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WILLS AND INHERITANCE TAX PLANNING

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WILLS AND INHERITANCE TAX PLANNING Powered By Docstoc
					     Your House
   Asset or Liability

   A presentation by
      Tim Adams
    Barlow Robbins LLP
          Solicitors
Guildford Godalming Woking
      Inheritance Tax

“…broadly speaking, a voluntary levy paid
  by those who distrust their heirs more
  than they dislike the Inland Revenue”

     Roy Jenkins, speaking in 1981
      Inheritance Tax

 Calculated on the value of a person’s
  estate at death and on certain gifts
  made during lifetime
 First slice taxed at 0%- the “Nil Rate
  Band” -Currently £285,000
 Balance taxed at 40% on death and
  20% for certain lifetime transfers
Potentially Exempt Transfers

  A gift from one individual to another is
   free of Inheritance Tax, if the donor
   survives for seven years
  Very few transfers into trust qualify as
   PETs (the majority are now chargeable
   after Finance Act 2006)
     The Family Home

 Often the most valuable family asset,
  but it will attract inheritance tax if you
  fail to plan
 But do remember, you have to live
  somewhere – the future can be
  uncertain
  Reservation of Benefit

 If a parent gives a house to a child who
  does not live with them, this is ineffective
  for IHT – Reservation of Benefit
 Works if parent pays FULL market rent
 Works if child lives with parent and
  remains there, paying a full contribution to
  the outgoings
Tax Mitigation Schemes

 Most of these are now unattractive
  since the introduction of Pre-Owned
  Assets Tax in 2004.
 A child can still buy a house from a
  parent, provided it is the entire interest,
  not just a share
 Commercial equity release possible but
  expensive – last resort
          Downsize

 Sell the house, buy somewhere less
  expensive and possibly give away some
  of the surplus proceeds by way of PET
 Consider your own future needs
 Sale of one’s principal residence is CGT
  free
Inheritance Tax and Your Will

   Making your Will provides an ideal
    opportunity to review your financial
    position and take some positive steps to
    reduce your potential Inheritance Tax
    liability
   but first – an old chestnut
   “Surely we will save Inheritance Tax by
    owning our house as tenants in common”
Joint Tenants/Tenants in Common
    Joint Tenants - Property automatically
     passes to surviving joint owner on first
     death, irrespective of provisions of Will
    Tenants in Common - Share of
     property is part of estate and passes
     according to Will or Intestacy
    No automatic saving of tax - depends
     on terms of Will
    Usually necessary in any tax mitigation
     arrangements
    The Nil Rate Band

 Currently £285,000
 Each spouse is treated separately for
  Inheritance Tax purposes
 Possible tax saving £114,000 on the
  second death
 Benefit wasted if everything left to
  survivor on first death
Will making strategies to reduce
        Inheritance Tax

    On the first death
      Leave a legacy (cash or assets) of
       the “nil rate band” to the children as
       an outright gift
      Leave a legacy of the “nil rate band”
       on discretionary trusts
   Outright Gift by Will

 Is it affordable?
 Possibly leave a share of the house to
  the children – but what happens if
  children suffer financial or marital
  problems (or predecease)?
 Potentially effective for IHT provided
  survivor has no guaranteed rights to
  occupy
 CGT disadvantages
Nil Rate Discretionary Trust

  On first death - Legacy of the nil band to
   trustees
  Trustees can use trust fund for a range of
   beneficiaries, including the surviving
   spouse
  Spouse has no automatic right to benefit
  If care is exercised, trust fund should avoid
   being taxed on death of survivor
Funding the nil rate trust

 What assets can be used for the
  trust?
   Only assets “owned” by the deceased
   Share of house? Not prior to Finance
    Act 2006, but now may be possible
   Joint assets held as tenants in
    common
   The “Charge” scheme
    The Charge Scheme
 Enables the “nil rate gift” into a
  discretionary trust to be satisfied by
  requiring the trustees to accept a “charge”
  over assets passing to the survivor
 Survivor can inherit whole estate subject to
  a liability/debt in favour of the nil rate trust
 The Revenue accept (at present) that the
  basic arrangement is tax effective
       Anti-avoidance

 S.103 Finance Act 1986 – debt may be
  disallowed where assets gifted by
  survivor during lifetime to first to die
   Solution – leave residuary estate to
    survivor on life interest trust (IPDI)
 Trustees must be careful to “manage”
  the trust to avoid allegations of a sham
      Deeds of Variation

 It is possible to “rewrite” someone’s Will after
  their death to rearrange matters in a more tax
  effective manner
 May be possible to insert retrospectively a nil
  rate discretionary trust
 It is possible to “sever” a joint tenancy
  retrospectively
 Strict time limit of two years from date of
  death
 Not safe to rely on it – make a proper Will
ANY QUESTIONS?


Thank you for listening

     Tim Adams

				
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