust
during their lifetime
 Those who are in the final stages of their retirement and require a
speedy IHT solution
Key risks of business property relief




Investors capital is at risk
Performance is not guaranteed
Tax legislation can change
Shares in unquoted companies are not as liquid as shares listed on
the London Stock Exchange which could affect the speed of
withdrawals
 No commitment that the investment into various companies will
remain a qualifying investment
Octopus Inheritance Tax Service
Complex and comes at a cost
 2% initial charge on amount invested
 1% pa annual management charge
 1% pa fund charge
Investment £200,000
 Initial charge £4,000
 Annual charge £4,000
Case study
 Mrs Jackson is age 87 and widowed. Her health is average for her age
 Her estate consists of the following:
 Main residence £1,000,000 plus £400,000 savings and investments
 Final salary pension covers expenditure
 Mrs Jackson inherited her husband’s nil rate tax band.
 Mrs Jackson doesn’t want to give any of her savings away as she is
concerned she will need the funds for long term care
Q. Should business property relief form a consideration for Mrs
Jackson’s estate tax planning?
Case study - continued
Case study example: Mrs Jackson dies age 90
 Property remains valued at £1 million and covered by NRB and RNRB
1. No business property relief investment made
Taxable estate £400k savings and investments
IHT = £160k
2. £200,000 investment made Octopus Inheritance Tax Service age 87
Taxable estate £200k residual savings and investments
IHT = £80k
In this scenario possible £80,000 saved.
Wills
 Expression of wishes
 Laws of intestacy
 Risks
 When should I draft a will or update my existing will?
Deeds of variation
 Well tested and proven post death planning
 Is there a future?
 Update your will!
Powers of attorney
 The prevalence rate of disability rises with age − around 1 in 20
children are disabled, compared to around 1 in 5 working age adults,
and almost 1 in 2 people over state pension age
 There are 9.4 million disabled people in England, accounting for 18
per cent of the population
 One in six people aged 80 and over have dementia
 The proportion of people with dementia doubles for every five year
age group
*English Federation of Disability Sport
Powers of attorney
 Lasting power of attorney
 Property and affairs
 Health and welfare
 Enduring power of attorney
Powers of attorney
Benefits
 Right person at the right time
 Prospective versus retrospective
 Talk about your wishes today
Wills, deeds of variation & powers of attorney
 Need help?
 County Wills & Trusts
 Sarah Steel - specialist
Questions
?
Summary
1. Give it away during lifetime (Exemptions/Allowances)
2. Main residence nil rate band
3. Pension wealth transfer planning
4. Gifts into trust(s) during lifetime
5. Invest in exempt assets
6. Ensure Wills are up to date
7. Lasting powers of attorney
Future events
 Feedback form
 Spring County seminar 14 April 2016
We wish everyone a joyful Christmas
and a happy and peaceful new year.
Estate Planning Workshop
10th December 2015