Monthly Archives: September 2010

Giving away wealth tax-efficiently

Posted on September 6, 2010 by - Financial News

Passing on parts of an estate without it being subject to Inheritance Tax
There are some important exemptions that allow you to legally pass your estate on to others, both before and after your death, without it being subject to Inheritance Tax.

Exempt beneficiaries
You can give things away to certain people and organisations without having to pay any Inheritance Tax. These gifts, which are exempt whether you make them during your lifetime or in your will, include gifts to:

– your husband, wife or civil partner, even if you’re legally separated (but not if you’ve divorced or the civil partnership has dissolved), as long as you both have a permanent home in the UK
– UK charities
– some national institutions, including national museums, universities and the National Trust
– UK political parties

But, bear in mind that gifts to your unmarried partner or a partner with whom you’ve not formed a civil partnership aren’t exempt.

Exempt gifts
Some gifts are exempt from Inheritance Tax because of the type of gift or the reason for making it. These include:

Wedding gifts/civil partnership ceremony gifts
Wedding or civil partnership ceremony gifts (to either of the couple) are exempt from Inheritance Tax up to certain amounts:

– parents can each give £5,000
– grandparents and other relatives can each give £2,500
– anyone else can give £1,000
You have to make the gift on or shortly before the date of the wedding or civil partnership ceremony. If it is called off and you still make the gift, this exemption won’t apply.

Small gifts
You can make small gifts, up to the value of £250, to as many people as you like in any one tax year (6 April to the following 5 April) without them being liable for Inheritance Tax.

But you can’t give a larger sum – £500, for example – and claim exemption for the first £250. And you can’t use this exemption with any other exemption when giving to the same person. In other words, you can’t combine a ‘small gifts exemption’ with a ‘wedding/civil partnership ceremony gift exemption’ and give one of your children £5,250 when they get married or form a civil partnership.

Annual exemption
You can give away £3,000 in each tax year without paying Inheritance Tax. You can carry forward all or any part of the £3,000 exemption you don’t use to the next year but no further. This means you could give away up to £6,000 in any one year if you hadn’t used any of your exemption from the year before.

You can’t use your ‘annual exemption’ and your ‘small gifts exemption’ together to give someone £3,250. But you can use your ‘ annual exemption’ with any other exemption, such as the ‘ wedding/civil partnership ceremony gift exemption’. So, if one of your children marries or forms a civil partnership you can give them £5,000 under the ‘wedding/civil partnership gift exemption’ and £3,000 under the ‘annual exemption’, a total of £8,000.

Gifts that are part of your normal expenditure
Any gifts you make out of your after-tax income (but not your capital) are exempt from Inheritance Tax if they’re part of your regular expenditure. This includes:

– monthly or other regular payments to someone, including gifts for Christmas, birthdays or wedding/civil partnership anniversaries

– regular premiums on a life insurance policy (for you or someone else)

It’s a good idea to keep a record of your after-tax income and your normal expenditure, including gifts you make regularly. This will show that the gifts are regular and that you have enough income to cover them and your usual day-to-day expenditure without having to draw on your capital.

Maintenance gifts
You can also make Inheritance Tax-free maintenance payments to:

– your husband or wife

– your ex-spouse or former civil partner

– relatives who are dependent on you because of old age or infirmity

– your children (including adopted children and step-children) who are under 18 or in full-time education

Potentially exempt transfers
If you, as an individual, make a gift and it isn’t covered by an exemption, it is known as a ‘potentially exempt transfer’ (PET). A PET is only free of Inheritance Tax if you live for seven years after you make the gift.

Gifts that count as a PET are gifts that you, as an individual, make to:

– another individual

– a trust for someone who is disabled

– a bereaved minor’s trust where, as the beneficiary of an Interest In Possession (IIP) trust (with an immediate entitlement following the death of the person who set up the trust), you decide to give up the right to receive anything from that trust or that right comes to an end for any other reason during your lifetime

Only ‘outright gifts’ count as PETs
If you make a gift with strings attached (technically known as a ‘gift with reservation of benefit’), it will still count as part of your estate, no matter how long you live after making it. For example, if you give your house to your children and carry on living there without paying them a full commercial rent, the value of your house will still be liable for Inheritance Tax.

In some circumstances a gift with strings attached might give rise to an Income Tax charge on the donor based on the value of the benefit they retain. In this case the donor can choose whether to pay the Income Tax or have the gift treated as a gift with reservation.

A gift with reservation

Posted on September 6, 2010 by - Financial News

Getting the full benefit of a gift to the total exclusion of the donor

A gift with reservation is a gift that is not fully given away. Where gifts with reservation were made on or after 18 March 1986, you can include the assets as part of your estate but there is no seven year limit as there is for outright gifts. A gift may begin as a gift with reservation but some time later the reservation may cease.

In order for a gift to be effective for exemption from Inheritance Tax, the person receiving the gift must get the full benefit of the gift to the total exclusion of the donor. Otherwise, the gift is not a gift for Inheritance Tax purposes.

For example, if you give your house to your child but continue to live there rent free, that would be a gift with reservation. If, after two years, you start to pay a market rent for living in the house, the reservation ceases when you first pay the rent. The gift then becomes an outright gift at that point and the seven year period runs from the date the reservation ceased. Or a gift may start as an outright gift and then become a gift with reservation.

Alternatively, if you give your house to your child and continue to live there but pay full market rent, there is no reservation. If over time you stop paying rent or the rent does not increase, so it is no longer market rent, a reservation will occur at the time the rent stops or ceases to be market rent.

The value of a gift for Inheritance Tax is the amount of the loss to your estate. If you make a cash gift, the loss is the same value as the gift. But this is not the case with all gifts.

Beneficiaries

Posted on September 6, 2010 by - Uncategorized

Leaving your assets, who gets what?
If you leave everything to your husband, wife or civil partner, in this instance there usually won’t be any Inheritance Tax to pay because a husband, wife or civil partner counts as an ‘exempt beneficiary’. But bear in mind that their estate will be worth more when they die, so more Inheritance Tax may have to be paid then.

However, if you are domiciled (have your permanent home) in the UK when you die but your spouse or civil partner isn’t, you can only leave them £55,000 tax-free.

Other beneficiaries
You can leave up to £325,000 tax-free to anyone in your will, not just your spouse or civil partner (2010/11). So you could, for example, give some of your estate to someone else or a family trust. Inheritance Tax is then payable at 40 per cent on any amount you leave above this.

UK Charities
Inheritance Tax isn’t payable on any money or assets you leave to a registered UK charity – these transfers are exempt.

Wills, trusts and financial planning
As well as making a will, you can use a family trust to pass on your assets in the way you want to. You can provide in your will for specific assets to pass into a trust or for a trust to start once the estate is finalised. You can also use a trust to look after assets you want to pass on to beneficiaries who can’t immediately manage their own affairs (either because of their age or a disability).

You can use different types of family trust depending on what you want to do and the circumstances. If you are planning to set up a trust you should receive specialist advice. If you expect the trust to be liable to tax on income or gains you need to inform HM Revenue & Customs Trusts as soon as the trust is set-up. For most types of trust, there will be an immediate Inheritance Tax charge if the transfer takes you above the Inheritance Tax threshold. There will also be Inheritance Tax charges when assets leave the trust.

Financial reasons to make a will

Posted on September 6, 2010 by - Uncategorized

Putting it off could mean that your spouse or civil partner receives less

It’s easy to put off making a will. But if you die without one, your assets may be distributed according to the law rather than your wishes. This could mean that your spouse receives less, or that the money goes to family members who may not need it.

If you and your spouse or civil partner own your home as ‘joint tenants’, then the surviving spouse or civil partner automatically inherits all of the property.

If you are ‘tenants in common’ you each own a proportion (normally half) of the property and can pass that half on as you want.

A solicitor will be able to help you should you want to change the way you own your property.

Planning to give your home away to your children while you’re still alive

You also need to bear in mind, if you are planning to give your home away to your children while you’re still alive, that:

– gifts to your children, unlike gifts to your spouse or civil partner, aren’t exempt from Inheritance Tax unless you live for seven years after making them

– if you keep living in your home without paying a full market rent (which your children pay tax on) it’s not an ‘outright gift’ but a ‘ gift with reservation’, so it’s still treated as part of your estate, and so liable for Inheritance Tax

– following a change of rules on 6 April 2005, you may be liable to pay an Income Tax charge on the ‘benefit’ you get from having free or low cost use of property you formerly owned (or provided the funds to purchase)

– once you have given your home away, your children own it and it becomes part of their assets. So if they are bankrupted or divorced, your home may have to be sold to pay creditors or to fund part of a divorce settlement

– if your children sell your home, and it is not their main home, they will have to pay Capital Gains Tax on any increase in its value

If you don’t have a will there are rules for deciding who inherits your assets, depending on your personal circumstances. The following rules are for deaths on or after 1 July 2009 in England and Wales; the law differs if you die intestate (without a will) in Scotland or Northern Ireland. The rates that applied before that date are shown in brackets.

If you’re married or in a civil partnership and there are no children

The husband, wife or civil partner won’t automatically get everything, although they will receive:

– personal items, such as household articles and cars, but nothing used for business purposes

– £400,000 (£200,000) free of tax – or the whole estate if it was less than £400,000 (£200,000)

– half of the rest of the estate

The other half of the rest of the estate will be shared by the following:

– surviving parents

– if there are no surviving parents, any brothers and sisters (who shared the same two parents as the deceased) will get a share (or their children if they died while the deceased was still alive)

– if the deceased has none of the above, the husband, wife or registered civil partner will get everything

If you’re married or in a civil partnership and there were children

Your husband, wife or civil partner won’t automatically get everything, although they will receive:

– personal items, such as household articles and cars, but nothing used for business purposes

– £250,000 (£125,000) free of tax, or the whole of the estate if it was less than £250,000 (£125,000)

– a life interest in half of the rest of the estate (on his or her death this will pass to the children)

The rest of the estate will be shared by the children.

If you are partners but aren’t married or in a civil partnership

If you aren’t married or registered civil partners, you won’t automatically get a share of your partner’s estate if they die without making a will.

If they haven’t provided for you in some other way, your only option is to make a claim under the Inheritance (Provision for Family and Dependants) Act 1975.

If there is no surviving spouse/civil partner

The estate is distributed as follows:

– to surviving children in equal shares (or to their children if they died while the deceased was still alive)

– if there are no children, to parents (equally, if both alive)

– if there are no surviving parents, to brothers and sisters (who shared the same two parents as the deceased), or to their children if they died while the deceased was still alive

– if there are no brothers or sisters then to half brothers or sisters (or to their children if they died while the deceased was still alive)

– if none of the above then to grandparents (equally if more than one)

– if there are no grandparents to aunts and uncles (or their children if they died while the deceased was still alive)

– if none of the above, then to half uncles or aunts (or their children if they died while the deceased was still alive)

– to the Crown if there are none of the above

It’ll take longer to sort out your affairs if you don’t have a will. This could mean extra distress for your relatives and dependants until they can draw money from your estate.

If you feel that you have not received reasonable financial provision from the estate, you may be able to make a claim under the Inheritance (Provision for Family and Dependants) Act 1975, applicable in England and Wales. To make a claim you must have a particular type of relationship with the deceased, such as child, spouse, civil partner, dependant or cohabitee.

Bear in mind that if you were living with the deceased as a partner but weren’t married or in a civil partnership, you’ll need to show that you’ve been ‘maintained either wholly or partly by the deceased’. This can be difficult to prove if you’ve both contributed to your life together. You need to make a claim within six months of the date of the Grant of Letters of Administration.

Planning your finances

Posted on September 6, 2010 by - Financial News

Make sure your estate is shared out exactly as you want it to be
Planning your finances in advance should help you to ensure that when you die everything you own goes where you want it to. Making a will is the first step in ensuring that your estate is shared out exactly as you want it to be.

If you don’t make a will, there are rules for sharing out your estate called the Law of Intestacy, which could mean your money going to family members who may not need it, or your unmarried partner or a partner with whom you are not in a civil partnership receiving nothing at all.

If you leave everything to your spouse or civil partner there’ll be no Inheritance Tax to pay because they are classed as an exempt beneficiary. Or you may decide to use your tax-free allowance to give some of your estate to someone else or to a family trust.

Good reasons to make a will
A will sets out who is to benefit from your property and possessions (your estate) after your death. There are many good reasons to make a will:

– you can decide how your assets are shared – if you don’t have a will, the law says who gets what

– if you’re an unmarried couple (whether or not it’s a same-sex relationship), you can make sure your partner is provided for

– if you’re divorced, you can decide whether to leave anything to your former partner

– you can make sure you don’t pay more Inheritance Tax than necessary

Before you write your will, it’s a good idea to think about what you want included in it. You should consider:

– how much money and what property and possessions you have

– who you want to benefit from your will

– who should look after any children under 18 years of age

– who is going to sort out your estate and carry out your wishes after your death, your executor

Passing on your estate
An executor is the person responsible for passing on your estate. You can appoint an executor by naming them in your will. The courts can also appoint other people to be responsible for doing this job.

Once you’ve made your will, it is important to keep it in a safe place and tell your executor, close friend or relative where it is.

It is advisable to review your will every five years and after any major change in your life, such as getting separated, married or divorced, having a child or moving house. Any change must be by ‘codicil’ (an addition, amendment or supplement to a will) or by making a new will.

Scottish law on inheritance differs from English law.

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.