Legacy Wills blog

Understanding the Residential Nil Rate Band

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The Residential Nil Rate Band – RNRB – can be quite complicated. However, if you can get a good understanding of it, you’ll be saving yourself a whole lot in inheritance tax. Since when it came into effect in April 6th2017, any deaths after this date can claim the £325,000 rate band. Currently the RNRB is set at £125,000 per person with an expected annual increase of £25,000 every April until when it reaches £175,000. After this figure, it will increase annually in line with inflation.

To benefit from RNRB, you have to possess a Qualifying Residential Interest. A QRI means ownership of a property of a deceased. The residence must have been lived in by the deceased at a point. A Buy to let property does not qualify for the RNRB, only a place the deceased must have lived in. In the event of multiple properties, the executors will settle for which will be the QRI. However, the prevailing value of a house will determine the QRI entitled to.

Another important condition to benefit from QRI is to be ‘related’. The direct descendants, who can either be the deceased’s adopted, biological, fostered or even stepchildren – this may include the grandchildren also. Other descendants include spouses of those children and grandchildren; the widows, widowers or other civil partners of the deceased who are unmarried at the time of death.

RNRB is intended to help the middle class in England and those who are not wealthy. There will also be traps that will surface now or later due to the objectives of RNRB.

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Why UK Parents Are Scared Of Divorce

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Divorce and separation have been on the rise. However, there is bound to be a slow down in the rate of divorce as couples are trying to avoid the complexities surrounding how wealth would be distributed when their spouse remarries. Complexities due to inheritance have increased the number of issues that ends up in court. To avoid this imbroglio, couples are relying on Trusts arrangements to ensure their children gets what belongs to them after their demise.

What is a Trust and How Does It Work?

Simply put, a Trust is a ring fence that around how wealth should be disbursed and shared in the future. As a parent, the most effective way to ensure safe landing is to set up a Trust. With a Trust in place, it doesn’t matter if any of the surviving spouses remarries, the inheritance is still maintained and the stated distribution pattern in preserved. There is an increasing interest in couples considering Trust as a means of safeguarding their assets. Which makes Trust planning a sought after need in the UK, this is despite the posture of the government to Trust taxation.

Position of UK on Trusts

There have been calls for the government to reconsider its stance on Trust planning as it readily fits the modern-day need. Trusts aren’t new, what is new is the renewed interest by people all over the UK. Trusts are having a renaissance and people have to pressure the government to provide a structure for policy formulation towards it.

 

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Top Tips On Reducing Your Power Of Attorney Costs

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Tip 1 – Are You Entitled To Benefits?

There are some power of attorney costs that are available with concessions and
exemptions. For example, if you are in receipt of income support, job seekers
allowance, housing benefits and work-related disability benefit payments.
You can find out whether you are eligible for a reduction or exemption for the power
of attorney costs, from seeking advice from the Citizens Advice Bureau, and you
may also be entitled to financial support from specialist’s funds and other charities.

Tip 2- Bundle Up Requests For Legal Help:
When you are speaking to a legal advisor regarding setting up a lasting power of
attorney, you may wish to discuss other legal issues also. For example, this would
be also a good time to make your Will or to update it. If you also have some assets,
you may want to start thinking about estate planning and looking at legitimate ways
to reduce your inheritance tax,
Tip 3 – Shop Around:
Firstly, beware of the danger of going straight for the cheapest option, as you do not
want to get this wrong. There is no harm with shopping around to get different
quotes, to make things easier, for those needing help with producing a power of
attorney.
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What Could Happen If I don’t Secure A Power Of Attorney

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It’s very unfortunate that people only realise that they should have put a Lasting Power Of Attorney agreement in place when it is too late. In essence, a Lasting Power Of Attorney enables family members and close friends that you trust to make decisions on your behalf, so if you do not legally give them the capability to do so, these decisions will then be made by others.

Your loved ones may or may not have a say, but Lasting Power Of Attorney will grant them permission to actively suggest and carry out tasks for you, in the way you would have wished.

In addition, whilst you plan your future, it is essential to think of Estate Planning, to ensure your affairs will be looked after efficiently. In particular when it comes to mitigating inheritance tax that may be due.

If you are looking for different ways to protect your assets, then you should look at putting your property in a trust. These are the most popular types:

  • Protective Property Trust, which allows you to leave your assets to a spouse.
  • Life interest Trust
  • Interest in Possession Trust

For more information or to discuss your needs, please call John Ireland now

on 0208 547 2583 or email, john@legacy-wills.co.uk

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Reviewing Your Plan For The Inheritance Tax

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Each new year brings all of us the opportunity to examine our future plans for what will be necessary for our future needs in financial and wealth planning.  As we go over our assets and liabilities, we need to be aware of the Inheritance Tax (IHT), and what it might mean to our beneficiaries and our estate.

The IHT has had many changes and modifications over the past several years, and many families are unaware of the potential benefits that they can receive by conducting some simple financial planning for the IHT.  By reviewing your current and potential future financial situation, even families with moderate to high levels of wealth in savings, pensions, and land ownership could protect themselves from a big IHT hit.

From the 2015 to 2021, the ordinary nil rate band will hold steady at £325,000.  In addition to this rate, the potential passing of a family home has been affected by rule changes in the Summer Budget of last year.  The new changes created a situation where property that at any time in the life of the deceased was a primary residence will be subject to a new residence nil rate band.  The band will be £100,000 for deaths occurring after 5 April 2017, and the band increases to £175,000 for deaths occurring after 5 April 2020.

If any potential tax shelters are unused, then they will be available for use by the spouse or civil partner resulting in the potential value of IHT exemptions £1m from 6 April 2020 for a couple.  A major drawback is that estates with an assessed value in excess of £2.2m will not be eligible for any benefits under the new rule changes.  The full 40% liability of the IHT will be assessed on these estates.

Reduce Your IHT

By committing to several smaller steps over a wide range of years, you can improve your results and liabilities in regards to the IHT tax that will be paid upon your death.  One way to help lessen the eventual tax burden is to make sure that every available allowance, exemption and relief is being used.  These are placed in the tax code for your benefit, so make sure you use them.

Gifting

One way to lessen your eventual IHT burden is to gift your assets over your lifetime.  After seven years, these gifts will no longer be eligible to be taxed under the guidelines of the IHT if there is no benefit gained from the gift of assets.

Allowances

There are several other forms of gifting that have IHT benefits.  One is the annual gift exemption which stands at £3,000.  If no gifts were made in the previous year, then the allowance is £6,000.  One kind of gift that can be eligible for use as an allowance is the small gift of £250 per beneficiary.  Another is the marriage gift where you can give children up to £5,000, grandchildren £2,500, and £1,000 to anyone else getting married.  If you look, there are many different tax allowances that can be found.

Using Surplus Income

Do you have extra income just lying around, and you don’t know what to do with it?  There is a way to make gifts out this additional income, and you can avoid the IHT as these gifts are not subject to taxation even if you pass away within seven years.

Inheritance Tax and Gifts

With the Prime Minister making changes to estate taxation, the implications of the Inheritance Tax are on most peoples’ minds.  The government estimates that receipts focused on IHT will increase from £4.6bn in recent years to £5.6bn in 2020-2021.  It is estimated however from research that only 14% of taxable persons are aware of correct IHT thresholds that affect all of us.

According to Octopus CEO, Simon Rogerson, 21% of households with a family income over £50,000 are spending to reduce their IHT tax liability, and 4% of households over the age of 60 reduce their IHT liability through using investments that are shelters from IHT.  Despite all of the talk about IHT, very few people make future financial plans with IHT in mind.

According to the HMRC, the Inheritance Tax is used when a person’s estate is worth more than £325,000 at the time of death.  This rate is for the years 2016/2017 with the estate consisting of a person’s property, money, investments, and possessions.  Estates valued over £325,000 are taxed 40% in accordance with IHT.  If 10% or more of the estate is left to charity, then the IHT rate is reduced to 36% of the estate’s value.

If married and civil partners live permanently in the UK, then they have the option to transfer funds tax free to each other.  This means that when one dies, then the allowance for the remaining spouse or partner can double to £650,000.  This increase would allow most to escape the IHT entirely.

Other ways to limit or avoid the IHT completely is through the use of tax reliefs such as the agriculture relief, a heritage asset, or the woodland relief.  The use of any of these reliefs can be verified through contacting the HMRC.

Military service can also be a tax relief for the deceased’s estate.  If the death occurred while on active service or active service contributed to the death of the person in question, then the estate of the deceased is exempt from IHT as well.

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Find Out How To Lessen Your Tax Bill

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Due to the number of ways you can mitigate your tax burden the inheritance tax is an easy tax to avoid.  One of the best ways is the nil rate band which allows you to leave up to £500,000 to each person without a tax penalty.

For those looking to take care of their families and heirs making use of tax reliefs is acceptable practice in addition to the use of trusts.  Investors looking to make more money can also use EISs and a variety of investment tools for their finances.

The Inheritance Tax (IHT) has become a heavily debated issue in recent years as property, the main asset of many people has begun to gain in value at a rapid pace in recent years.  In the creation of every political budget, pressure from every Budget and Autumn Statement look to make changes to the nil rate band sitting at £325,000 since 2010 as homes and other types of properties were devalued.  As the Inheritance Tax was changed, many people saw it as a way to secure their wealth.

With the benefits of the IHT, financial planners are finding other means to help with estate planning.  One way to help financial planning is to explore using trusts for life insurance.  The idea here is that when the person passes away, the months an estate can be in probate are eliminated and the intended inheritors can access the estate funds right away.  Other ways that the IHT can be avoided is through placing funds in many different kinds of investments that are subject to business property relief which lessens the amount available to IHT.

Finally, look to making multiple gifts to beneficiaries during your lifetime to reduce impact from the IHT.  The only catch here is that if you pass away within seven years of making the gift, there is potential to be subject to the IHT tax liability.

 

For more information or to discuss your needs, please call John Ireland now

on 0208 547 2583 or email, john@legacy-wills.co.uk

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Planning For The Inheritance Tax

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There are many ways to limit the tax implications from the Inheritance Tax (IHT).  This article will explore the means through which the tax can be minimized or even avoided all together.  Children, charity and tax shelters are all viable means to limit the IHT on your will.  No one wants to give 40% of what they worked their entire lives for away in taxes.  Learn what you can do now to limit the tax bill later.

Planning for the IHT

At current rates, anyone worth more than £325,000 will be subject to IHT as of the 2017/2018 fiscal years.  This means that if you own a house and have even a limited savings, life assurances, and other assets, then there is a good chance your estate will be vulnerable to the IHT.   Even gifts that you make during your lifetime might be liable if they were made within seven years of your passing.

 

What is the IHT?

When a person living in the UK passes away, their personal wealth is subject to the IHT in conjunction with all of the gifts and bequests that the individual made in the seven years prior to their death.  Even certain people not living in the UK can be taxed by the IHT as if they were living here.  The individual’s estate can be taxed up to 40%, but there is minimal relief due to a sliding scale for any gift made between 3 and seven years of death.

What You Need to Know About IHT

Before you can begin to understand the IHT, you need to know the current state of your assets and how they might change in the future.  You need to know your own finances and your overall financial security.  Finally, you need to know or have an idea of the future needs of your family or your intended beneficiary.

Your Finances and Security

As you assess your current finances, you need to make sure that you and any spouse are taken care of and have plenty of assets.  This need of assets will become even more important as you enter the retirement phase of life.  You should not be worrying about giving away assets if you are going to need them.

The Needs of My Family

Your family is very important to you if you are looking into how to leave them the most money and assets possible, but how much control do your kids need of finances that might be transferred to them?  In the chance you die first, you should consider how much money to leave to a spouse so they are taken care of.   All of these considerations and more would be covered by a proper Will and Testament that will be executed upon your death.  Even the assets of your parents and elderly family members need to be considered in your financial planning.

Will the IHT Impact My Business?

If you control a business and own business related assets, then you can expect that a business property relief between 50 – 100% can be utilized.  Agricultural assets that are very similar to the relief expected for another business.

Can You Reduce Your IHT Liability?

In short, yes, you can reduce the IHT Liability.  However, there are many different ways this can be accomplished.  First, keep in mind that smaller gifts made during your lifetime can be completely exempt.  Second, assets given to your spouse and civil partner can potentially avoid the IHT liability.  Annual gifts up to £3,000 for the 2017/2018 Fiscal Years can be exempted as well as an allowance for a gift up to £250 from the previous year if it was not claimed in the gift year.

For more information or to discuss your needs, please call John Ireland now

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Top Tax Tips For Budgets And Bills From The Government

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The country’s tax laws are constantly changing as the Autumn Statements were modified, and the December Statement is expecting to be enhanced as well.  Upon the recommendations of the Chartered Institute of Taxation in conjunction with the Institute for Government and the Institute for Fiscal Studies, a Better Budgets report was made public earlier this year with specific ideas for the better performance of Government.

There were ten recommendations in all.  The first was to adhere to a single principal fiscal event while reducing the number of additional Budget measures.  This recommendation stressed fiscal solvency through sticking to an initial Budget and prevent overspending through the limiting/eliminating additions to the Budget through the year.

Second, there is a necessity to define the principles and priorities of tax policy in a clear and manner.  Creating early statements for the priorities and approaches to the tax system would give Parliament the framework to fiscally responsibility.

Third would be to create a Corporate Tax Road Map model, which were outlined in the Better Budgets report and could be applied across the tax system.  The fourth would be to begin tax consultations earlier in the taxation process to prevent time and money being wasted with consultations that occur when the tax process is in motion and key decisions have been made and implemented.   A fifth idea would be to find more active approaches to consultations in which people being consulted are found before the consultation was necessary and respondents could be polled for their opinions giving valuable feedback.

The sixth recommendation would be to poll the public in order to see where future reforms might be initiated.  Through conducting external reviews via independent means, the policy making process could be improved using more public participation.  The basis for the seventh recommendation is to have the Treasury and HMRC address the potential gaps in the perceived capability of making tax policy.  Allowing insiders who can develop a tax expertise in HMT and policy expertise in HMRC needs to be supported.

The eighth recommendation supports the improvement of internal processes in order to modify the making of tax and Budget policy.  The use of small Budget Cabinet Committees will improve making decisions through a collective means resulting in expert challenges presenting issues and suggesting solutions.  Ninth, the ability of Parliament and the public to review and criticize tax proposals needs to be improved.  The Government needs to provide both Parliament and the public clear documentation of decision-making in order to enhance transparency.  Parliamentary committees working on taxes need to have better working relationships with access to more information from tax experts.

Finally, all tax measures need to be institutionalized and have the ability to be evaluated through post-legislative review.  These reviews need to be efficient and on a regular basis to see if these measures are achieving their goals within proper means.  More data needs to be available to Parliament so that the legislative body can hold the government accountable if necessary.

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Tax Breaks That Are Beneficial For The Married Couple

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Newly passed tax allowances have been missed by married couples.  According to the Freedom of Information Bureau the insurer Royal London stated that over £1.3bn in allowances remain unclaimed by eligible married couples.

In 2015, a new Marriage Allowance was initiated to help married couples to allow any unused tax-free allowances to be transferred to married spouses who are higher earners.  Additional benefits of the allowance were that it was made available to people in civil unions and up to 10% of an unused allowance for an individual could be transferred.

For 2017 alone, this increased access to tax savings would save couples upwards of £230.  Couples who would have used the credit since it’s inception every year would have earned an additional £662 in total tax savings.

For eligible couples, the Marriage Allowance transfers up to £1,150 of a personal allowance to a husband, wife or civil partner as long as they are the higher earner.  This allowance can reduce a tax burden by £230 in the tax year.  The lower earner must earn £11,500 or less, and any claim can be retroactively backdated to 2015.  The couple’s higher earner must be between £11,500 and £45,000 annually.  Couples who receive a pension and living abroad receiving a personal allowance are also eligible.

Steve Webb, Director of Policy at Royal London stated, “The Government has created a tax break specifically designed to benefit married couples and civil partners, but the take-up of the new allowance is shocklingly low

“Even in the third year of operation, around two million couples who could benefit from the marriage allowance are not doing so.  When family finances are so tight, I would encourage every married couple to check whether they might be eligible, including for the last two years, as they could qualify.”

In 2015, the HMRC projected that nearly 4.2 million couples would benefit from the new tax allowance.  However, FOI has provided data that only 2.2 million couples have claimed the allowance to date.  FOI findings were that in 2015 only 644,916 couples claimed the allowance.  Nearly 1.2 million allowances were used in 2016, and just over 2.2 million in 2017.

While more and more couples used the tax allowance every year, this result means that two million couples are still eligible, but they have not yet claimed the allowance.  If these two million couples would retroactively apply for the allowance of £662 per couple then the total tax savings from allowance use would be £1.3bn.

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The Business Trust – A Guide

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The Business Trust arrangement allows full advantage of 100% Business Property Relief (BPR) to be taken. It can also be used where assets qualify for 100% Agricultural Property Relief (APR)

BPR and APR are extremely valuable relief’s for Inheritance Tax (IHT) purposes in that most cases the shares or interest in a business will qualify for 100% relief from IHT without any upper limit. This means that businesses can be left to future generations without any IHT liability arising.

Unfortunately in many cases these generous gifts can be wasted since on first death the shares or interest in the business is frequently left to a surviving spouse. Whilst this may not cause a problem where the spouse intends to retain an interest, where the intention is to sell, an IHT liability can arise on the death of the spouse. The Trust is therefore particularly useful if a there is a business protection arrangement in place whereby the remaining shareholders or partners are likely to buy the shares or interest.

Take the following example:

Andy, Bob & Charlie are all equal shareholders in an unquoted company worth £750,000. To provide a smooth buyout for the company’s shares they have each taken out life assurance policies for £250,000 on their own lives and placed each policy under a Flexible Business Trust for their co-shareholders.

They have then entered into Cross Option Agreements which state that the surviving shareholders have the option to purchase the shares in the business from the personal representatives if one of the shareholders dies. Similarly the personal representatives have the option to sell the shares to the other shareholders. As the business is a trading company and the shares have been held for at least two years, it is anticipated that 100% BPR will apply. All the shareholders are married with children and their Wills currently leave all their assets to their surviving spouses.

1. Andy dies first and the proceeds from his policy pay out to Bob & Charlie.

2. Bob & Charlie use these proceeds to buy the shares from Andy’s estate.

3. Andy’s personal representatives then pass the cash received to his widow, Denise.

4. No IHT applies due to the spousal exemption.

5. However, when Denise dies, the proceeds from the sale of the shares are part of her estate.

6. IHT liability on second death therefore is £250,000 x 40% i.e. £100,000, assuming the nil rate band has been used by other assets.

How can the Business Trust help?

Andy could have established a Business Trust in his Will and nominated that the shares in the business should be held in trust for his wife/children. The IHT liability on second death will be as follows;

1. Andy dies first, the shares he owns pass into a Business Trust for his beneficiaries and the proceeds from his policy pay out to Bob & Charlie as before.

2. Bob & Charlie use the proceeds to buy the shares from Andy’s beneficiaries Business Trust .

3. The personal representatives then pass the cash received to the trustees of the Business Trust to hold on Trust for the children of the named beneficiaries.

4. No IHT applies on the transfer to the Trust due to the availability of 100% BPR at the time of Andy’s death.

5. The Trustees can use their discretion to pay or lend funds to Denise, Andy’s widow.

6. Since the value of the Trust fund will not be treated as part of the Denise’s estate, then on her death, the IHT liability on the proceeds from the sale of the shares is nil. Any loans made to her from the Trust will reduce the value of her own estate.

What is the IHT position on Andy’s death?

Assuming that under the Business Trust Andy’s children are entitled to income from the Trust fund (and therefore have the interest in possession) on Andy’s death, the transfer will be treated as having been made from Andy to his children. Although this potentially incurs IHT, no charge arises where full 100% Business Property Relief is available.

How are Trust assets used for the benefit of Andy’s widow?

Subsequently, as and when Denise requires cash from the Trust, the Trustees, and Denise can be a Trustee, can make irrevocable appointments of capital to herself and pay the necessary cash.

Alternatively, it may be more IHT efficient for the Trustees to make loans to Denise. These can be interest free if interest is charged on the loan it will be Trust income payable to Andy’s children and liable to income tax at personal rates.

For more information or to discuss your needs, please call John Ireland now

on 0208 547 2583 or email, john@legacy-wills.co.uk

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