Wills and Estates
Over coming months, I will review various life time planning scenarios which will cover both pre and post retirement situations with an overall strategy of reducing exposure to IHT (Inheritance Tax). The present government have confirmed the existing Nil Rate Band will remain at £325k for the remainder of this parliamentary term (2015).
Between spouses (or civil partners), it is possible to transfer the first spouse’s unused nil rate band, on the occasion of the second death, (assuming the qualifying criteria are met) giving a total of £650k sheltered from IHT.
Let’s assume a widower, age mid seventies, who has inherited his late wife’s estate when she died ten years ago. Our widower has two children and five grandchildren.
The estate of our widower is valued at £1.5mn-half of which is comprised in the family home –the other half –securities and cash provides for retirement income, in addition to state and private pension provision. (It is likely that surplus income is building up over the years).
The intended beneficiaries are two adult children and five grandchildren. We are assuming our widower is in good health and (on current life expectation figures), could expect to live a further ten/twelve years or so.
What should he do? Well if he does nothing –which is fairly common- the IHT on his demise is projected at £340,000. This is calculated by subtracting two (spouses) nil rate bands at £650k-leaving £850k that would be taxed at 40% -a bill of £340,000. The IHT, on the family home, could be paid by ten annual instalments (plus interest); assuming however it was sold by the executors (following probate to the Will being obtained); any outstanding IHT, against the property, is then due immediately. The IHT against the cash and securities falls due six months after the month in which our widower will have died. For good measure; probate to the Will (of our widower) cannot be obtained until the Probate Registrar has sight of a receipted form 421 (issued by the Capital Taxes Office): part of IHT 400 –the main form to be completed by the executors when gross assets exceed £1mn. This receipt covers the IHT due against the securities and cash owned at death.
How can we reduce the tax bill of £340k: (remember also that whilst a future government could increase the IHT Nil Rate Band –but this is not mandatory - that any resultant increase in asset values will bear a contingent liability of 40p /£.
Of course, asset values can decrease but, generally, the trend is usually upwards over the years.
The simplest method is for our widower to give away a portion of his existing estate-in favour of his children/grandchildren. As long as he survives a further seven years, such gifts fall out of account for IHT purpose. Remember – beneficial ownership of assets so gifted must change –no benefit must remain in the hands of our widower-otherwise reservation of benefit (IHT) rules will apply.
What to gift? The family house is the obvious choice – sell and downsize –gift the excess sale proceeds to the children/grandchildren- the grandchildren will be eternally grateful that “grandfather” has funded a crucial 10% deposit for that “starter home.”
Sounds easy but in practice difficult! Clients often object to selling the family home: furthermore both widows and widowers are amazingly reluctant to gift the “family assets” to the next generation during lifetime!
“Cannot trust them” is a frequent response –yet more surprising when such aged parents had probably spent the better part of £200k in “educating” their two children for some 17 years each! (I suspect the real issue is the relationship of respective sons and daughters in-laws to said parents in-law)!
Next month –we shall continue with the next option –re-arrange the cash and securities to provide more income –which can then be gifted as surplus income. Provided qualifying criteria are met –such gifts will fall outside your estate for IHT purposes.
Andrew Murdoch (ACIB, AIFP, Dip PFS, TEP, Solicitor)
(The content of this article is only intended as information and should not be considered as legal advice. Andrew Murdoch cannot be held liable for any loss caused by any act or omission as a result of information in this article).
