INHERITANCE TAX PLANNING GUIDE

Transcription

1 INHERITANCE TAX PLANNING GUIDE Carl Islam Barrister TEP Averose Chancery Chambers Tel: +44 (0) Mob: Cranborne Gardens Manor Road Oadby Leicestershire LE2 4EZ. September

2 INHERITANCE TAX PLANNING GUIDE This brochure contains general information about Inheritance Tax planning and my services. A comprehensive dictionary of planning terms and other information about wealth structuring and Inheritance Tax planning is available to view in the subscription area at CONTENTS 1. The big picture. 2. Inheritance Tax ( IHT ) and planning. 3. My approach. 4. The planning process. 5. My services. 6. Disclaimer. 1. The big picture 1.1 A comprehensive wealth structuring and inheritance plan should be developed before any specific action is implemented. 1.2 If you own assets located overseas this requires a global plan. 1.3 Wealth structuring and inheritance planning involves putting and then keeping your house in order. 1.4 This requires: preparation by you of an inventory of all your assets (in England and overseas), including: approximate values; and location; the assembly review and filing of all documents potentially required by: 2

3 (i) your executor and accountants for probate; and (ii) for the making of any s.8a Inheritance Tax Act 1984 ( IHTA 1984 ) claim by the personal representatives of your spouse on his/her death if he/she survives you (see the Planning Note about Transferable NRB s ). These documents may include: documents that evidence your domicile; relevant tax and accounting records (going as far back as your accountants require), including details of any: (i) IHT exempt transfers, particularly under s.21 IHTA 1984 (normal expenditure out of income); and (ii) other lifetime chargeable transfers (including potentially exempt transfers); current statements about bank and building society deposits; property ownership information and registration documentation, i.e. HM Land Registry office copies for any registered land (including any registered lease) in England; documentation for any personal debt or long term liability owed by you, e.g. any outstanding mortgage or personal loan; documentation for any debt owed to you, e.g. any loan made by you (including the amount of your director s loan account in any privately owned company); documentation about any capital account balance in a partnership; asset insurance policies; life-insurance policies; documentation about any death in-service benefit, and sums payable under retirement, annuity, and pension policies (including any ancillary trust documentation); share certificates; investment bonds and certificates; a family constitution; 3

4 a shareholders agreement; a share option agreement; a partnership agreement; a trust deed, and ancillary documents; a foundation charter (and constitutional documents for any other foreign legal entity); a will (including a foreign will); a letter of wishes; a codicil; a power of attorney; and any documents that are relevant to the making of an application by the executor of your will, under s.8a IHTA 1984, following your death. These include: (i) your former s deceased spouse s will; (ii) any codicil; (iii) any form and accounts submitted to HMRC by the executor of your former deceased spouse; (iv) any subsequent correspondence with HMRC and documents issued by them; and (v) the grant of probate of your former s deceased spouse s estate; please read the planning note about Transferable NRB s ; a factual analysis and periodic review of your actual domicile, and deemed domicile status for IHT; house-cleaning, which includes taking advantage of available tax amnesties and disclosure routes; life-time planning, e.g. the legal structuring of property ownership to optimise: privacy (whilst ensuring full regulatory compliance); asset-protection (e.g. to shelter family assets in the event of divorce); and tax-efficiency; the execution of a tax-efficient will, and letter of wishes (if desired and appropriate), in each fiscal jurisdiction in which assets are located; the execution of a power of attorney in each fiscal jurisdiction in which assets are located (if desired), which in England would require the execution and registration of a lasting power of attorney ( LPA ); 4

5 1.4.8 the execution of a living will (if required); the execution by a spouse or civil partner of a pre-nuptial agreement (if required); the execution by a dependant, of a contractual waiver of rights under the Inheritance (Provision For Family Dependants) Act 1975 (if required); for any person who is resident in England but actually domiciled elsewhere (even if deemed domiciled in England for IHT), life-time planning to mitigate capital gains tax, and ultimately IHT, by using for example an offshore excluded property trust; and for global families with assets located in more than one jurisdiction, overseas business interests and international trading operations, international corporate tax planning to reduce the family s overall tax bill, e.g. by corporate migration to a low tax jurisdiction, such as Austria. 2. Inheritance Tax and planning 2.1 An individual who is actually domiciled in England (or deemed domiciled for IHT) is liable to IHT on their worldwide assets wherever located, whereas a foreign domiciliary ( non-dom ) is only liable to IHT on chargeable property located within England. 2.2 Therefore the pivotal factor in IHT planning is an individual s domicile. 2.3 The rules that apply to determine a person s domicile for IHT may change during their lifetime, as may their settled intentions. 2.4 Where the effectiveness of an individual s planning strategy hinges upon their domicile, the status of that person s actual and fiscal domicile needs to be ascertained and periodically reviewed. Please read the Planning Note about Domicile. 2.5 Documentary evidence also needs to be assembled and kept in case their domicile status is challenged by HMRC. 5

6 2.6 IHT is a cumulative wealth tax charged on the value transferred by a chargeable transfer made by a person: during their lifetime (at the rate of 20%); and on death (at the rate of 40%). 2.7 In the tax year that started on the 6 th April 2013 ( 2013/2014 ), the first 325K of chargeable transfers made by a person in any seven-year period is taxable at nil%. This is known as the Nil Rate Band ( NRB ). The rate of 325K has been frozen by the Coalition Government until The amount of a person s NRB becomes fully replenished every seven years. 2.9 Therefore in calculating IHT due on a person s chargeable transfers of value, their available NRB must be ascertained This requires aggregation of a transfer on death or during their lifetime, with all chargeable transfers made by them within the previous seven years The amount of IHT chargeable on death is subject to all available IHT exemptions and reliefs, and depends upon: the aggregate of all chargeable life-time transfers and potentially exempt transfers ( PET s ) made by a person within the previous seven years; and whether the recipient of the gift is an exempt beneficiary (for example a spouse or civil partner), or a non-exempt beneficiary (for example a child or grandchild) IHT must be paid before a person s remaining estate can be distributed, and delay in payment gives rise to penalties It is an urban myth that payment of IHT is voluntary When effective inheritance planning is not undertaken, there can only be one outcome. IHT is not philosophical. By analogy to the laws of physics it is more like the force of gravity, and the amount of wealth accumulated by a person during their 6

7 lifetime remaining available for distribution after payment of IHT, will be significantly less If a person does not leave a will the Intestacy Rules apply, which can produce peculiar and unintended results (particularly for the surviving spouse) When a person pays for a wealth structuring and inheritance plan that results in the drafting of a tax-efficient will, what they get in return is the preservation and effective management of their personal wealth for the benefit of their surviving spouse, descendants, and future generations. This can save substantial amounts of IHT and result in asset protection The development of a comprehensive wealth structuring and inheritance plan requires a holistic approach The planning process is labour intensive, and the provision of professional advice involves high standards of client care and technical expertise, all of which comes at a cost Rule 2.1 of the Code of Professional Conduct of the Society of Trust and Estate Practitioners (see requires that, a member shall at all times perform competent work for his or her client. Competent work requires the knowledge, skill, thoroughness and preparation reasonably necessary to perform the work, as well as performing the work conscientiously and diligently in a timely and cost-effective manner Rule 2.3 further states that a member should not undertake work for a client if he or she is not competent to handle the work, or is not able to become competent to perform the work without undue delay, risk or expense to the client. Where a member feels he or she is not competent to handle the work, the member should either decline to act, or obtain instructions from his or her client to retain or consult with a practitioner or other advisor who is competent to perform the work Mandatory Money Laundering due diligence must also be fully complied with. 7

8 2.22 Failure to comply by a Solicitor or Barrister is professional misconduct, and can result in the imposition of criminal sanctions (including fines and imprisonment), and in disciplinary action (including striking-off) Compliance requires thorough due diligence to be completed before any legal advice is provided Because a comprehensive wealth structuring and inheritance plan is likely to save substantial amounts of IHT, the cost of obtaining proper professional advice can be viewed as an investment It is perhaps the single most important action a person can take during their lifetime to: preserve family wealth for the benefit of future generations; and secure an enduring legacy of the sum total of a lifetime of work and saving The costs of developing a plan will be reduced if you read the Planning Notes and Will Check-List available to download at and then provide me with comprehensive information and documents in reply to all relevant questions in my Inheritance Planning Questionnaire (see below) The questionnaire equips you to ask me about anything you do not understand, and enables me to focus on the strategic issues upon which the development of a comprehensive and effective plan hinges That is where my professional advice can create and add maximum value. 3. My approach 3.1 My approach to Inheritance Tax planning is to maximise the use of all available tax reliefs and exemptions in other words to play by and within the rules. 3.2 In my view aggressive and artificial tax-planning schemes are red rag to a bull, and are likely to be challenged by HMRC. 8

9 3.3 If they fail, then intrinsically linked planning including for example, privacy and asset-protection planning, may collapse along with the rest of the house of cards. 3.4 Such schemes are therefore not a solid foundation on which to plan for the preservation and effective management of the family s wealth. 3.5 Schemes however, need to be distinguished from planning arrangements that amount to lawful tax mitigation. 3.6 There are also financial products and investments that play an integral part in achieving certain outcomes. However these should not be considered in isolation, as they may restrict the availability of other planning options (e.g. the use of pilot trusts), if they result in the reduction of a person s fully available nil rate band. 4. The planning process Preliminary administrative formalities. Planning meetings. Subsequent planning actions. Decision making meetings. Implementation actions. Review meetings. 4.1 Preliminary administrative formalities My terms Before commencing work I will agree my work scope, and fee structure for inclusion in an agreement to be signed by the instructing professional advisor (the Agreement ). My standard terms of engagement (which contain client care information required by the Bar Standards Board) are available to view at Throughout the time my services are engaged, invoices will be issued monthly and are payable within seven days. Disbursements are payable in advance on account. 9

10 Estimating likely costs and time-scales in the development and implementation of a wealth structuring and inheritance plan, is like trying to accurately guess the length of a piece of string. Subject to events outside my control (including the timely and complete disclosure to me of any information I may request from e.g. your accountants or solicitors), I will try to provide an approximate time estimate for each stage of the work. This will not be a quotation. However, just like a house-builder cannot assume the risk of providing a fixed price for building to a specification that has not been fully developed, agreed and priced, I cannot provide an estimate for an entire planning exercise at the outset. Likewise, if you change your requirements, I will charge for any additional time and disbursements incurred. I am not required to be registered for VAT therefore the only charges billed are time-costs and disbursements. When I am instructed to advise a married or unmarried couple, or a family, it is my practice to interview each person separately. Each person will need to complete a separate questionnaire for discussion with me (see below) Money laundering compliance By law I am required to undertake money-laundering compliance and cannot provide legal advice until I have been provided with all of the information I request in order to comply Inheritance Planning Questionnaire Discussing a case commences with the completion of a fact-finding Inheritance Tax Planning Questionnaire. My standard Inheritance Planning Questionnaire (in PDF format) can be viewed at The completed questionnaire will form the basis of subsequent investigations and confidential planning discussions with you until key issues (including the following) have been properly investigated and ascertained: (i) your domicile (and future plans); 10

11 (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) (xi) (xii) (xiii) (xiv) (xv) the composition, nature, ownership, value, and location of your assets (including any life-insurance policies, death in-service benefits, and sums payable under retirement, annuity, and pension policies); your debts and liabilities; your life-style, needs, and income; approximate calculation of the amount of cash you earn each year which you do not need to pay for your lifestyle and needs; your family and dependants (including their age, domicile, needs, plans, resources, and the state of their relationships with you and with each other); how your estate is to be distributed on death (including any personal gifts e.g. of jewellery, furniture, art, cars, any other chattels, and of land / buildings); your choice of executors and trustees; your choice of guardians and protectors (if required); approximate calculation of your unused NRB (including the percentage of any transferable NRB inherited from a former deceased spouse), which requires tracing both your own history of giving within the last seven years, and that of any former deceased spouse in the seven year period before her death (and sometimes further back); approximate calculation of the amount of IHT payable on your death if you die intestate (as a bench-mark for comparison); the potential availability of any IHT exemptions and reliefs; the existence of any regular pattern of giving; any potentially excluded property; and approximate calculation of your net residuary estate available for distribution. Please note that a separate questionnaire needs to be completed by your spouse and by any other adult member of the family I am separately advising. 4.2 Planning meetings The usual agenda is: 11

12 4.2.1 administrative formalities: the signature of the Agreement; and money laundering compliance due diligence; discussion of your questionnaire; discussion of any general planning questions you may have about, for example: the terms: income and capital beneficiaries; trust; life-interest; life-tenant; and remainder man; mental capacity; fiscal domicile and residence; the mechanics of the transferable NRB; chargeable transfers of value; legal title and beneficial ownership; joint-ownership of property as tenants in common or on a legal and beneficial joint-tenancy; tax evasion, avoidance, and mitigation; any potentially available IHT exemptions; the operation of the reservation of benefit rules and pre-owned assets tax; any potentially available IHT reliefs; capital gains tax ( CGT ), and the relationship between CGT and IHT; stamp duty land tax ( SDLT ); trusts and the taxation of trusts; trustees duties and powers; lasting powers of attorney; disclosure routes and tax amnesties; and will/ trust planning techniques, including the use of: (i) (ii) (iii) (iv) discretionary trusts; gifts of chattels; gifts of excluded property; gifts of residue; 12

13 (v) (vi) (vii) (viii) (ix) (x) legacies and devises; options to purchase; pilot trusts; tax privileged trusts; specific gifts of property qualifying for agricultural property relief or business property relief; and survivorship clauses; brief explanation: of the extent of testamentary freedom under English law, and the potential for a claim being made by a dependant and certain relatives, within six months of your death, under the Inheritance (Provision for Family and Dependants) Act 1975; that jointly-held property will pass outside your estate by survivorship; that unless specific provision is made in your will, a gift of a specific item will fail under the legal doctrine of ademption, if during your lifetime it: (i) is sold; or (ii) changes in substance; that unless your will provides otherwise, in the event that the recipient of a gift predeceases you, most gifts made in your will to that person will fail under the legal doctrine of lapse, and either: (i) fall into your residuary estate (i.e. to be distributed to the residuary beneficiaries); or (ii) pass under the Intestacy Rules; about provision in your will for the making of a gift over (or substitutional gift ); of the incidence of taxation; grossing-up ; and that unless your will provides otherwise, a beneficiary who takes property subject to a debt, will take it subject to that debt (and that particular care is required where life assurance is linked to debt); that payments from pension funds and insurance policies written in trust for beneficiaries, will pass outside your will; and 13

14 about the scope of s.142 and s.144 IHTA 1984 (post-death variations and automatic reading-back). 4.3 Subsequent planning actions Written confirmation of your instructions Any further fact finding and due diligence Legal research ing a written Inheritance Tax Planning Report to the instructing professional advisor that sets out my comprehensive recommendations for discussion with you. 4.4 Decision making meetings Meeting to discuss the written report and explain your options and my recommendations Meeting to discuss your instructions, followed by written confirmation. 4.5 Implementation actions Preparatory transactions carried out by your solicitor These may include: severance of a legal and beneficial joint-tenancy; an application to HM Land Registry e.g. to register a property in jointnames as tenants in common; terminating a trust and drafting the necessary trustee resolutions and deeds of appointment; the re-structuring of agricultural and business property, involving for example the constitution of a farming partnership and transfers of land; and the constitution of an offshore: foundation; trust; underlying company; and limited liability partnership Drafting documents 14

15 4.5.3 Submission of documents for checking and approval with an explanatory note Amendments Execution of documents 4.6 Review meetings Planning assumptions can change over time, for example in relation to: a person s actual and deemed fiscal domicile, and fiscal residence; a person s wealth, the nature and ownership of their assets, and asset values; the stability of a marriage at both the level of (a) that person with their spouse; and (b) between their children/grandchildren and their respective spouses; the age, character, abilities, and needs of a person s intended heirs; and the prevailing fiscal environment, and political climate Tax legislation may also be introduced with retrospective effect, for example the Pre-Owned Assets Tax Therefore the implementation of any wealth structuring and inheritance plan (and in particular the drafting of a tax-efficient will) should be reviewed periodically, and in my view at least once every two years, unless there is an intervening seismic event Review is also an opportunity for professional advisors to discuss, update, and assemble documentation and records required for probate and for the making of a claim under s.8a IHTA 1984 by the personal representatives of the surviving spouse after the second death. 5. My services I am licensed to exercise rights of audience in all courts and proceedings in England and Wales and provide litigation advice and advocacy services in relation to: 15

16 will and trust disputes (including settlement through mediation); professional negligence claims in the Chancery Division of the High Court against financial advisors, accountants, and will writers (Inheritance Tax advice, estate planning, and will drafting); and Inheritance Tax appeals in the Tax Chamber. I also provide legal opinions about: domicile; and the construction and rectification of wills and trusts. and work with firms of chartered accountants and CTA s who specialise in capital tax planning to jointly: develop bespoke family inheritance plans; structure the tax-efficient ownership of assets; and draft tax-efficient wills and trusts, shareholder agreements, partnership agreements, and family constitutions. For non-dom clients this includes tax and asset-protection planning using offshore structures that involve the establishment and management of protected cell companies, trusts, and foundations. I am a registered Public Access practitioner and can be instructed directly by a member of the public without the involvement of a solicitor. In a professional negligence claim it may also be necessary for you to instruct a tax expert to provide evidence to the court about the provision of negligent tax advice by for example, a qualified financial advisor accountant or solicitor, to yourself or to a deceased parent. I work closely with a number of expert tax advisers in both Leicester and in the City of London whom I can recommend to you (including experts in tax planning for non-doms). For members of the public my terms are set out in a Public Access Agreement which contains information that a Public Access Barrister is required to provide under the Public Access Rules of the Bar. Please note that before I can provide any legal advice formalities need to be complied with including money laundering due diligence and 16

17 execution of an agreement to engage my services in relation to a specified scope of work. In case you have any questions a copy of my standard agreement will be e- mailed to you before our first meeting. If you decide to instruct me I will specify the scope of work in the agreement and send it to you by post for signature and return to me before I commence work. To contact me please send an to carl@ihtbar.com and I will call you to arrange an initial free meeting subject to location and availability. 6. Disclaimer The information contained in this brochure is only intended as a general guide, and is provided on the basis of no liability for the information given. If you want advice about English law upon which legal reliance may be placed you can instruct me to provide it. Carl Islam