INSIDE THIS ISSUE
PRESERVE & PROTECT YOUR LEGACY
Welcome to the October 2017 issue of Legacy Legal. Protecting your estate is ultimately about securing more of your wealth for your loved ones and planning for what will happen after your death to make the lives of your loved ones much easier. On page 02, we look at why making sure that you’ve made plans for after you’re gone will give you peace of mind. It’s not nice to think about but it means that your loved ones can carry out your wishes and be protected from Inheritance Tax. It is important to plan ahead to ensure that when you die, your estate is shared out exactly as you want it to be – and this can be achieved by leaving a will. The Inheritance Tax threshold (or ‘nil rate band’) is the amount up to which an estate will have no IHT to pay. If the estate (including any assets held in trusts and gifts made within the seven years before death) is more than the threshold, IHT will be due at 40% on the amount over the nil rate band. The full articles can be found on page 04. We also look at what happens when someone dies while living outside the UK. In this case, the rules for paying Inheritance Tax usually depend on how long they lived abroad, whether their assets (property, money and possessions) are in the UK or abroad, if their assets in the UK are ‘excluded assets’, and if their assets were put into a trust. Find out more opposite.
It’s good to talk To arrange an appointment or to discuss any concerns that you may have in relation to making appropriate protection for you, your loved ones and your estate, please contact us. We look forward to hearing from you.
Issue 34 – October 2017
LIVING OUTSIDE THE UK What happens when someone dies?
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hen someone living abroad dies, the rules for paying Inheritance Tax usually depend on: • How long they lived abroad • Whether their assets (property, money and possessions) are in the UK or abroad • If their assets in the UK are ‘excluded assets’ • If their assets were put into a trust HOW LONG THE DECEASED LIVED ABROAD For IHT purposes, HM Revenue and Customs (HMRC) can treat someone who had their permanent home (‘domicile’) abroad as if it was in the UK (known as ‘deemed domicile’) if they had either: • Had their permanent home in the UK at any time in the three years before they died • Been resident in the UK for at least 17 of the 20 Income Tax years up to their death • If the deceased is deemed domiciled in the UK, their estate has to pay UK IHT on all their assets. If they aren’t deemed domiciled, their estate: • Has to pay IHT on their assets (except excluded assets) in the UK
• Won’t have to pay UK IHT on their assets outside the UK HMRC only recognises a change of domicile if there’s strong evidence that someone has permanently left the UK and intends to live abroad indefinitely. UK ASSETS YOU DON’T PAY INHERITANCE TAX ON The estate doesn’t have to pay IHT on some assets in the UK if the deceased was domiciled abroad. These are known as ‘excluded assets’. They include: • Holdings in authorised unit trusts and open-ended investment companies (OEICs) • Foreign currency accounts with a bank or the Post Office • UK government gilts which were issued ‘free of tax to residents abroad’ • Overseas pensions • Pay and possessions of members of visiting armed forces and staff of allied headquarters GOVERNMENT GILTS There’s no IHT payable on government gilts issued: • Before 30 April 1996 – and the deceased wasn’t deemed
domiciled or resident in the UK • On or after 30 April 1996 – and the deceased wasn’t resident in the UK CHANNEL ISLANDS AND ISLE OF MAN National Savings Certificates or certain other forms of small savings are excluded from IHT if the deceased was domiciled (not deemed domiciled) in the Channel Islands or the Isle of Man. DOUBLE-TAXATION TREATIES You may be able to avoid or reclaim tax through a double-taxation treaty if IHT is charged on the same assets by the UK and the country where the deceased lived. TRUSTS There are different rules if the deceased put assets outside the UK into a trust while they were domiciled in the UK. How can we help? With regular reviews, we can help you to ensure that you make the most of your estate planning requirements. Contact us today to find out more.
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SECURING MORE OF YOUR WEALTH
You don’t have to be wealthy for your estate to be liable for Inheritance Tax Protecting your estate is ultimately about securing more of your wealth for your loved ones and planning for what will happen after your death to make the lives of your loved ones much easier. PEACE OF MIND Making sure that you’ve made plans for after you’re gone will give you peace of mind. It’s not nice to think about but it means that your loved ones can carry out your wishes and be protected from Inheritance Tax (IHT).
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You don’t have to be wealthy for your estate to be liable for IHT and it isn’t something that is paid only on death, it may also have to be paid on gifts made during someone’s lifetime. Your estate will be liable if it is valued over the current IHT threshold on your death. The IHT threshold, or Nil Rate Band (NRB), is fixed until 2020/21 at £325,000. Your estate includes any gifts you may have made within seven years of your death. Anything under the IHT threshold is not taxed (the ‘Nil
Rate Band’) and everything above it is taxed, currently at 40%. Where a person dies and leaves at least 10% of their net estate to a qualifying charity a reduced rate of 36% IHT can be payable. Any unused proportion of the NRB belonging to the first spouse or registered civil partner to die can be passed to the surviving spouse or registered civil partner. ADDITIONAL NIL RATE BAND From 6 April 2017, the Government introduced
an Additional Nil Rate Band (ANRB). This started at £100,000 and will increase by £25,000 each tax year until it reaches £175,000 in 2020/21, when it will increase each tax year by the Consumer Price Index (CPI). The ANRB will be available where you pass your house to your children, grandchildren or great grandchildren. It will also be available if you downsize or cease to own a home as long as the replacement is passed to your children, grandchildren or great grandchildren. It will start to reduce if your net estate is more
than £2 million and will reduce by £1 for every £2 it is over. As with the NRB, the ANRB is transferable between spouses and registered civil partnerships if unused on first death. EXEMPTIONS Moving ownership of assets to your spouse or registered civil partner may help reduce the IHT liability on your estate. However, don’t forget that this can cause an increased IHT liability when they die. There are also exemptions if you make a donation to a charity. MAKING GIFTS If you can afford to make gifts during your lifetime, this will also reduce the value of your estate, and so your ultimate IHT liability. You can make a gift of up to £3,000 a year without any IHT liability, and if you don’t use this whole allowance it can be carried forward to the next tax year. You can also give gifts of up to £250 a year to any number of people with no IHT liability. There are two types of gift which currently have tax implications. The first is Chargeable Lifetime Transfers (CLTs). The most common chargeable transfers are lifetime gifts into Discretionary Trusts. A transfer will be charged if (together with any chargeable transfers made in the previous seven years) it exceeds the IHT NRB (currently £325,000). Tax is paid at 20% on excess over the NRB. The other type of gift to be aware of is Potentially Exempt Transfers (PETs). Gifts between individuals or into a bare trust arrangement are examples of PETs. These gifts are free from IHT provided you survive more than seven years beyond the date of the gift. The other area to be aware of is that if you are making a gift but try to reserve any of the benefit for yourself, for example, retaining dividend income from shares you have gifted, or living rent-free in a property you have. LIFE INSURANCE POLICY Taking out a life insurance policy written under an appropriate trust could be used towards paying any IHT liability. Under normal circumstances, the payout from a life insurance policy will form part of your
legal estate, and may therefore be subject to IHT. By writing a life-insurance policy in an appropriate trust, the proceeds from the policy can be paid directly to the beneficiaries rather than to your legal estate, and will therefore not be taken into account when IHT is calculated. It also means payment to your beneficiaries will probably be quicker, as the money will not go through probate. SETTING UP A TRUST The structures into which you can transfer your assets can have lasting consequences for you and your family and it is crucial that you choose the right ones. The right structures can protect assets and give your family lasting benefits. A trust can be used to reduce how much IHT your estate will have to pay on your death. A trust, in principle, is a very simple concept. It is a legal arrangement where the ownership of someone’s assets (such as property, shares or cash) is transferred to someone else (usually a small group of people or a trust company) to manage and use to benefit a third person (or group of people). Broadly speaking, there are two types of trust to choose from, a Discretionary Trust and Bare Trust. A trust, in principle, is a very simple concept. It is a legal arrangement where the ownership of someone’s assets (such as property, shares or cash) is transferred to someone else (usually a small group of people or a trust company) to manage and benefit a third person (or group of people). An appropriate trust can be used to reduce how much IHT your estate will have to pay on your death. DISCRETIONARY TRUSTS A discretionary trust offers flexibility when it comes to deciding who you would like to be the beneficiaries. The appointer can appoint benefits to the beneficiaries of the discretionary trust. With a discretionary trust there are possible tax liabilities to be aware of. On creation of the trust, IHT might be payable. IHT may also become payable if you die within seven years of the creation of the trust. Depending on the value
A BARE TRUST ENSURES THAT, ONCE NAMED, THE BENEFICIARIES CANNOT BE CHANGED OR ADDED TO IN THE FUTURE. ONCE A BENEFICIARY HAS REACHED THE AGE OF 18 THEY CAN ASK FOR THE TRUST TO PAY THEIR SHARE TO THEM DIRECTLY.
of assets in the trust there could be further charges to consider during the lifetime of the trust. BARE TRUSTS A bare trust ensures that, once named, the beneficiaries cannot be changed or added to in the future. Once a beneficiary has reached the age of 18 they can ask for the trust to pay their share to them directly. The major advantage of bare trusts over discretionary trusts is that they are classed as potentially exempt transfers (PETs) with no immediate or ongoing IHT charges, provided the creator of the trust survives more than seven years from the date of the transfer. MAKE A WILL By making a Will, you are detailing what you want to happen to your assets after you die. A Will also nominates someone to be in charge of carrying out your wishes. If you die without making a Will, the Government could keep everything if a suitable heir is not found. The rules of intestacy (dieing without making a valid Will) can be very complicated, and it should be noted that only your spouse or registered civil partner is assured of any inheritance.
THE SOONER YOUR START PLANNING, THE MORE YOU CAN DO Whether you want to provide for the next generation or leave a charitable legacy when you die, or simply want to minimise an IHT bill, whatever your priorities are, the sooner you start thinking about this the more you can do. If you would like to discuss your situation or to find out more, please contact us – we look forward to hearing from you. INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE. THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE WILL WRITING, INHERITANCE TAX PLANNING OR TAXATION ADVICE.
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PAYING TAX WHEN WRITING YOUR WILL
The IHT threshold and exemptions It is important to plan ahead to ensure that when you die, your estate is shared out exactly as you want it to be – and this can be achieved by leaving a will. The Inheritance Tax (IHT) threshold (or ‘nil rate band’) is the amount up to which an estate will have no IHT to pay. If the estate (including any assets held in trusts and gifts made within the seven years before death) is more than the threshold, IHT will be due at 40% on the amount over the nil rate band. The current nil rate band is £325,000. ANNUAL EXEMPTION If your estate is worth more than £325,000, there are some IHT exemptions which allow you to make gifts to others during your lifetime and not have to pay tax on them when you die. You could make use of your ‘annual exemption’, which allows you to give away gifts worth up to £3,000 in total in each tax year – these gifts will be exempt from IHT when you die. You can carry forward any unused part of the £3,000 exemption to the following year. You can also make small gifts up to the value of £250 to as many individuals as you like in any one tax year, although you cannot use your small gifts allowance together with another exemption when giving to the same person. In addition, any gifts you make to your children will be exempt from IHT as long as you live for seven years after making the gift. If you die within seven years and
the gift is valued at more than the nil rate band, IHT will need to be paid on it either by the recipient of the gift or the representatives of your estate. However, if you die between three and seven years of making the gift and its value is over the nil rate band, the gift attracts ‘taper relief ’, which reduces any IHT due on it on a sliding scale. CHANGING THE WAY YOU OWN YOUR HOME If you give your home to your children but continue to live there, it will not be exempt from IHT, even if you live for seven years afterwards. However, if you sell your home and give the money to your children, the gift won’t be included in your estate for IHT purposes provided you live for seven years. If you and your spouse/civil partner own your home as joint tenants, the surviving spouse/ partner will automatically inherit the property when you die. However, if you own a property as tenants in common with another person, you can pass your portion onto your children when you die. This may reduce the future size of the taxable estate when your surviving spouse dies. If your estate is worth more than the nil rate band, you may wish to consult a solicitor to discuss the implications of changing the way you own your home. You may be able to claim special relief for passing on the particular assets, such as business assets or agricultural property.
USING TRUSTS If your children aren’t immediately able to look after their own affairs, you can use a trust to pass assets on to them. However, gifts into a trust may still be subject to IHT if the size of your estate, including the amount being transferred, is over £325,000. Trusts are complicated, so it is advisable to seek professional help.
IT’S GOOD TO TALK To arrange an appointment or to discuss any concerns that you may have in relation to making appropriate protection for you, your loved ones and your estate, please contact us – we look forward to hearing from you.
The content of this publication is for your general information and use only, and is not intended to address your particular requirements. The content should not be relied upon in its entirety and shall not be deemed to be, or constitute, advice. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of the content. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts. Levels and bases of, and reliefs from, taxation are subject to change and their value depends on the individual circumstances of the investor. The Financial Conduct Authority does not regulate Will Writing, Inheritance Tax Planning or Taxation Advice. All figures relate to the 2017/18 tax year, unless otherwise stated.
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