Topic: Financial News

Valuing a deceased person’s estate

Posted on September 6, 2010 by - Financial News

Reflecting what those assets would reasonably receive in the open market

When valuing a deceased person’s estate, you need to include assets (property, possessions and money) they owned at their death and certain assets they gave away during the seven years before they died. The valuation must accurately reflect what those assets would reasonably receive in the open market at the date of death. Valuing the deceased person’s estate is one of the first things you need to do as the personal representative. You won’t normally be able to take over management of their estate (called ‘applying for probate’ or sometimes ‘applying for a grant of representation/confirmation’) until all or some of any Inheritance Tax that is due has been paid.

But bear in mind that Inheritance Tax is only payable on values above £325,000 (2010/11).

The valuation process
This initially involves taking the value of all the assets owned by the deceased person, together with the value of:

– their share of any assets that they own jointly with someone else

– any assets that are held in a trust, from which they had the right to benefit

– any assets which they had given away, but in which they kept an interest – for instance, if they gave a house to their children but still lived in it rent-free

– certain assets that they gave away within the last
seven years

Next, from the total value above, deduct everything that the deceased person owed, for example:

– any outstanding mortgages or other loans
– unpaid bills
– funeral expenses

(If the debts exceed the value of the assets owned by the person who has died, the difference cannot be set against the value of trust property included in the estate.)

The value of all the assets, less the deductible debts, gives you the estate value. The threshold above which the value of estates is taxed at 40 per cent is £325,000 (2010/11).

Use the information available
If you don’t know the exact amount or value of any item, such as an Income Tax refund or household bill, you can use an estimated figure. But rather than guessing at a value, try to work out an estimate based on the information available to you.

The forms on which you’ll need to record the valuation will differ, depending on the expected valuation amount. You complete a form IHT205 for estates where you don’t expect to have to pay Inheritance Tax (called ‘excepted estates’) and a form IHT400 where you do expect to have to pay. The forms vary for excepted estates in Scotland.

You should be able to value some of the estate assets quite easily, for example, money in bank accounts or stocks and shares. In other instances, you may need the help of a professional valuer (or chartered surveyor for valuing a property). If you do decide to employ a valuer, make sure you ask them to give you the ‘open market value’ of the asset. This represents the realistic selling price of an asset, not an insurance value or replacement value.

If the affairs of the estate are complicated, you may want to work with a solicitor to help you value the estate and pay any tax due. If you’re not using a solicitor you can ask HM Revenue & Customs to use form IHT400 to work out any Inheritance Tax due.

Once you’ve completed the relevant tax forms, you also need to complete the relevant probate form.

Mitigating Inheritance Tax

Posted on September 6, 2010 by - Financial News

Transferring assets can seriously improve your wealth

Current rules mean that the survivor of a marriage or civil partnership can benefit from up to double the Inheritance Tax allowance (£650,000 for 2010/11), in addition to the entitlement to the full spouse relief.

Inheritance Tax is only paid if the taxable value of your estate when you die is over £325,000 (2010/11). The first £325,000 of a person’s estate is known as the Inheritance Tax nil rate band because the rate of Inheritance Tax charged on this amount is currently set at zero per cent, so it is free of tax.

Transferring exempt assets
Where assets are transferred between spouses or civil partners, they are exempt from Inheritance Tax. This can mean that if, on the death of the first spouse or civil partner, they leave all their assets to the survivor, the benefit of the nil rate band to pass on assets to other members of the family, normally the children, tax-free is not used.

Where one party to a marriage or civil partnership dies and does not use their nil rate band to make tax-free bequests to other members of the family, the unused amount can be transferred and used by the survivor’s estate on their death. This only applies where the survivor died on or after 9 October 2007.

In effect, spouses and civil partners now have a nil rate band that is worth up to double the amount of the nil rate band that applies on the survivor’s death.

Since October 2007, you can transfer any unused Inheritance Tax threshold from a late spouse or civil partner to the second spouse or civil partner when they die. This can increase the Inheritance Tax threshold of the second partner from £325,000 to as much as £650,000 in 2010/11, depending on the circumstances.

Spouse or civil partner Inheritance Tax exemption

Everyone’s estate is exempt from Inheritance Tax up to the nil rate band: £325,000 in 2010/11.

Married couples and registered civil partners are also allowed to pass assets from one spouse or civil partner to the other during their lifetime or when they die without having to pay Inheritance Tax, no matter how much they pass on, as long as the person receiving the assets has their permanent home in the UK. This is known as spouse or civil partner exemption.

If someone leaves everything they own to their surviving spouse or civil partner in this way, it’s not only exempt from Inheritance Tax but it also means they haven’t used any of their own Inheritance Tax threshold or nil rate band. It is therefore available to increase the Inheritance Tax nil rate band of the second spouse or civil partner when they die, even if the second spouse has re-married. Their estate can be worth up to £650,000 in 2010/11 before they owe Inheritance Tax.

To transfer the unused threshold, the executors or personal representatives of the second spouse or civil partner to die need to send certain forms and supporting documents to HM Revenue & Customs (HMRC). HMRC calls this ‘transferring the nil rate band’ from one partner to another.

Transferring the threshold
The threshold can only be transferred on the second death, which must have occurred on or after 9 October 2007 when the rules changed. It doesn’t matter when the first spouse or civil partner died, although if it was before 1975 the full nil rate band may not be available to transfer, as the amount of spouse exemption was limited then. There are some situations when the threshold can’t be transferred but these are quite rare.

When the second spouse or civil partner dies, the executors or personal representatives of the estate should take the following steps.

Calculating the threshold you can transfer
The size of the first estate doesn’t matter. If it was all left to the surviving spouse or civil partner, 100 per cent of the nil rate band was unused and you can transfer the full percentage when the second spouse or civil partner dies even if they die at the same time.

It isn’t the unused amount of the first spouse or civil partner’s nil rate band that determines what you can transfer to the second spouse or civil partner. It’s the unused percentage of the nil rate band that you transfer.

If the deceased made gifts to people in their lifetime that were not exempt, the value of these gifts must first be deducted from the threshold before you can calculate the percentage available to transfer. You may also need to establish whether any of the assets that the first spouse left could have qualified for Business or Property Relief.

You will need all of the following documents from the first death to support a claim:

– a copy of the first will, if there was one

– a copy of the grant of probate (or confirmation in Scotland), or the death certificate if no grant was taken out

– a copy of any ‘deed of variation’ if one was used to vary (or change) the will

If you need help finding these documents from the first death, contact the relevant court service or general register office for the country you live in. The court service may be able to provide copies of wills or grants; the general register offices may be able to provide copies of death certificates

The relevant forms
You’ll need to complete form IHT402 to claim the unused threshold and return this together with form IHT400 and the forms you need for probate (or confirmation in Scotland).

You must make the claim within 24 months from the end of the month in which the second spouse or civil partner dies.

In the following two cases, the rules for transferring a threshold are different:

– if the estate of the first spouse or civil partner had qualified for relief on woodlands or heritage property

– If the surviving spouse or civil partner had an unsecured pension as the ‘relevant dependant’ of a person who died with an Alternatively Secured Pension

Inheritance Tax matters

Posted on September 6, 2010 by - Financial News

Careful planning is required to protect your wealth

Inheritance Tax is the tax that is paid on your ‘estate’, chargeable at a current 2010/11 rate of 40 per cent. Broadly speaking, this is a tax on everything you own at the time of your death, less what you owe. It’s also sometimes payable on assets you may have given away during your lifetime. Assets include property, possessions, money and investments. One thing is certain, careful planning is required to protect your wealth from a potential Inheritance Tax liability.

Not everyone pays Inheritance Tax on their death. It only applies if the taxable value of your estate (including your share of any jointly owned assets and assets held in some types of trusts) when you die is above the £325,000 nil rate band or threshold (2010/11). It is only payable on the excess above this amount.

Passing on amounts without any Inheritance Tax
There are also a number of exemptions which allow you to pass on amounts (during your lifetime or in your will) without any Inheritance Tax being due, for example:

– if your estate passes to your husband, wife or civil partner and you are both domiciled in the UK there is no Inheritance Tax to pay, even if the estate is above the £325,000 nil rate band

– most gifts made more than seven years before your death are exempt

– certain other gifts, such as wedding gifts and gifts in anticipation of a civil partnership up to £5,000 (depending on the relationship between the giver and the recipient), gifts to charity and £3,000 given away each year are also exempt

Transfers of assets into most trusts and companies will become subject to an immediate Inheritance Tax charge if they exceed the Inheritance Tax nil rate band (taking into account the previous seven years’ chargeable gifts and transfers).

In addition, transfers of money or property into most trusts are also subject to an immediate Inheritance Tax charge on values that exceed the Inheritance Tax nil rate band. Tax is also payable ten-yearly on the value of trust assets above the nil rate band; however certain trusts are exempt from these rules.

Gifts and transfers made in the previous seven years
In order to work out whether the current Inheritance Tax nil rate band of £325,000 has been exceeded on a transfer, you need to take into account all ‘chargeable’ (non-exempt, including potentially exempt) gifts and transfers made in the previous seven years. If a transfer takes you over the nil rate band, Inheritance Tax is payable at 20 per cent on the excess.

Where the transfer was made after 5 April and before 1 October in any year, the tax is payable on
30 April in the following year. Where the transfer was made after 30 September and before 6 April in any year, it is payable six months after the end of the month in which the transfer was made.

Government rule changes regarding trusts
On 22 March 2006, the government changed some of the rules regarding trusts and introduced some transitional rules for trusts set up before this date. Trusts not affected by the new rules (and so where no InheritanceTax is immediately payable on any transfers, but with regard to transfers made during someone’s lifetime may be payable if the individual dies within seven years) are:

– lifetime transfers into a trust for a disabled person

– trusts created on death for a disabled person

– trusts created on death for a minor child of the deceased in which the child will become fully entitled to the assets at age 18

– trusts set up under a will for someone who is not a disabled person or minor child of the deceased who becomes entitled to their benefit on the death of the person who wrote the will

Existing accumulation and maintenance trusts had until
6 April 2008 to change (where appropriate) the trust’s rules to enable them to fall outside the new rules.

Interest in possession (IIP) trusts that existed before 22 March 2006, or which replaced a pre-March 2006 IIP up to 5 October 2008, continue to benefit from the old rules until they come to an end. All other newly created IIP trusts will come under the new rules.

Recalculating Inheritance Tax on transfers
If you die within seven years of making a transfer into a trust on which you have already paid 20 per cent Inheritance Tax, the tax due is recalculated using the Inheritance Tax rate applicable on death (currently 40 per cent). Tax will be payable by your estate to HM Revenue & Customs on the difference.

If you made a transfer on which no Inheritance Tax was due at the time, its value is added to your estate when working out any Inheritance Tax that might be due.

Trusts that count as ‘relevant property trusts’ must also pay:

– a ‘periodic’ tax charge of up to 6 per cent on the value of trust assets over the Inheritance Tax nil rate band once every ten years

– an ‘exit’ charge proportionate to the periodic charge when funds valued above the Inheritance Tax nil rate band are taken out of a trust between ten year anniversaries

These rules don’t apply to trusts which are exempt from
the new rules.

Annuity rule change

Posted on July 7, 2010 by - Financial News

Securing a retirement income

A rule that requires all pension savers to purchase an annuity by age 75 will cease next year, the government announced on 22 June. Initially at least, the age will be revised up to 77, with a consultation process on whether the rule should be removed altogether.

Financial foundations

Posted on July 7, 2010 by - Financial News

We take the time to find out about you

In times of turbulent markets and changing tax legislation, you want to be certain your future is adequately planned for. That is why, rather than offering clients an off-the-shelf financial planning solution, we take the time to find out about you, your current financial situation and your short-, medium- and long-term goals. Only then will we make firm recommendations about how you should plan for your future.

Open for business

Posted on July 7, 2010 by - Financial News

Business taxes given some respite

The Chancellor of the Exchequer, George Osborne MP, said in his emergency Budget speech that he wants a sign to go up over the British economy saying ‘Open for Business’.

Taking control of your existing pensions

Posted on July 7, 2010 by - Financial News

Alternative homes for your nest eggs

The Bank of England’s decision to keep interest rates low means that many savers will now receive virtually no return from their money. As a result, many will be looking for alternative homes for their nest eggs. If you are considering building a portfolio of income-producing funds, your first priority should be to decide the level of risk you’re happy with and the investment term. Let’s consider some of the options available.

Lifestyle protection

Posted on July 7, 2010 by - Financial News

Has your need for protection changed?

Most people fully understand the need to protect their valuables, but when it comes to protecting their ability to provide for their loved ones after their death, this can get overlooked. In the event of your premature death, having the correct level of life assurance will ensure that your dependants are able to cope financially and their lifestyle is protected.

Spreading your investments

Posted on July 7, 2010 by - Financial News

Risk is an implicit aspect OF investing

When deciding whether to invest, it is important that any investment vehicle matches your feelings and preferences in relation to investment risk and return. Hence your asset allocation needs to be commensurate with your attitude to risk. Another key question to ask yourself is: ‘How comfortable would I be facing a short-term loss in order to have the opportunity to make long-term gains?’ If your answer is that you are not prepared to take any risk whatsoever, then investing in the stock market is not for you.