The Changing Landscape of IHT

Transcription

1 The Changing Landscape of IHT 1 st November

2 About me Senior Associate at DMH Stallard LLP, Brighton based Estate planning (pre & post death) Open University degree Society for Trust and Estate Practitioners full member Committee member of STEP Sussex Solicitors for the Elderly

3 Inheritance Tax 40% Death Rate of IHT 325K NRB 100K RNRB

4 Know your Nil Rate Bands Nil Rate Band - 325k Transferable NRB - 325k Residence Nil Rate Band - 175k (by 2020/21) Transferable RNRB - 175k (by 2020/21) A married couple will get up to 1m at 0% IHT by 2020/21.

5 IHT exemptions and reliefs Gifts Charities Spouse exemption Business Relief/ Agricultural Relief Small gifts ( 250) Annual exemption 3,000 Potentially exempt transfers Normal expenditure out of income Charity exemption Reduced rate of IHT 36% Lifetime gifts On death 100% or 50% relief

6 Residence Nil Rate Band the headlines Effective for deaths after 5 th April 2017 Phased in over 4 tax years (increases 25k per year) Tapers 1 for every 2 over 2m Taper tested on 1 st and 2 nd death 2m estate includes exempt and relievable assets Can be claimed even when property sold or gifted Unused is carried forward to 2 nd death Must have a qualifying residential interest (QRI) Must be closely inherited

7 Property of sufficient value Property must have been lived in RNRB only claimed against one property Sufficient beneficial interest To cover transferable RNRB as well Consider using RNRB on 1 st death Multiple properties Capture RNRB at earliest opportunity Avoid 2m taper Downsizing provisions may apply

8 Closely inherited (broadly defined) Children, grandchildren and remoter descendants Step-children (not children of unmarried partner) Deceased s relationship to beneficiaries Spouses, civil partners, widows, widowers Adopted children and Foster children

9 Closely Inherited If deceased owned QRI outright If deceased Life Tenant of qualifying IIP If deceased left to a discretionary trust Beneficiaries can either inherit outright or through a Trust: IPDI Bereaved minor trust Descendants must inherit outright If falls onto further trust then RNRB cannot be claimed Must use section 144 to appoint out to beneficiaries within 2 years Note: executors cannot appropriate to claim RNRB if beneficiaries are a mixture of closely inherited and not

10 Downsizing and Gifts Applies to sales/disposals since 8 July 2015 Three scenarios: Deceased sold and downsized; Sold but didn t buy a replacement property; or Deceased gifted property Must have had a QRI on or after 8 July 2015 and assets to the value of the RNRB to be closely inherited

11 Property why have a Nil Rate Band Will Trust Assets in the Will Trust will increase in value Reduces the value of the survivor s estate Asset protects Allows 3+NRBs to be claimed Takes advantage of Joint Property Discount

12 How does the Joint Property discount work? HMRC accepts that a share of a jointly owned property is not worth the respective % of the whole. Applies 15% discount for jointly owned property that is occupied and 10% for unoccupied property. Husband and Wife have no children House worth 1.2m on first death Increases to 1.35m on second death Wills all to survivor fully spouse exempt on first death Second death: 1,350k - 650k = = 280k IHT

13 Joint Property Discount no children Husband dies with NRB trust Wife dies a few years later Property now worth 1,350k 15% discount 1.2m T W Her share worth 950k Trust receives 382K Property in trust has increased to circa. 400K Wife s estate worth 855k (10% discount) 855k less her NRB of 325k = 530k = 212k IHT NRB trust has saved 68k IHT

14 With a RNRB (with children) Husband dies with NRB trust Wife dies a few years later Property now worth 1.35m 15% discount 1.2m T W Her share worth 950k Trust receives 382K Property in trust has increased to circa. 400K Wife s estate worth 855K (10% discount) Less NRB & RNRBs - 855k - 675k = 180K 40% IHT = 72K IHT WITHOUT THE NRB TRUST: 1,350K - 1,000K 40% IHT = 140k IHT NRB trust saves 68k IHT

15 With a RNRB (estate over 2m) Husband dies with NRB trust Wife dies a few years later Property now worth 1.35m Her share worth 950k 15% discount 1.2m T W Other assets holiday home, investments, contents - 1m Trust receives 382K Wife s estate worth 1,855k (10% discount on property) Less NRB & RNRBs - 1,855k - 675k = 1,180k 40% IHT = 472k IHT WITHOUT THE NRB TRUST 2,350K RNRB tapered from 350k to 175k 2,350k less 2x NRBs, less 175k = 1,525k 40% = 610k IHT ( 138k more tax)

16 If in doubt include a NRB Will Trust Saves IHT in its own right Protects the RNRB Protects from care costs, remarriage or bankruptcy Two years to wind up if not needed

17 Business Relief Must qualify - wholly or mainly for trading, held for 2 years Included in the 2m threshold for RNRB Gift into trust or outright (be careful of clawback) Can mitigate IHT 10 year charge/exit charge on lifetime trusts Claim relief at the earliest opportunity use NRB Will Trusts

18 Planning with the Business Add a BPR trust into the Will: APR & BPR assets APR/BPR Will Trust (+ NRB) Cross Option Agreement or sale of assets Cash in trust on 2 nd death passes IHT free Distributions or loans to survivor Reduces survivor s estate for RNRB 2m test

19 Will Trusts of Residue - Life Interest Trust Life tenant does not need income End right to income (PET) Assets pass to children IHT free

20 Will Trust of Residue - Discretionary Trust Need flexibility? Letter of Wishes Discretionary Trust of Residue Appoint out within 2 years Avoid double To get RNRB IHT 10% to charity 36% IHT Exact amount If unmarried

21 Lifetime NRB trusts Cash Assets with a gain +APR/BPR Land with hope value 650K per couple to avoid 20% IHT Add surplus income Add NRB every 7 years Family trust for generations to come Avoids death rate of IHT Possible to mitigate income tax and CGT

22 Lifetime Trusts - Relevant Property Trusts IHT Regime Entry Charge 20% over available NRB Exit Charge proportion of 10 year period 10 year Charge 6% over NRB Death within 7 yrs APR/BPR clawback Excluded Property Related Settlements Same Day Additions

23 Pensions Age at death of member, dependant, nominee, successor Death before age 75 Death at 75 and above Tax Treatment Any pension death benefits can be paid free of income tax. This includes nominations of lump sum benefits in favour of a bypass trust Beneficiary pays tax on the money they withdraw. Depending on tax status benefits could be taxed anywhere between 0% & 45% Nominations of lump sum benefits to bypass trusts will be taxed at 45% (beneficiary can make a tax reclaim)

24 Pensions Pros and Cons of Pilot Trusts Pros Death benefit can be paid tax free into pilot trust Pilot trust outside scheme rules Trustees are family members/friends/appointed professionals who will have the benefit of a letter of wishes giving them guidance Provide for spouse and descendants Control over ultimate beneficiaries Tax efficient if scheme member under 75 Cons Trust rate of income tax on income going forward If scheme member is 75+ then lump sum subject to 45% income tax (can be mitigated but initial hit makes it very undesirable) Answer may be a flexible letter of wishes