The fine art of estate planning

							The fine art of estate planning




      Bowes Museum 21st April 2005
The fine art of estate planning

                           Agenda
 14:00 -   Arrival & Refreshments
 14:30 -   Session 1 : Inheritance Tax & Wealth Preservation
           (Jonathan Fry, Jonathan Fry & Co)
 15:15 -   Afternoon Tea
 15:45 -   Session 2 : Wills, Estate Planning& Long Term Care Issues
            (Andrew Way, Latimer Hinks)
The fine art of estate planning

  No man in this country is under
  the smallest obligation, Moral or other,
  so to arrange his legal relations to his business or to
  his property

  as to enable the Inland Revenue to put the largest
  possible shovel into his stores.
  Lord Clyde said, in Ayrshire Pullman Motor Services and Ritchie v. IRC (1929)
The fine art of estate planning
Every man is entitled if he can,
to order his affairs, so as that the tax attaching,
under the appropriate Acts, is less than it
otherwise would be.
If he succeeds in ordering them
so as to secure this result, then,
however unappreciative the Commissioners of Inland
 Revenue or his fellow taxpayers may be of his
ingenuity,
 he cannot be compelled to pay an increased tax.
Lord Tomlin, in the UK House of Lords case, IRC v. Duke of Westminster (1936).
The fine art of estate planning

                   Seminar Overview
 • Insight into current legislation affecting estate planning

 • Checklist of the issues you might wish to consider


 • Examples of some possible solutions
The fine art of estate planning

                  A tax on the wealthy ?

  Estate Duties

  Capital Transfer Tax FA 1975

  Inheritance Tax FA 1986

  Current Threshold £275,000
The fine art of estate planning

  It is the moderately wealthy members of society who suffer the
  Greatest proportionate burden of Inheritance Tax when
  compared to their overall wealth.

  The problem for many people in the middle wealth bracket is
  that they face a fundamental dichotomy.

  On the one hand they have, on paper, sufficient wealth to leave
  their family with a very substantial tax burden when they pass
  away.

  On the other hand, however, they do not really have a great
  deal of disposable income, despite leading reasonably modest
  lifestyles.
The fine art of estate planning

        Two effective ways to avoid IHT
• Die poor, or
• Plan ahead

Most of us find the first option somewhat unpalatable, and also
quite difficult to achieve without a remarkable sense of timing!

Until recently, planning ahead, has perhaps been seen as the
prerogative of the very wealthiest members of society, leaving
the moderately wealthy to pick up the bill. Our aim in this
seminar is to provide some practical solutions
The fine art of estate planning

 “A Well timed death is the acme of good
  tax planning,
 better even than a well timed marriage”

 Donald C. Alexander, Commissioner of Internal Revenue, 1973-1977
The fine art of estate planning

                   Budget 2005
  • £275,000   2005-2006 Tax Year

  • £285,000   2006-2007 Tax Year

  • £300,000   2007-2008 Tax Year
The fine art of estate planning

    The scale of the problem
The number of families caught by Inheritance Tax
could rise to 4 million in 10 years time according to Halifax


           Percentage Rise In House Price V IHT Threshold

  25.00%

  20.00%

  15.00%                                                        House Price
  10.00%                                                        IHT Threshold

   5.00%

   0.00%
            1998   1999   2000   2001   2002   2003   2004
The fine art of estate planning

 “Those who have large estates
 and watchful lawyers will find
  ways of minimising these tax burdens”

 Robert H. Jackson
The fine art of estate planning

                Tightening the noose
 • 1986 “Gifts with reservations” – added to tax framework
 • These rules seek to impose an IHT charge on the estates of
   individuals who have given away assets but have retained
   the use of them.
 • IHT planners developed many ingenious ways to work
   around these rules
 • Ingram & Eversden
The fine art of estate planning

               Pre-Owned Asset Tax
 • April 2005 Pre-owned Asset Tax (POAT) – income tax on
   living donors who retained the use of assets given away
   (Schedule 15 Finance Act 2004) – may apply to any gifts
   made after 17th March 1986

 • Main purpose to restrict the scope for tax planning in
   respect of an individual’s main residence
The fine art of estate planning

 “All the money nowadays
 seems to be produced
 with a natural homing instinct
 for the treasury”

 Prince Philip, Duke of Edinburgh
The fine art of estate planning

                 Pre-Owned Asset Tax
 • The basic thrust of the new legislation is that, from 6th April
   2005, the Inland Revenue will impose an income tax charge
   on anyone who continues to enjoy the use of assets they
   once owned, free of charge or below market-value rent, in
   effect creating a tax liability out of thin air !
 • This benefit is retrospective to March 1986 (though the tax
   liability will not be backdated)
The fine art of estate planning

                          What is possible ?
   • ‘Inheritance tax is, broadly speaking, a
     voluntary levy paid by those who distrust
     their heirs more than they dislike the
     Inland Revenue’
     Lord Jenkins of Hillhead.

   • Gross over simplification particularly with regard to current
     legislation
The fine art of estate planning

        What is realistically possible ?
 • Legal

 • Non contentious

 • Practical – tax tail does not wag the dog

 • Specialist solutions – caveat emptor !
The fine art of estate planning

 “I always imagined that a client needs at
 least two tax advisors.

 One tells what the law is.
 The other tells him what he wants the
 law to be.
 Then he can choose”
 Terence Floyd Cuff
The fine art of estate planning

                      Using the law
  • Exemptions & Potentially exempt transfers

  • Wills & Nil Rate Band Discretionary Trusts

  • Deeds of Variation

  • Trust based solutions
The fine art of estate planning

               Who is liable to IHT ?
 • UK Domiciled – then all worldwide assets,
   not just property in the UK. (Do not confuse with tax
   resident !)
 • A person is domiciled in the UK if he is deemed by law to
   have his permanent home in the UK.
    s.267 IHTA 1984 (resident in 17 of 20 tax years preceding
   the transfer)
The fine art of estate planning

                  Assets liable to IHT
 • Personal assets, house, personal possessions, savings,
   investments @ 40%.
 • The statistics on the main sources of Inheritance Tax make
   interesting reading: 41% comes from people's own homes!
 • 26% comes from cash (including savings accounts, deposit
   accounts, etc.).
 • 12% comes from quoted shares and securities.
 • The remaining balance comes from household personal effects,
   insurance proceeds and other land holdings.
The fine art of estate planning

              What is exempt ?

  • Business assets – BPR

  • Agricultural assets – APR
The fine art of estate planning

              Business Property Relief
 • Business Property Relief (BPR) is available on transfers of
   business property which meet the following three
   conditions:
    – The business concerned is a qualifying business
    – The asset itself is relevant business property, and
    – The asset has been owned by the transferor for the
       relevant minimum period.
The fine art of estate planning
             Agricultural Property Relief
 • Agricultural land or pasture
 • Woodlands
 • Buildings used for the intensive rearing of livestock or fish
 • Farmhouses, cottages and other farm buildings
 • Stud farms

 It is given at rates of 50% or 100%, depending on the exact
 Circumstances of the transfer of value arising and subject to
 the usual raft of provisions designed to prevent abuse.

 It is essential that agricultural activities are being carried out
     on
 the land at the time of the transfer.
The fine art of estate planning

 “Next to being shot at and missed,
 nothing is quite as satisfying
 as an income tax refund”

 F.J. Raymond
The fine art of estate planning

                    Exempt transfers
 • £3,000 annual gift exemption – unused balance in one tax
   year can be carried forward to the following tax year – but
   no further

 • For example a husband & wife can transfer assets to the
   value of £12,000 if they have the previous years’
   exemptions available

 • Over a 20 year period, a husband and wife can each transfer
   up to £63,000 of value out of their estates tax-free which
   would achieve a potential inheritance tax saving of £50,400.
The fine art of estate planning

                    Exempt transfers
 • £250 small gifts exemption – often overlooked – give away
   to as many people as the donor wishes

 • Gifts on marriage
    – Each parent gift £5,000
    – A grandparent or distant relative £2,500
    – Anyone else £1,000
The fine art of estate planning

                     Exempt transfers
   •   Normal expenditure out of income exemption
   •   Must be made out of earned or unearned income
   •   Part of normal, habitual, expenditure
   •   Donor must be left with sufficient income to maintain their
       usual standard of living
The fine art of estate planning

                    Exempt Transfers
  • Married taxpayers should be looking to fully utilise the
    exemption for transfers between spouses, as there is a total
    exemption for gifts, whether made during lifetime or on
    death, between husband & wife.

  • Equalise estates – use the exemption to better exploit the
    separate inheritance tax “identity” of each spouse, so as to
    achieve a considerable tax saving (of at least £105,200)
The fine art of estate planning

 “Nothing makes a man and wife feel closer,
 these days, than a joint tax return”

 Gil Stern
The fine art of estate planning

              Some further exemptions
 • Gifts to charities

 • Certain gifts for national purposes and public benefit

 • Certain gifts of works of art, land and historic houses
The fine art of estate planning

       Potentially Exempt Transfers (PETS)
• Introduced March 1986 – when IHT replaced CTT
• Can be of any size
• A PET is treated as an exempt transfer at the time it is made
  and provided the donor lives seven years from the date of the
  PET it falls out of account as far as the donor is concerned
• If the donor dies within 7 years of the PET then it is added back
  into the deceased’s estate at its value on the date it was made.
• Tax payable on death within seven years reduced by Taper
  Relief
The fine art of estate planning

                    Trusts
  • Why into trust rather than direct gift ?

  • Trusts as a means of holding capital
    for future beneficiaries
The fine art of estate planning

                  Absolute Gift Trust
 • Outright gift – no access to capital or income

 • All growth in value outside estate from date of gift

 • Original value of gift outside estate after 7 years
The fine art of estate planning

                   Gift & Loan Trust
  • Donor makes a gift directly into trust, trustees then make a
    loan back to the donor of the capital

  • Loan is ultimately repayable on death

  • Growth in value outside estate
The fine art of estate planning

                Discounted Gift Trust
  • Donor makes a gift into trust

  • Retains the right to income during own lifetime

  • Value of income discounted from the amount of the gift
    when calculating IHT liability
The fine art of estate planning

                        Purpose Trust
• Sale of estate assets to a Purpose Trust created especially to serve
  the individuals needs

• In return, a lifetime income is provided

• Family have access to the residual estate after death

• Assets immediately outside estate following sale to trust
The fine art of estate planning

            A straight forward solution
  • Life Assurance policy

  • Payable on the second death

  • Proceeds can be used by the beneficiaries towards the
    payment of Inheritance Tax
The fine art of estate planning

              Other possible solutions
 • Portfolio of AIM shares
    – Outside the estate after 2 years

 • Equity Release
    – Capital gifted into trust
    – Debt deducted from value of estate
The fine art of estate planning

             Important considerations
 • Careful consideration with regard to business and
   agricultural assets
 • May be worth retaining if exempt from IHT
 • Pension assets – consider use of pilot trust for death benefits
   prior to retirement
 • Introduction Pensions Simplification Legislation w.e.f 6th
   April 2006
 • Professional advice needed
The fine art of estate planning

                                  Summary
 •   Consider assets
 •   Deduct any liabilities
 •   Calculate potential IHT due
 •   Consider objectives & priorities
 •   Consider family circumstances
 •   Also consider impact of long term care costs
 •   Estimated typical bed now costs £345 a week – how might
     this be funded ?
 •   Be aware of the legislation – Utilise the law - Create appropriate solutions
The fine art of estate planning

                         Summary
  • Make a will – review existing wills
  • Law Society estimates 2 out of 3 of us die without having
    made a will - intestate – and of those who have already
    made wills, many dispose of their estates in ways which
    give rise to a higher charge to inheritance tax (IHT) than
    need be the case.
The fine art of estate planning

 “It is seldom given to mortal man to feel superior to a tax
 lawyer”
 Anthony C. Amsterdam


 “A dog who thinks he is man’s best friend is a dog who obviously
 has never met a tax lawyer ”
 Fran Lebowitz


 “A tax lawyer is a person who is good with numbers but does not
 have enough personality to be an accountant”
 James D. Gordon III
The fine art of estate planning

 This information is based on our current understanding of
 proposed legislation, taxation law and Inland Revenue practice,
 which may be subject to future variation

 Benefits are not guaranteed and the value of investments may go
 down as well as up. Past performance is not necessarily a guide to
 future performance

 Jonathan Fry & Co is regulated by the Financial Services
 Authority
The fine art of estate planning




      Bowes Museum 21st April 2005