The government has launched a Homeowners Mortgage Support scheme (HMS). This scheme enables eligible borrowers to defer a proportion of their interest payments for up to two years, with the government underwriting a proportion of the lender’s ultimate risk of loss.
The Home Builders Federation (HBF) commented recently that the announcement by the government on zero carbon homes is necessary in providing homebuilders with greater clarity on the definition of zero carbon.
Once you take out any kind of mortgage, it’s very important that you make all the repayments in full, and on time. If you fail to do so you could lose your home and it could also affect your credit rating.
Data form the Council of Mortgage Lenders (CML) confirms that lenders are showing forbearance to borrowers who fall into arrears, and that a range of government schemes is also providing help. They have also lowered their prediction for the number of mortgage possessions this year from 75,000 to 65,000.
Firms offering sale-and-leaseback have only until the end of July to submit applications for interim authorisation from the FSA. If they fail to do so, they will be unable to offer sale-and-leaseback during the period of interim regulation of the market, lasting until the end of June next year. Firms that want to offer sale-and-leaseback and are already authorised by the FSA for other activities still have to apply for an interim variation of permission.
We believe, however, that it is important to distinguish between cases where the tenancy is recognised by the lender (because the landlord has a buy-to-let mortgage) and instances where a tenancy is not recognised and probably not even known to the lender. This can occur if the borrower has a residential mortgage but is letting out the property to a tenant without the consent of the lender and in breach of the terms of the mortgage.
Common estate planning terms
Administration
Dealing with the affairs and estate of a person who has died including collecting their assets, paying their debts and paying the residue to the people who are to benefit.
Affidavit
A document giving evidence which is sworn in front of a solicitor or other person who can administer oaths.
Agricultural Property Relief (APR)
Relief from Inheritance Tax for the agricultural value of some farms and farmhouses (the value if the land and buildings could only be used for agricultural purposes and not the open market value). Various conditions apply including a minimum ownership period.
Beneficiary
A person or organisation who will receive assets from the estate of the deceased.
Bequests and Legacies
Bequests and legacies are names for gifts lefts in a will.
Business Property Relief
Relief from Inheritance Tax for businesses, a minimum ownership period applies and the business or interest in the business must fulfil the conditions.
Caveat
A notice entered at the Probate Registry, for example if you have entered a caveat you will be warned before any Grant of Representation is issued.
Chattels
Assets of a person other than land for example jewellery, ornaments, clothes, cars, animals, furniture and so on.
Charity
A charity is an organisation that has as its aim purposes are exclusively “charitable” (as recognised by law); for example the relief of poverty or promoting education. Charities can be structured in a variety of ways, for example as a company with a board of directors or as a trust fund with a board of trustees. Charities must be for the public benefit. Most charities must register with the Charities Commission. Charities are strictly regulated.
Codicil
An addition to a will which may change, modify, delete, extend or add to a will.
Deed of Variation
A document that can vary the division of a person’s estate after they have died either by changing their will retrospectively or altering the persons entitled on an intestacy (where there is no will or the beneficiaries no longer exist). This must be done within 2 years of the person’s death.
Discretionary Trusts
A trust where the trustees can choose which beneficiaries (if any) should receive income and or capital. They are a flexible way of setting property aside for the benefit of one or more persons.
Domicile
Your domicile will affect whether you pay Inheritance Tax or particular assets and can affect how much Inheritance Tax you pay. Domicile is not the same as residence.
Estate
All the property and assets of the person who has died.
Executor
This is the personal representative who has been appointed by the will or codicil.
Guardian
A guardian will have parental responsibility for any child (under 18) of whom they are named guardian. Parental responsibility means legal authority to act in relation to a child on such matters as medical care, where they are to live, their education, what surname they should be known by. Guardians may be appointed by a parent who has parental responsibility, an existing guardian or the Court. If you name a guardian in your will the appointment may not take effect if your child has a surviving parent with parental responsibility.
Inheritance Tax
A tax on the value of a person’s estate on their death and also on the value of certain gifts made by an individual during their lifetime. You may be subject to Inheritance Tax on all your assets everywhere in the world if you are domiciled in England & Wales. Inheritance Tax also applies to most types of trusts and may be charged when assets are added to or leave the trusts and on the 10 yearly anniversaries of the trust’s creation.
Intestate/Intestacy
The rules that govern where a person’s estate is to pass and who can deal with the estate in the absence of a will.
Joint Tenancy
A way of co-owning land and other property. On the death of one of the co-owners the other takes their share by survivorship. For example if you and your spouse own your home as joint tenants it will automatically pass to the surviving spouse when one of you dies. Your share of your house will not be part of your estate as it passes automatically.
Letters of Administration
A grant of representation on where there is no valid will, or there is a will but no executor appointed.
Life Tenant
This is a person who is entitled to benefit from a trust during their lifetime. They cannot have the capital in the trust fund; they are entitled only to the income or enjoyment of the property for example if the trust fund was a house the beneficiary would be entitled to live there.
Personal Representative
The person who is dealing with the administration of the estate of the person who has died.
Potentially Exempt Transfer (PET)
This is an outright gift lifetime by an individual to another individual or certain types of trusts. If the giver (donor) survives the gift by 7 years it will become completely exempt from Inheritance Tax, and will be outside the donor’s estate for the purposes of calculating Inheritance Tax.
Power of Attorney
This is a formal document giving legal authority from one person (the donor) to another (the attorney) so that the Attorney may act on behalf of their principal. Power of Attorney may be an ordinary General Power or it may be a Lasting Power of Attorney.
Lasting Power of Attorney
A Lasting Power of Attorney can relate to your property and affairs or your personal welfare i.e. decisions about your medical treatment. In order to make a Lasting Power of Attorney you must have mental capacity to do so which must be certified by a certificate provider. An ordinary General Power of Attorney will come to an end if you lose your mental capacity but a Lasting Power of Attorney will not.
Probate (Grant of)
The ‘Proving’ of a will by sending it to the Probate Registry.
Residue
The remainder of the estate of the person who has died after all their debts have been paid and any specific gifts they make under their will have also been paid.
Revocation (of will)
This is the process by which someone cancels or takes back a will (or codicil) made previously when they no longer intend that will to take effect. The Testator (person who made a will or codicil) must have mental capacity to revoke the will (or codicil). The effect of revocation is that any earlier will is resurrected and will take effect as if the later cancelled will does not exist. If there is no previous will then the person revoking their will becomes intestate. Most new wills contain an explicit clause stating that they revoke any previous wills. There are formal requirements for revocation of a will as there are for making a will.
Statutory Legacy
If a person dies intestate with a spouse or civil partner the statutory legacy is the amount of the deceased’s estate that their spouse or civil partner will receive, a common misconception is that the spouse or civil partner will automatically receive all of the estate of the person who has died intestate but this is not necessarily the case if there are surviving children and it is therefore desirable to make a will to ensure that your spouse or civil partner inherits all that you intend them to take.
Testator/Testatrix
The person making a will (male or female).
A Trust
One or more persons hold property for the benefit of others (the beneficiaries). A trustee is the person who is acting in the trust and holds the property for the benefit of someone else
A Will
The formal document known as a testamentary disposition by which somebody confirms their wishes as to the division of their estate on death.
1 in 40 people in the UK inherit an average of £17,500 each year. The total after tax is £31 billion.
The average estate leaves £90,000 net of tax and the average amount received by each individual is £17,500. This suggests that, on average, people share out their bequests between five people. Some 10 per cent of beneficiaries receive £50,000 or more. A further 30 per cent receive £10,000 or more, enough to make a down-payment on a home or pay off a sizeable amount of a mortgage.
The individual threshold from the current £325,000 2009/10 tax year is set to increase by 7 per cent to £350,000 in 2010/11.
It is possible to pass the unused proportion of a nil-rate band to your spouse or civil partner for use in the future.
Sources: HM Revenue & Customs
& International Longevity Centre UK 2008
Making the most of different solutions
Decreasing term assurance
Decreasing term assurance can be arranged to cover a potential Inheritance Tax liability and used as a Gift Inter Vivos policy. This is a type of decreasing term plan that actually reduces at the same rate as the chargeable Inheritance Tax on an estate as a result of a Potentially Exempt Transfer (PET).
For example if you gift part of your estate away before death then that part is classed as a PET, this means that for a period of 7 years there could be tax due on the transfer. This amount of tax reduces by a set amount each year for 7 years.
The Gift Inter Vivos plan is designed to follow that reduction to ensure sufficient money is available to meet the bill if the person who gifted the estate dies before the end of the 7 year period.
Such policies should be written in an appropriate trust, so that the proceeds fall outside your estate.
Business and agricultural property
Business and agricultural property are exempt from Inheritance Tax.
Business Property relief. To qualify, the property must be “relevant business property” and must have been owned by the transferor for the period of 2 years immediately preceding death. Where death occured after 10 March 1992, relief is given by reducing the value of the asset by 100 per cent. Prior to 10 March 1992, the relief was 50 per cent.
Agricultural Property relief
Agricultural property is defined as “agricultural land or pasture and includes woodland and any buildings used in connection with the intensive rearing of livestock or fish if the woodland or building is occupied with agricultural land or pasture and the occupation is ancillary to that of the agricultural land or pasture; and also includes such cottages, farm buildings and farmhouses, together with the land occupied with them as are of a character appropriate to the property.” Where death occurred after 10 March 1992 relief is given by reducing the value of the property by 100 per cent, certain conditions apply. Prior to that date the relief was 50 per cent.
Woodlands relief
There is a specific relief for transfers of woodland on death. However, this has become less important since the introduction of 100 per cent relief for businesses that qualify as relevant business property.
Where an estate includes woodlands forming part of a business, business relief may be available if the ordinary conditions for that relief are satisfied.
When a woodland in the United Kingdom is transferred on death, the person who would be liable for the tax can elect to have the value of the timber, that is, the trees and underwood, (but not the underlying land) excluded from the deceased’s estate.
If the timber is later disposed of its value at the time will be subject to Inheritance Tax. Relief is available if:
an election is made within 2 years of the death, though the Board of HM Revenue & Customs have discretion to accept late elections, and
the deceased was the beneficial owner of the woodlands for at least 5 years immediately before death or became beneficially entitled to it by gift or inheritance.
The Pre-Owned Assets Tax
Pre-Owned Assets Tax (POAT), which came into effect on 6 April 2005, clamped down on arrangements, whereby parents gifted property to children or other family members, while continuing to live in the property without paying a full market rent.
POAT is charged at up to 40 per cent on the benefit to an individual continuing to live in a property, which they have gifted, but are not paying a full rent and where the arrangement is not caught by the Gift with Reservation rules.
So anyone who has effected such a scheme since March 1986 could fall within the POAT net and be liable to an income tax charge of up to 40 per cent of the annual market rental value of the property.
Alternatively, you can elect by 31 January following the end of the tax year in which the benefit first arises, that the property remains in your estate.
Rental valuations of the property must be carried out every 5 years by an independent valuer.
Who will handle your affairs?
The ‘personal representative’ (the person nominated to handle the affairs of the deceased person) arranges to pay any Inheritance Tax that is due. You usually nominate the personal representative in your will (you can nominate more than one), in which case they are known as the ‘executor.’ If you die without leaving a will a court can nominate the personal representative, in which case they are known as the ‘administrator.’
If you have been nominated as someone’s personal representative you have to value all of the assets that the deceased person owned. This valuation must accurately reflect what the assets would reasonably fetch in the open market at the date of death.
In most cases, Inheritance Tax must be paid within 6 months from the end of the month in which the death occurs, otherwise interest is charged on the amount owing. Tax on some assets, including land and buildings, can be deferred and paid in instalments over 10 years.