The Calder Group IHT & Asset Protection

the

& the use of trusts to protect your assets

ways to reduce inheritance tax7

The Old Vicarage, Market Place, Castle Donington, DE74 2JB.Phone: 01332 856966 Email:

Website:

introductionPut simply, anyone who is affected by IHT can take some simple but highly effective steps to LEGITIMATELY avoid the tax, at limited cost and inconvenience to themsleves.

Inheritance Tax (IHT) is a tax that many people don’t believe affects them or simply feel it is something that only the rich and the elderly need to be concerned about. However, this is certainly not the case and could not be further from the truth.

The starting point at which your Estate will begin to pay IHT is £325,000 if you are single or divorced or £650,000 if you are married, in a civil partnership or widowed. These amounts are referred to as the nil rate bands.

Everything in your estate over and above your nil-rate band, including the value of your house, savings, investments and assets is subject to 40% tax when you die. That’s 40p out of every pound you own - or £400 out of every £1000!

These “nil-rate” amounts may sound high, however with a dramatic increase in house prices over the last few years, you may be surprised at how much your estate is actually worth.

There is a further position that is often overlooked: IHT has to be paid before “probate” is granted after someone dies and within 6 months of their passing. The executors of the estate often need the probate application agreed to release the assets to pay the tax, hence the classic conundrum of how do the executors pay the IHT prior to paying the inheritance tax.

Reassuringly there are many ways to mitigate and even ultimately reduce the potential IHT liability to ZERO and this guide will cover a small selection of these options which we call the “7 ways to reduce inheritance tax.”

In the 2015 Summer Budget the chancellor announced a new “Main Residence Nil-Rate Band” which will come into force in

2017 providing everyone with £175,000 of additional Inheritance Tax allowance by 2020. Qualifying residential interest will be limited to one residential property but personal representatives will be able to nominate which residential property should qualify if there is more than one in the estate.

It will be possible for spouses and civil partners to transfer any unused proportion of the main residence nil-rate band in the same way that the existing nil-rate band can be transferred.

If the net value of the estate is above £2 million, the additional nil-rate band will be tapered away by £1 for every £2 that the net value exceeds that amount.

It was also announced that the main nil rate band would be frozen until the end of the 2020/21 tax year. The freezing of the main nil-rate band will increase the importance of IHT planning as more families are drawn into the IHT net through wealth inflation (leaving residences aside).

The main residence nil-rate band will enable the Chancellor to claim that a £1 million nil- rate band has been achieved and will undoubtedly take some families out of the IHT net. However, house price inflation may mean that the benefits of this additional nil-rate band will be gradually eroded.

This may sound glaringly obvious however a recent survey found that 60% of UK adults had NOT made a Will and even more alarmingly more than 67% of married couples had NOT made wills either!

Many people be they married, registered civil partners, single, divorced or widow or widower, still believe that on their death their whole estate will automatically pass to whom they want without the need of a Will - but in fact, depending on the size of your estate, a spouse may only inherit the first £250,000 and the rest may pass to your children. An unmarried or unregsitered civil partner has no automatic rights to your state at all.

Furthermore a Will not only provides legal ways of helping to reduce or avoid Inheritance Tax, but helps to ensure that as much of your wealth as possible is retained by your family and that your ‘wishes’ are carried out.

Writing a Will has multiple benefits but can be the starting point for making sure effective gifts are made (i.e ones that do not incur IHT) and making sure that the relevant money and assets end up in the right hands at the right time.

For example, someone with £900,000 in assets who has no Will could easily find that much of their money ends up in the hands of the Crown and not with their preferred beneficiaries - Writing a Will can easily rectify this.

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If you wish to discuss how to do this, contact us to arrange a consultation.

In addition, you can give as much as you like to charities or political parties and these gifts will be exempt from IHT.

More realistically and probable is that you give your assets away to loved ones; does this take the money away from the tax man?

NO! Gifts are not automatically exempt, you may need to live for 7 years after the date the gift is made and some gifts may even attract IHT in your lifetime.

Gifting money is still probably the most effective way of discharging an IHT liability, but only when the right amount is given in the right way at the right time.

Simply handing over a sum to a loved one is not IHT avoidance, it could easily be caught up in the IHT rules; it may attract immediate IHT and/or affect later gifts that you may wish to make.

A far better alternative to this course of action is to utilise Trusts to achieve this aim, and later in this guide the many advantages to trusts will be outlined.

So gifting is an effective and worthwhile step, but for any amount above the amounts you can gift IHT free every year then you must explore gifting under a suitable Trust to protect your overall IHT position.

This may sound outrageous and some what ridiculous, however under current legislation there is no limit on how much you can simply pass to family members or any individual you choose.

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However there are several ways to actively construct debts to reduce the value of an estate and alter the amount of your estate that is potentially liable to IHT. Whilst this may be attractive to some, it is often an uncomfortable concept for many and other alternatives are sought. But where a case can be made for construction of a debt arrangement it can be highly effective.

One example would be the simple mechanism of a couple raising funds against their property through some form of Equity Release. This creates a debt on the Estate whilst creating a sum of money for the couple to use as “an asset.” If the sum raised is then placed in an appropriate trust, then the asset can be taken out of the Estate whilst the debt is left in the Estate.

If they now raise an Equity Release loan of £200,000 on their property and place the money into some form of Trust and after seven years the loan has risen to £300,000 outstanding and there have been no other increases in their asset values (or changes to the nil rate bands) then their liability will be wiped out. Provided the value of the trust assets increases in line with the rising debt then the liability to IHT is now zero, meaning their heirs will inherit £120,000 more.

WarningThis is a great piece of theory but it is riddled with underlying assumptions and practical implications which have to be carefully considered and weighed up. In many scenarios this is a workable plan, but in line with all the other points in this document, do not make a decision without first seeking specialist advice from an independent source.

Debts can be used to effectively reduce the value of the Estate on which the 40% tax charge is levied, reducing IHT liability.

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the simplified example will explain further...

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IHT Liability

£120,000

House Value

£650,000Investments / Savings

£200,000Other Assets

£100,000Liabilities

£0

Certain investment wrappers fully approved and endorsed by Her Majesty’s Revenue and Customs (HMRC) include Enterprise Investment Schemes (EIS) and the use of shares on the Alternative Investment Market (AIM).

Whilst the tax breaks offered are without doubt attractive, the underlying investment risk may often preclude investors who are more concerned with the protection and preservation of their investments.

However where the risks are properly understood and weighed up, an investment into one or more of these areas can have huge benefits. An EIS or AIM based investment may also have tax benefits, such as income tax relief and Capital Gains Tax (CGT) advantages.

An investment into an EIS (of £100,000 for example) may take this sum out of the IHT reach (saving £40,000). It also may preclude any growth from IHT (so if the investment increases by 50% in value the growth of £50,000 is free of IHT), the £100,000 may get income tax relief (£20,000 at current rates – subject to the investor having the requisite level of income) and any growth may be free of Capital Gains Tax. Furthermore if the investment goes wrong any loss may be offset against other Capital Gains or Income later down the line.

You can invest in several different vehicles to mitigate IHT; these can be within many varieties of trust based solutions, some of which offer the prospect of removing the amount invested within 2 to 7 years.

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If you wish to explore this area, simply contact us and one of our affiliated experts will be happy to discuss your options with you.

Annual exemptionEveryone can give away £3,000 exempt from IHT in any one tax year. It doesn’t have to go to one specified person, but the total must not exceed this figure. Also, if you have not used the previous tax years allowance you could potentially back date the allowance, so in effect you could gift £6,000 to begin with.

Marriage gifts exemptionEach parent can give a wedding gift of up to £5,000 to each child when they get married at any time before the wedding day. If it is your grandchild, you can gift them up to £2,500 each and for other family members or friends you can give up to £1,000.

In addition, you can also make gifts utilising your annual exemption to the same person. So potentially a parent could give their child up to £8,000 in the year they are married (£5,000 marriage gift and £3,000 annual exemption).

Small gifts exemptionYou can make any number of gifts to different people up to the value of £250 each in a tax year. However, if an individual gift exceeds this £250 threshold, this gift must be deducted from your £3,000 annual exemption allowance instead.

Are there any other gifts you can make?In addition to the allowances mentioned above, you can make direct gifts of cash, shares or other items of value – referred to as Potentially Exempt Transfers (PET) – and they will be deducted from your estate providing you live for seven years after the date of transfer.

Chargeable Lifetime Transfers (CLT) have created restrictions on how much can be placed into trust arrangements. You can also make as many gifts as you like out of ‘normal’ income, an arrangement which means you can divert income to your beneficiaries as long as you don’t reduce your own standard of living in the process. This is part of the woolliest part of the IHT legislation, so careful steps need to be taken and documented arrangements are advised, but where you can show this to be the case then it is very valuable.

This is particularly useful for high income pensioners and earners.Imagine an individual, aged 70, with total income of £50,000 who needs £20,000 per year to pay for their normal standard of living. This individual could pass over £30,000 per year to beneficiaries under this exemption. If they did this every year for 10 years they would pass over £300,000 IHT free without any issue or affecting any other allowance or tax saving limit.

The government and HMRC allow you to make certain transfers and these are referred to as gifts, and there are many exemptions available as follows:

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The provisions of the trust dictate when and to whom the benefits of the trust will be payable. The provisions also set out the way in which the Trustees can invest or deal with the assets while they have charge of them. The document containing the trust provisions is generally referred to as ‘the Settlement’ or ‘the Trust Deed’.

Trusts are a very effective way of mitigating Inheritance Tax and there are many variations of trusts applicable to the situations of different individuals. The approprate use of trusts can in some cases achieve the optimum position of controlling an individual’s assets whilst simultaneously removing the asset from the grasp of the taxman. However, this process does require a skilled hand, one that only a specialist can provide.

A trust is a legal arrangement whereby one person (the Donor) transfers legal ownership of an asset to other people (the Trustees). Trustees act as ‘guardians’, holding the asset(s) for one or more other people (the Beneficiaries), who are the beneficial owners (the persons who are, or may become, entitled to receive the assets).

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ways to reduce inheritance tax7

Asset Preservation Trust (APT)The APT is a discretionary settlement written as a ‘Spousal By Pass Trust.’ It is specifically designed to deal with Pension and Death in Service benefits.

Any Death in Service benefit can be assigned to the APT, provided that the main scheme from which the benefit derives does not have an exclusion cause (less than 2% of schemes have an exclusion clause). All Personal Pensions, Stakeholders, SIPP’s, Retirement Annuity Contracts, FSAVC’s and money purchase schemes can be held under the trust.

The Asset Preservation Trust (APT) removes the death benefits from the Settlor’s estate. Because the APT is written as a discretionary settlement, the value of the death benefits of the Death in Service and pension that fall into the APT are outside of the Beneficiary’s estate. This has the following effects:

The value within the APT is not liable to IHT on the Beneficiaries•

death, thus the value can be passed down the generations free

of IHT for up to 125 years.

If the spouse is a Beneficiary the assets are protected from the•

“toy boy syndrome”

If the spouse is a Beneficiary, the assets within the trust•

will not be included in any future marriage estates and are

therefore protected against potential losses through future

divorce

Assets within the APT will be protected from children’s divorce•

Assets within the APT will be protected from children’s•

bankruptcy

Assets within the APT will not be included in the Beneficiaries•

estate and so will not affect means tested benefits

Assets within the APT will not be included in an estate valuation•

for local authority Long Term Care valuations & seizure

Discretionary TrustA Discretionary Trust gives the Trustee the “discretion” between Beneficiaries. The trust is set up with the standard three classes of party. The person creating the trust is the Settlor, the person orpersons who are due to receive the proceeds are the Beneficiaries and the person holding the assets is the Trustee.

Under the Discretionary Trust, the Settlor sets out “classes” or “categories” or people who will benefit. These can be “My brother” “My children”, “My wife” etc. but can also be corporations or companies. It will be the trustee’s job to decide who gets what from the trust within the categories.

For example:If you left the proceeds to “my children” the Trustees would have to pass the benefits to your children. However, it would be up to the Trustee to decide how much each child received and when. It is the “discretion” that gives the flexibility that is usually required in the event of death, simply because it is unknown what will be happening at that time.

Long Term Care Trust (LTCT)When dealing with estate planning, many people spend so much time dealing with Inheritance Tax planning that they forget that the potential costs of Long Term Care can be even worse than the costs levied on an estate by IHT.

If your estate is valued over £650,000 (2015/16 tax year), then any amount over this is liable to Inheritance Tax at a rate of 40%. However if your estate is valued at over £23,250 in England, you are liable to meet all of your own care costs. If your health fails, there is no valid claim with the NHS.

Care costs are usually met to some degree from income that people already have, such as a pension or investment income. But very often, these are not sufficient and individuals have to liquidate capital to meet the ever increasing costs of care. Because we are living longer, these costs can go on for many years. In the majority of cases this means selling the family home.

A Long Term Care Trust is a unique and very effective solution to this potential problem.

The general idea of the trust is that a small piece of equity is taken from your home and placed into the trust. Through a series of re-insurance arrangements within the trust the amount that you pay into the trust is returned to your beneficiaries free of any Inheritance Tax (in full if the trust has been in place for 7 or more years or with a reduction of tax otherwise). If, during your lifetime you require care, then the trust will pay a set amount, tax free, to the care provider to either supplement your own payments from income or even to meet the costs in full.

The following are some of the most popular types of Trust and are shown merely as examples of what can be achieved:

Whole of LifeA Whole of Life policy has a sum assured which is paid to the beneficiaries on death. It is written under trust and it will not be added to your estate as the money in the trust doesn’t belong to you – it belongs to the trustees whom you choose. It can be paid beforethe assets are released which means that your Beneficiaries don’t have to wait until probate thus avoiding lengthy delays and potential emotional distress at the wrong time.

Level Term AssuranceLevel Term Life Assurance is designed to provide a lump sum in the event of death during the term of the policy. You can choose the amount of cover that you want and the term so you can ensure your family could potentially settle or continue payments on a mortgage, or other debts, and also maintain their standard of living. If you die during the policy term, your insurer will pay the amount you are covered for and if the policy reaches the end of its term, and you have never needed to make a claim, the cover ceases and the policy has no value.

Sometimes, despite exploring all other methods of trying to eliminate or reduce IHT, there is no option but to simply insure the liability by taking out life assurance to cover the cost of the tax bill that potentially your heirs will have to pay when you die.

There are two main options of a life assurance policy: Whole of Life and Level Term Assurance.

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Inheritance Tax is a complex area that necessitates the services of an FCA regulated adviser. With potential changes to IHT legislation likely in the immediate future, the topical nature of IHT also further necessitates the advice of an appropriate regulated source.

With the aggressive nature of IHT rates, employing the services of a professional adviser would seem justified given the financial benefits that can be gained from reducing IHT liability.

taking specialist advice

Tom BuCK Dip PFS - Director & Adviser

Tom has worked as a financial adviser since the mid 1990’s, starting with the Nat West in Staffordshire and then with various companies in the West Midlands before he formed The Calder Group, determined to create a business focused on providing first class client service.

Tom’s expertise lies in estate planning, ensuring that his clients hard earned assets are passed down the generations and ensuring they are protected from creditors, divorce, bankruptcy and inheritance tax. He also works closely with his clients to ensure that they have sufficient income and capital for their retirement needs using the most appropriate plans for each individual client.

He has talked extensively across the UK, presenting seminars in an informative and entertaining manner as well as being a regular contributor on Saga Radio in the West Midlands, discussing financial matters and answering listeners questions.

Tom is married with two children and enjoys spending time with his family hiking in the Peak District as well as in the mountains of Scotland, Wales and the Lake District. When time allows he makes an attempt at playing golf, has been a lifelong supporter of Mansfield Town FC and loves watching Formula One.

www.thestrattongroup.co.uk

who are the stratton group?The Stratton Group comprises a group of businesses that offer specialist expertise in all areas of taxation, investment and trust planning. The two main companies are Stratton Annettes Limited a totally independent and whole of market financial planning firm that offers entirely fee based financial planning solutions and Stratton House Limited which provides unique tax and trust planning solutions.

who are your customers?Our customers are individuals, families and business owners aged typically 45+ who come to us for advice on how to manage their investments. We also through the use of Trust planning protect their wealth from attack from local authorities, from divorce/remarriage claims and inheritance tax liabilities.

what inspires you?To help each and every one of our clients achieve their financial and personal goals through innovative solutions in tax, investment and trust planning.

what sets you apart from your competitors?We are an independent whole of market solely fee based financial planning service. Our clients trust our wealth of knowledge, wisdom and expertise in estate, tax and investment planning, knowing that we are constantly monitoring economic, political and fiscal changes that may affect their financial affairs.

what has been your greatest business challenge?Our greatest business challenge has been to manage the Group and our clients through the unique and once in a generation challenging times of the banking crisis and huge uncertainty and subsequent recession. We have managed throughout to keep our clients motivated and fully informed.

We pride ourselves on a totally customer driven process and service and this has been invaluable during this period.

What keeps you motivated?No two days are the same at The Stratton Group, it can be both challenging and rewarding. Dealing with clients on a daily basis and helping them achieve their goals gives an enormous sense of achievement. The long term relationships we build and foster makes running these businesses so worth while.

What are your plans for the next 12 months?To continue to deliver our award winning service and provide first class advice. We will be running “Free” public education seminars. Please contact us for details.

Article taken from Business Profile in the August 2010 edition of Cotswold Life Magazine.

NOTES

The Old Vicarage, Market Place, Castle Donington, DE74 2JB.Phone: 01332 856966 Email:

Website:

The Calder Group IHT & Asset Protection

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