January 2009
These are difficult times - whether in business, employment, retired, or just raising a family: financial security is all important. Death and taxes are the two certainties in life: we should ensure that we have made appropriate arrangements to both protect the family and that financial matters are established in a tax efficient manner.
There are a number of practical issues that should be considered: a well structured “tax-efficient” Will being fundamental, in conjunction with a power of attorney instrument, should always be a first consideration.
Savings are usually built upon after tax income (the main exceptions being ISA plans and pension contributions); but on death ISA plans are not exempt and (in certain circumstances) individual pension funds could also be exposed. The tax on capital that may arise on death is known as inheritance tax (IHT); any income that arises, during the estate administration, is assessable to income tax (@ 20% or 10%) and capital gains tax (CGT) may also arise during this period (chargeable @ 18%) after any Annual Exemption is deducted.
IHT is levied on death where (net) chargeable assets exceed the Nil Rate Band (NRB): currently £312k for individuals (for married couples or civil partners the NRB is £624k – applying on the second death, assuming the surviving spouse’s or civil partner’s estate was solely entitled to benefit from the first death). Where the chargeable estate exceeds the NRB the IHT rate is 40% for every one pound of “excess”. The NRB is reviewed each (tax) year within the Finance Act.
Chargeable gifts (known as Potential Exempt Transfers) can be exempt if made more than seven years prior to death. No advantage arises if less than three years have elapsed prior to death. However, there are pitfalls, not least the rules concerning reservation of benefit.
HMRC could assess IHT against the recipients of such gifts where such individuals (or their estates) have failed to interpret correctly the (IHT) rules over chargeable gifts made in the seven years (in some cases fourteen years) prior to death. The key element, to avoid these unhappy scenarios, is lifetime planning coupled with a coherent estate planning strategy.
There are a number of reliefs and exemptions available (against IHT and CGT) to individuals – by using them a relatively substantial proportion of an individual’s estate is sheltered against IHT on death. If such a lifetime planning strategy is established, this has the dual benefit of providing for succeeding generations: both (adult) children and grandchildren.
You may say this is all very well, but my own asset position is modest, – do I need all this planning and advice which bears a cost! Fair comment - however drawing up a flexible and tax efficient Will carries only a modest cost; in relation to the size of assets passing on death, potentially valued in thousands of pounds.
If you die without leaving a Will, this is known as intestacy, where the law decides who your beneficiaries will be; it is a rigid and cumbersome procedure - certainly not tax efficient.
Where readers have young families – Wills incorporating provision for the appointment of guardians for children should be mandatory.
Next month’s article will review:
Executors – who do you appoint – it is a highly responsible position.
Guardians – who would you wish to appoint as suitable guardians for your children.
IHT – three simple and straightforward exemptions.
Andrew Murdoch
(ACIB, AIFP, Dip PFS, TEP, Solicitor)
