Estate planning for 1m to 5m estates: maximising the benefits of the Residence Nil Rate Band Brooks Macdonald Adviser Academies April / May 2018 John

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1 Estate planning for 1m to 5m estates: maximising the benefits of the Residence Nil Rate Band Brooks Macdonald Adviser Academies April / May 2018 John D. Bunker Head of Private Client Knowledge Management, Tax Page Trusts 1 and Estates, IM Private Wealth

2 Estate planning for 1m to 5m estates: maximising the benefits of the Residence Nil Rate Band Brooks Macdonald Adviser Academies: Technical Presentation RNRB & PDB: major tax changes, Estate planning & working together pro-actively; role of FPs & IMPW RNRB: key basics incl traps for wills Estate planning for 1m- 5m estates: Rethinking use of Pensions and other assets Spouses: planning wills & trusts to avoid loss of RNRB Lifetime gifts to reduce estate below 2m threshold Page 2

3 Irwin Mitchell nationally Page 3

4 Irwin Mitchell Private Wealth Irwin Mitchell Private Wealth comprises 4 national teams: Tax Trust & Estates Wills Trust and Estates Disputes Family and Residential Property Tax Trust & Estates team includes:- Will drafting, Inheritance Tax & Estate Planning; Planning with APR & BPR for farm and business owners; Trusts: advice and drafting to create, vary, re-arrange and wind up trusts; Tax & trust compliance: all the advice, accounting, tax and admin; Estate administration (Probate); International Tax planning, wealth structuring & estate planning for HNWIs; Elderly & Vulnerable Clients: a wide range of services including LPAs & COP. Page 4

5 1.1 Estate Planning for 1m to 5m estates for RNRB Residence Nil Rate Band (RNRB) introduced April 2017 Major opportunity to save IHT But lots of traps & hurdles many unsuspecting clients will not qualify Key focus: 2m taper threshold will deny many RNRB So how can to maximise RNRB? Pension Death Benefit (PDB) tax changes in 2015/17 ties in with RNRB planning So a need to re-think solutions for clients Any estate planning pre 2015 needs review Page 5

6 1.2 Estate Planning: Legal, tax and financial planning Estate planning brings together 3 disciplines: Legal especially wills & trusts, tax planning IHT, CGT, Income Tax, SDLT etc. & financial planning Good for lawyers/tax advisers to work with FPs/IFAs For long term benefit of clients and mutual benefit Work together- where clients recognise value paying, for better results Combining legal, tax planning and financial planning solutions Page 6

7 1.3 Role of Financial Advisers in major tax changes FPs /IFAs have key role in pro-active advice to clients Hope to show key points to flag up for attention with 12 top tips Tax reforms mean new opportunities and new traps Many will assume they get RNRB when they don t Clients don t know what they don t know! So we need to help clients see need for specialist advice Pro-active advice needed To flag up traps or hurdles & potential to save tax with re-thinking/ re-structuring But may need to sell the value of the advice! Page 7

8 1.4 role of IM Private Wealth in these key tax changes We in IM Tax Trust & Estates work closely with FPs / IFAs & Investment managers building long term client relationships - to help achieve aims IM can provide integrated legal and tax planning advice Working with FPs/IFAs, including one-off estate planning advice IM s Tax Trust & Estates team works with other parts of IM Private Wealth E.g. Family Asset Protection service for protecting capital, e.g. from gifts, Page 8

9 2.1 RNRB key basics: Major new IHT Relief New relief for Inheritance Tax (IHT) from 2017/18 Where deceased owned a home see 2.3/2.4 & Left sufficient of estate to direct descendants see 2.5 & No need for specific gift but NB how HMRC treat share of estate see 2.6 & Estate value not over 2m or lose RNRB by tapering see 2.7 & Spouses can C/F unused RNRB to second spouse s estate see 2.8 & Real traps for wills, e.g. grandchildren & unmarried families see 2.9/10 Page 9 9

10 2.2 RNRB key basics: Spouses can leave target 1m! RNRB phased in from April 2017 to 2020/21 Now 125K in 18/19 175K in 20/21 In 2020/21 reach the magic 1m. for spouses! RNRB 175K + NRB 325K = total 500K each Married couple 1 million free of IHT Price: NRB frozen for 12 years to 2020/21. Page 10 10

11 2.3 RNRB key basics: owned residences Where deceased owned a home Has to have been occupied as a residence at some time No need to be main residence includes interests in homes held by life interest trust so aggregable with personal estate Can be 2 interests incl trust but only one property Downsizing addition if sale on/after 8 July 2015 Page 11 11

12 2.4 RNRB key basics: Tip 1 re owned residences Tip 1: Keep net value of client s home under review As can lose RNRB if don t own sufficient equity E.g. in 2020/21» 175K or 350K for 2 RNRB Can you review value of any property interest(s) & Cf. with RNRB available each year, including any brought forward from a spouse?» See 2.8 Page 12 12

13 2.5 RNRB key basics direct descendants Where sufficient estate left to children & remoter descendants = property interest is closely inherited Widely defined including step-children spouses and widows of descendants -if do not remarry Can be closely inherited through some forms of trust: But not a discretionary trust Can vary estate or trust within 2 years of death to achieve result Deed of variation or deed rearranging trust Page 13 13

14 2.6 RNRB key basics No need for specific gift of home No need to have specific gift of property interest HMRC treat property as inherited as per shares of residuary estate E.g. 3 x 1/3 share. If Prop 450K 1/3 = 150K if 1 share does not qualify, HMRC say only 2/3 prop gets RNRB = 300K so if 20/21 waste 50K of RNRB. Cannot put will right through Appropriations - HMRC say Tip 2: Ask for copy of will to see beneficiaries including any mixed estate where some not all - closely inherit Review with lawyers in lifetime, or after death: Worth a quick estimate of estate that is closely inherited In case revision to will or variation of estate needed Page 14 14

15 2.7 RNRB key basics: Tapered withdrawal estates over 2m. If estate exceeds 2 million the taper threshold Lose 1 for every 2 over limit So = no RNRB if estate: 2018/19 = over 2.25m or 2.5m if double RNRB Estate includes aggregated trust interests caught for IHT on death, But disregards all exemptions and reliefs - APR/BPR etc Effective marginal IHT rate on the top slice over 2m = 60% Page 15 15

16 2.8 RNRB basics: Dec d Spouse s Brought-forward allowance Brought-forward allowance If unused by Deceased spouses estate Subject to restriction tapered withdrawal if 1 st spouse s estate over 2m. If one spouse dies after , then double up RNRB even if dec d spouse died pre » 250K 2018/19» 350K 2020/21 Planning issues re whether good to use RNRB on 1 st death See part 4 Page 16 16

17 2.9 RNRB key basics: Traps re grand-children & stepchildren Grandchildren: what gifts in will can claim RNRB? main options: Outright gift, bare trust (no age contingency) or IPDI Any age contingency, Could appoint out absolutely - or on IPDI trusts - to claim RNRB Stepchildren : who are included? Children of spouse or former spouse but not children of unmarried partner So, many wills need to be reviewed Tip 3: Don t be afraid to query will terms e.g. to grandchildren OR step-children & do ask re possible remedies e.g. variation within 2 years of DOD Page 17 17

18 2.10 RNRB key basics: Traps re wills for unmarried couples If want surviving partner to have right to live in home, no RNRB on first death & no spouse exemption On 2nd death, ½ share to 1 st partner s kids = not gifts to stepchildren So no RNRB when capital goes to those children Even if children of the family & can claim v. estate The only RNRB on 2 nd partners gift to his/her own children Perhaps gift ½ share to IPDI for children of first to die Trustees need overriding power of appointment & clear LoW Value in good independent Trustee to ensure all protected Page 18

19 3.1 Planning to maximise benefits of RNRB: Re-thinking planning for RNRB & PDB tax changes If estate exceeds 2 million: loss of RNRB by taper Effective marginal IHT rate = 60% on top slice over 2m Pension fund value doesn t count towards 2m estate limit & Pension Death Benefit tax changes, from 2015/16 = major new opportunity to pass on assets tax effectively : Lump sums, pensions or FAD Tip 4: Anyone about to start drawing on pension: STOP Take advice on RNRB & PDB changes first Page 19

20 3.2 Planning to maximise benefits of RNRB: Estate planning for 1m- 5m estates: Pensions If estate exceeds 2 million the taper threshold Might 1m now go over 2m on death? & could 5m be drawn down to 2m on death? Pension fund doesn t count towards 2m so stop before drawing: Why not use pension as client took out for secure retirement income? If pension left untouched or less drawdown = death benefits passed down more tax effectively = better chance of preserving RNRB. Page 20

21 3.3 Planning to maximise benefits of RNRB : Re-thinking use of assets non-pension assets Tip 5: Can other cash & investments be drawn down to replace pension? Spending capital that would be 40% on death; or 60% marginal rate if in band over 2m Major change for clients who don t like spending capital FPs can show how works with benefit of cash flow modelling To show variables; & E.g. that capital does not run out, lasts to age 95 or..» Use annual CGT exemptions to draw down investments;» Keep ISAs to last, but they are taxable on death; Page 21

22 3.4 Planning to maximise benefits of RNRB : Re-thinking use of assets the end target Estate planning together thinking through options & financial, tax & legal aspects; Needs to draw down while preserving client comfort & security; But ideal if spend capital to avoid 60% marginal IHT rate; Reducing capital to 2m. Planning between spouses: FP s input vital to plan ahead for both spouses, & review on death of 1 st spouse options for 2 nd spouse? Does s(he) draw on pensions or save to pass on PDBs? Page 22

23 4.1 Spouses: planning wills & trusts to maximise RNRB Problem with pre RNRB Will planning Spouses: what is planned in wills on 1 st death? Typical planning pre RNRB: All left by 1st spouse to surviving spouse or an IPDI trust: Spouse exemption + Transferable NRB = 2 NRBs on 2 nd estate RNRB C/F to 2 nd estate Problem: adds to capital on 2 nd death in own name or IPDI trust & combined value = more likely total over 2m threshold So may lose both RNRBs on 2 nd death as a result Also risk capital passed to 2 nd spouse is caught twice 1 st spouse s estate over 2m = lose RNRB 2 nd estate now over limit incl assets from 1 st = lose RNRB Page 23

24 4.2 Spouses: planning wills & trusts to maximise RNRB Wills to help avoid going over 2m & losing RNRB Spouses - big question: to use NRB and/or RNRB on 1 st death or not? either by wills or variation within 2 years of death. Tip 6: Don t forget value of 2 year period to review :» Consider Deed of variation by 2 nd spouse» Or variation of Discretionary Trust If 1 st spouse estate below 2m but 2 nd well over: Use RNRB on 1 st death - as may not qualify on 2 nd death & also NRB to reduce 2 nd estate? If combined estates well over 2m threshold: Use both NRB + RNRB to reduce 2 nd estate?. Page 24

25 4.3 Spouses: planning wills & trusts to maximise RNRB Wills to use NRB on 1 st death: NRB D/T s On 1 st spouse s death: Consider use of NRB by setting up NRB D/T Nil Rate Band Discretionary Trust incl spouse as beneficiary trust not aggregated with 2nd estate But spouse can access if needs; Don t need a D/T to use NRB, but helps 2 nd spouse s security NRB D/T will not use RNRB if kept as RPT So although could leave share of property in D/T Leave sufficient property value in 2 nd spouse s name to use 2 x RNRB on 2 nd death Tip 7: Dust off old NRB D/T s notes they are back! Page 25

26 4.4 Spouses: planning wills & trusts to maximise RNRB Wills to use RNRB on 1 st death: not a D/T Use RNRB on 1 st spouse s death? Must be outright gift or trust for beneficiary who closely inherits But not a Discretionary trust So if whole estate on Discr trust must vary in 2 years of DOD Appoint out absolutely or on appropriate trust Could leave share of property in IPDI trust for children who closely inherit If main home, include spouse as potential beneficiary; Leave sufficient property value in 2 nd spouse s name For 2 nd estate to use own RNRB on 2 nd death Page 26

27 4.5 Spouses: planning wills & trusts to maximise RNRB E.g. Using NRB doesn t need to be a D/T Option A: Roger dies in 2020/21 leaving whole estate value 1.2M, incl his 500K share of home to his wife Sally When Sally dies, a few years later, her estate worth 2.7M incl whole house, now worth 1.4M = no RNRB Cf. option B: If Roger s 1/2 house ( 500K) had gone to children E.g. flexible IPDI trusts, with Sally still a beneficiary No IHT on Roger s death = 325K NRB + 175K RNRB Sally still has 175K RNRB for her estate = 2 RNRBs secured = saves 140K IHT. Tip 8: if not done by will: use of NRB can be achieved by Deed of Variation Page 27

28 4.6 Spouses: planning wills & trusts to maximise RNRB E.g. remarried widows using RNRB Denis and Pamela each widowed in early 2000s, married 2012 Both late spouses fully used NRBs Live together in Denis s house = worth 500K Pamela s old home = worth 400K - let out 450K in total savings 1st to die should leave 350K slice of house to own children So can use their 2 RNRB incl the C/F RNRB from late spouse 2nd to die has own 350K RNRB + 650K NRB + TRNB No IHT to pay m exempt 4 x RNRB between the 2 as both widowed Tip 9: Always check if clients widowed; if widowed or remarried: consider using 3 rd / 4 th RNRB Page 28

29 5.1 Lifetime gifts to reduce estate below 2m threshold If using assets effectively as per part 3, & spouses planned wills effectively as per part 4, & more needs to be done Or little time available e.g. death bed situation? Gifts can bring capital below 2m threshold: Gifts whenever made not taken into account in estate value for 2m calculation Doesn t matter for RNRB that dies within 7 years of gift Even though = a failed PET or chargeable lifetime transfer Page 29

30 5.2 Lifetime gifts to reduce estate below 2m threshold. Death-bed gifts can work the last resort! Death bed planning to reduce estate below 2m NB: Capacity issues NB attorneys can t make gifts without COP approval Lifetime gifts Include terminating life interests in trusts Where trust aggregable with Life tenant s estate if L/T s capacity poor & L/T not trustee If limited options, consider gifting property & paying full market rent Exemption from Reservation of Benefit Worth it if e.g. a terminal illness + limited period Tip 10: If death bed situation arises suggest urgent review re gifts But make sure gifts completed e.g. cheques presented for payment Page 30 30

31 5.3 Lifetime gifts to reduce estate below 2m threshold Clients concerned re asset protection: securing gifts? Many parents concerned re child s relationship Investec report Jan 2017: 1 in 3 parents unwilling to provide financial help to married children due to concerns re children's spouses. Consider use of a trust gift to a trust for children etc. to protect capital & enable different people to benefit; & clients can still retain control! Costs involved may be manageable Page 31

32 5.4 Lifetime gifts to reduce estate below 2m threshold Clients concerned re asset protection: Pre-nups? Parents could offer gift on basis that child completes: Pre-nup (if marrying) or post-nup (if already married) agreement, Must be full disclosure & independent advice and/or Declaration of trust giving child first x on any sale but many details to consider: but can play a part IMPW s Family Asset Protection service protecting capital, incl. from gifts. Tip 11: Encourage clients are ways to protect capital on gifts: trusts & pre-nups etc. Page 32 32

33 Conclusion: Estate planning: FPs etc. asking questions! RNRB: to maximise the benefits, may need to mix: Rearranging use of assets, & lifetime gifts & For married couples review use of NRB + RNRB on 1 st death Estate planning: Legal, tax & financial panning advice FP s & Inv Managers can work with solicitors & tax advisers Be pro-active in raising issues Don t assume any solicitor or tax adviser has advised on this Or that they have all the expertise Tip 12: Don t be afraid to ask questions Even with limited knowledge: may raise a crucial issue & make a big difference! Page 33 33

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