JULY 2021INHERITANCE TAX PLANNING !e future can’t be predicted, but it can be protected G U I D E T O 02 | GUIDE TO INHERITANCE TAX PLANNINGW E L C O M E !e future can’t be predicted, but it can be protected W elcome to this Guide to Inheritance Tax Planning. You no doubt want your loved ones to inherit as much of your wealth as possible when you die. Estate planning is about more than just tax. It is about making sure the people le! behind are "nancially supported, that your assets are protected and that the tax your estate pays is fair #e coronavirus (COVID-19) pandemic has served as a reminder of the importance of planning for the future and having our a$airs in order. When you’ve worked hard and invested carefully to build your wealth, you want to look a!er it. #at’s why it’s important to plan for your wealth preservation and the eventual transfer of that wealth. Have you considered this question: ‘What will happen to my estate once I’ve gone?’ Wealth preservation and wealth transfer are becoming an increasingly important issue for many families today. Individuals with assets of any size should seek professional "nancial advice to consider what action may need to be taken before it’s too late. #e reality is, most of us should prepare for the eventual transfer of our assets, regardless of any tax or legal consequences. It is natural that many of us want to leave our wealth to those who matter the most. Having a well-managed estate can save time and legal costs in the long term, help avoid a large Inheritance Tax bill, and cushion the blow for those you leave behind. It’s important to start with a clear picture of your goals. You may want your estate to provide ongoing income and security for dependents, to make bequests or to set up Trusts. Everyone’s circumstances are di$erent – planning can look at tax-e%ciency and maintaining access to income and capital. It can also include protection from irresponsible bene"ciaries, or to provide for vulnerable or minor bene"ciaries. We can also help you assess and minimise any risk to your inherited assets, for example, from divorce or bankruptcy. Wealth preservation and the transfer of your wealth is not just for the super rich. It is essential for anyone who wants to ensure that their loved ones bene"t from their inheritance and are not burdened by it. Time to preserve your wealth and transfer it e!ectively? #e accumulation of your assets and wealth will have come from hard work and determination. So protecting this is essential. Preserving your wealth and transferring it e$ectively is an important part of wealth management, no matter how much wealth you have built up. To "nd out more or arrange an appointment, please contact us – we look forward to hearing from you. G U I D E T O I N H E R I T A N C E T A X P L A N N I N G TRUSTS ARE A HIGHLY COMPLEX AREA OF FINANCIAL PLANNING. INFORMATION PROVIDED AND ANY OPINIONS EXPRESSED ARE FOR GENERAL GUIDANCE ONLY AND NOT PERSONAL TO YOUR CIRCUMSTANCES, NOR ARE INTENDED TO PROVIDE SPECIFIC ADVICE. PROFESSIONAL FINANCIAL ADVICE SHOULD BE OBTAINED BEFORE TAKING ANY ACTION. 03 | GUIDE TO INHERITANCE TAX PLANNING02 WELCOME The future can’t be predicted, but it can be protected 04 KEEPING WEALTH IN THE FAMILY Inheritance Tax receipts reach £5.32 billion in 2020/21 06 MAKING SUITABLE PLANS Organise how much you could leave for the people you care about 08 INCREASED NET WORTH AND RISING MORTALITY RATES The earlier you put plans in place, the more options you may have 10 MORE FAMILIES SUBJECT TO INHERITANCE TAX Balancing your plan with other financial priorities is key 11 MAKING A WILL Three in five UK adults have not made provision 12 INHERITANCE TAX RESIDENCE NIL-RATE BAND Relieving the burden by making it easier for individuals to pass on the family home 14 LIFETIME TRANSFERS Giving away money from your estate to reduce your Inheritance Tax bill 16 LEAVING YOUR LEGACY BEHIND Considerations when making a Will 18 TRUSTS ‘Ring-fencing’ assets to protect family wealth for future generations 19 BARE TRUSTS Held for the benefit of a specified beneficiary 20 DISCRETIONARY TRUSTS Wide class of potential beneficiaries 22 FLEXIBLE TRUSTS WITH DEFAULT BENEFICIARIES Discretion over which of the default and potential beneficiaries actually benefit 23 SPLIT TRUSTS Family protection policies 24 LASTING POWER OF ATTORNEY Taking control of decisions even in the event you can’t make them yourself 26 PRESERVING WEALTH FOR FUTURE GENERATIONS Factors likely to have a lasting and positive impact on wealth preservation 27 IN CONCLUSION Estate planning possibilities CONTENTS Inheritance Tax is a tax on an estate (the property, money and possessions) of someone who's died. Inheritance Tax receipts in the United Kingdom amounted to approximately £5.32 billion in 2020/21, compared with £5.36 billion pounds in the previous "nancial year, which was a peak for this provided time period[1]. Raising the money to pay an Inheritance Tax bill may mean cashing in any savings accounts held by the deceased and potentially selling some of the assets in the estate. There is no easy way to say it – anticipating one’s death is an uncomfortable topic. Yet it is often worth pushing past the initial discomfort to pursue the potential rewards of effective wealth transfer planning. There are three places your assets can go at your death: to your family and friends, to charity or to the government in the form of taxes. Almost half of all Baby Boomers say they have enough personal wealth that they can a$ord to gi! some of it away during their lifetime, new research shows[2]. #e "gures, collected by YouGov, show that 48% of Baby Boomers say they could a$ord to give money to family members before they die. Less than a third (29%) ruled it out, and 26% say they are unsure. LARGER ONE-OFF WEALTH TRANSFERS Of those who say they can a$ord to make lifetime gi!s, 40% say they would favour multiple small gi!s and a third (33%) would prefer larger one-o$ wealth transfers. A further 30% are unsure which would better suit their needs. Despite the large number of people who estimate they can a$ord to pass some of their savings and assets to family members, government statistics suggest only between 31% to 39% of people aged 50-69 have ever given a "nancial gi!. And just a small minority appear to have a plan for regular annual gi!ing, with just 15% of 50-59-year-olds having gi!ed in the last two years. INTERGENERATIONAL FINANCIAL ADVICE #e statistics reveal the importance of wealth transfer planning and lifetime gi!ing advice. It is estimated that around £5.5 trillion of intergenerational wealth transfers will occur over the next 30 years[3]. An e$ective plan can lessen the likelihood of family con&ict, reduce estate costs, reduce taxes and preserve wealth. Obtaining professional intergenerational "nancial advice will increasingly become a key part of "nancial planning for the Baby Boomer generation. #is generation has accrued signi"cant personal wealth, having bene"ted from K E E P I N G W E A L T H I N T H E F A M I L Y Inheritance Tax receipts reach £5.32 billion in 2020/21 04 | GUIDE TO INHERITANCE TAX PLANNING 05 | GUIDE TO INHERITANCE TAX PLANNINGrising house prices, stock market growth and the higher prevalence of generous pension schemes, and they want to give younger generations a "nancial boost. LIFELINE FOR SOME YOUNGER PEOPLE In contrast, younger generations o!en "nd themselves facing high house prices and the need to make signi"cant personal contributions to their De"ned Contribution pensions in order to secure a decent retirement fund. Gi!ing between the generations will increasingly become a lifeline for some younger people as they struggle to get on the housing ladder, pay for school fees and deal with the ever-increasing expenses of living. CAREFUL BALANCING ACT TO FIGURE OUT Passing on wealth to the next generation is one of the most important yet challenging aspects of "nancial planning. It’s vital that helping the younger generations doesn’t come at the expense of your own retirement funds and so there is a careful balancing act to "gure out if you can a$ord it. If you can a$ord to gi!, it’s vitally important to consider the various Inheritance Tax and gi!ing rules. Despite this, there is still a clear ‘gi!ing gap’ between the number of people who can a$ord to gi! and those who actually have a lifetime gi!ing plan in place. Gi!ing is a great way to help you make the most of your "nancial assets and enjoy seeing your life savings helping your children and grandchildren. WEALTH TRANSFER PLANNING PROCESS Establishing who gets what, how they get it and when they get it, are, as a general rule, personal matters. But these decisions can have signi"cant "nancial implications. Life events, as well as market and regulatory factors, can impact the wealth transfer planning process. #erefore, it is important for your wealth transfer plan to remain &exible and be revisited and adjusted periodically.O Source data: [1] https://www.statista.com/statistics/284325/united- kingdom-hmrc-tax-receipts-inheritance-tax/ [2] Research commissioned by Quilter and undertaken by YouGov Plc, an independent research agency. All "gures, unless otherwise stated, are from YouGov Plc. !e total sample size is 1,544 UK adults, comprised of 529 Baby Boomers, 501 Generation Xers and 514 Millennials. Fieldwork was undertaken between 07/07/2020 – 08/07/2020. !e survey was carried out online. [3] ‘Passing on the pounds – !e rise of the UK’s inheritance economy'. Published May 2019. Author: Kings Court Trust “ “ OF THOSE WHO SAY THEY CAN AFFORD TO MAKE LIFETIME GIFTS, 40% SAY THEY WOULD FAVOUR MULTIPLE SMALL GIFTS AND A THIRD (33%) WOULD PREFER LARGER ONE-OFF WEALTH TRANSFERS. Inheritance Tax can cost families thousands of pounds but there are various ways to legally avoid paying this tax. Without making suitable plans, your loved ones could face a tax bill of 40% on the value of everything you own above a certain threshold. Whether you have earned your wealth, inherited it or made shrewd investments, you will want to ensure that as little of it as possible ends up in the hands of the taxman and that it can be enjoyed by you, your family and your intended bene"ciaries. If you pass away and don't have provision in place to preserve and protect your assets, then your family may end up spending a substantial amount of time and money battling over your wealth. #is process of dividing up your assets could become complicated. Estate planning gives you control over what happens to your assets when you pass away. It is a fundamental part of "nancial planning, no matter how much wealth you have accumulated. Not only does an estate plan help to ensure that those who are important to you will be taken care of when you’re no longer around, but it can also help ensure that assets are transferred in an orderly manner, and that Inheritance Tax liabilities are minimised. #e process involves developing a clear plan that details how you would like all of your wealth and property to be distributed a!er your death. It involves putting documentation in place to ensure that your assets are transferred in line with your wishes. Your estate consists of everything you own. #is includes savings, investments, pensions, property, life insurance (not written in an appropriate trust) and personal possessions. Debts and liabilities are subtracted from the total value of all assets. WHAT TO CONSIDER WHEN DEVELOPING AN EFFECTIVE PLAN FOR THE FUTURE WRITE A WILL One of the most important components of an estate plan is a Will. First and foremost, a Will puts you in control. You choose who will bene"t from your estate and what they are entitled to. You also decide who will administer your a$airs a!er your death. If you don’t make a Will, the intestacy rules will decide who bene"ts from your estate – and that can produce undesirable results. #e law also sets a hierarchy of who is able to handle your "nancial a$airs a!er death, and that can lead to problems if the person is not suitable because of age, health, geographical location, or for any other reason. MAKE A LASTING POWER OF ATTORNEY A Lasting Power of Attorney (LPA) can be made for Property and Financial A$airs, as well as Health and Welfare. #ese documents can be put in place at any time, and it is important to consider setting them up, no matter what age you are. An LPA sets out your wishes as to who should assist you in relation to your property and "nancial a$airs and your health and welfare. You can control who deals with these and set out any limitations and guidance. PLAN FOR INHERITANCE TAX Once the Will and the LPA are sorted, the next step is to think about Inheritance Tax planning. Whenever someone dies, the value of their estate may become liable for Inheritance Tax. If you are domiciled in the UK, your estate includes everything you own, including your home and certain trusts in which you may have an interest. Inheritance Tax is potentially charged at a rate of 40% on the value of everything you own above the Nil-Rate Band (NRB) threshold. #e Nil-Rate Band is the value of your estate that is not chargeable to UK Inheritance Tax. GIFT ASSETS WHILE YOU’RE ALIVE #e amount is set by the government and is currently £325,000, which is frozen until 2026. In addition, since 6 April 2017, if you leave your home to direct lineal descendants, the value of your estate before tax is paid will increase with the addition of the Residence Nil-Rate Band (RNRB). For the 2021/22 tax year, the Residence Nil-Rate Band is £175,000. One thing that’s important to remember when developing an estate plan is that the process isn’t just about passing on your assets when you die. It’s also about analysing your "nances now and potentially making the most of your assets while you are still alive. By gi!ing assets to younger generations while you’re still around, you could enjoy seeing the assets put to good use, while simultaneously reducing your Inheritance Tax bill. 06 | GUIDE TO INHERITANCE TAX PLANNINGM A K I N G S U I T A B L E P L A N S Organise how much you could leave for the people you care about 07 | GUIDE TO INHERITANCE TAX PLANNINGMAKE USE OF GIFT ALLOWANCES A gi! from one individual to another constitutes a Potentially Exempt Transfer (PET) for Inheritance Tax. If you survive for seven years from the date of the gi!, no Inheritance Tax arises on the PET. Each tax year, you can give away £3,000 worth of gi!s (your 'annual exemption') tax-free. You can also give away wedding or registered civil partnership gi!s up to £1,000 per person (£2,500 for a grandchild and £5,000 for a child). In addition, you can give your children regular sums of money from your income. You can also give as many gi!s of up to £250 to as many individuals as you want, although not to anyone who has already received a gi! of your whole £3,000 annual exemption. None of these gi!s are subject to Inheritance Tax. INVEST INTO IHT-EXEMPT ASSETS For experienced suitable investors, another way to potentially minimise Inheritance Tax liabilities is to invest in Inheritance Tax exempt assets. #ese schemes are higher risk and are therefore not suitable for all investors, and any investment decisions should always be made with the bene"t of professional "nancial advice. One example of this is the Enterprise Investment Scheme (EIS). #e vast majority of EIS-qualifying investments attract 100% Inheritance Tax relief via Business Relief (BR) because the qualifying trades for EIS purposes are very similar to those which qualify for BR. Quali"cation for BR is subject to the minimum holding period of two years (from the later of the share issue date and trade commencement). LIFE INSURANCE WITHIN A TRUST Writing life insurance in an appropriate Trust is one of the best ways to protect your family’s future in the event of your death. Your life insurance policy is a signi"cant asset – and by putting life insurance in Trust, you can manage the way your bene"ciaries receive their inheritance. The proceeds from the policy can be paid directly to your beneficiaries rather than to your legal estate and will therefore not be taken into account when Inheritance Tax is calculated. KEEP WEALTH WITHIN A PENSION A de"ned contribution pension is normally free of Inheritance Tax, unlike many other investments. It is not part of your taxable estate. Keeping your pension wealth within your pension fund and passing it down to future generations can be very tax-e%cient estate planning. If you die before 75, your pension will be passed on tax-free. However, if you die a!er 75, your bene"ciaries will pay tax on the proceeds at their highest income tax rate. Your pension will not be covered by your Will, so you will need to ensure that your pension provider knows who your nominated bene"ciaries are. PRESERVED WEALTH FOR FUTURE GENERATIONS We all have one thing in common: we can’t take our assets with us when we die. If you want to ensure that your wealth is preserved for future generations and passed on e%ciently, an estate plan is crucial.O With careful planning it may be possible to reduce signi"cantly the need for your estate to pay Inheritance Tax. We spend a lifetime generating wealth and assets but not many of us ensure that it will be passed to the next generation – our children, grandchildren, nieces, nephews, and so on. Intergenerational wealth transfer is the passage of wealth from one family generation to the next. It’s becoming increasingly important for more people to consider succession planning and intergenerational wealth transfer as part of their "nancial planning strategy. As the Baby Boomer generation reaches retirement age, we’re on the brink of a vast shi! in assets, unlike any that we have seen before. WEALTH TRANSFERS By 2027, it is expected that wealth transfers will nearly double from the current level of £69 billion, to £115 billion[1], coined as ‘#e Great Wealth Transfer’ of the 21st century. Intergenerational wealth transfer can be a huge issue for all family members concerned. If done well and executed properly, it can make a real di$erence to the "nancial position of the recipients. If misjudged or poorly handled, it can cause enormous issues, con&icts and resentments that are never forgotten nor forgiven. FINANCIAL IMPLICATIONS One aspect that hasn’t been widely considered is the impact on other family members, and in particular children, as their parents think about selling their business or retiring from their career, perhaps selling their family home, and starting life in retirement. It is important that children are prepared to deal with this process, not least so they are aware of the "nancial implications and how they may be a$ected. For instance, children may be expecting to receive a certain amount of money from their parents – particularly those who are selling a business – and end up disappointed. Conversely, they may not be expecting to receive anything, and are therefore not equipped to deal with a windfall. CONTRIBUTORY FACTORS According to the King’s Court Trust, £5.5 trillion will move hands in the United Kingdom between now and 2055, with this move set to peak in 2035[2]. Why? Well, there are a number of contributory factors that account for this. #e two main reasons are increased net worth and rising mortality rates. For those approaching, or in, retirement, it’s important to have frank and open conversations with children about expectations and also whether children have the knowledge and understanding to manage "nancial matters. APPROACHING RETIREMENT #is is not an easy exercise, as you may not want to discuss your "nancial a$airs with your children. You may "nd your children’s eyes are opened when they see what their parents have been able to achieve "nancially. #ey may even want to know how they can do that themselves and change their own habits. Everyone works hard to provide for their family, and perhaps even leave them a legacy. However, parents approaching retirement shouldn’t feel that their family is solely reliant on them, or that they need to be responsible for their children’s "nancial situation. EXPRESSING WISHES A good approach is to help your children establish their own strong "nancial footing and be ready for intergenerational wealth transfer. For instance, introducing them to your professional advisers can provide comfort that there is someone they can go to for advice. Having open conversations with your children and expressing wishes and goals will also ensure that your family are all on the same page, which can help reduce potential con&ict later when managing intergenerational wealth transfer. I N C R E A S E D N E T W O R T H A N D R I S I N G M O R T A L I T Y R A T E S !e earlier you put plans in place, the more options you may have 08 | GUIDE TO INHERITANCE TAX PLANNING THESE ARE SOME QUESTIONS YOU SHOULD ANSWER AS PART OF YOUR INTERGENERATIONAL WEALTH TRANSFER PLANS: „ When did wealth enter my life and how do I think this timing in&uences my values and family relationships? „ What impact does a'uence have on my life and the lives of my next generation? „ What was the key to my success in creating wealth and how might telling this story to my future generation be helpful? „ What is my biggest concern in raising my children or grandchildren with a'uence? „ What conversations (if any) did I have with my parents about money and wealth growing up? „ How did my parents prepare me to receive wealth? „ What lessons did I learn from my parents about money and "nance that I would like to pass on to my heirs? „ What family values would I like to pass down to the next generation and how do I plan on communicating this family legacy? „ What concerns do I have about my adult children when it comes to inheriting and managing the family wealth? „ How can I help prepare my bene"ciaries to receive wealth and carry on our family legacy? BETWEEN GENERATIONS Despite the vast amount of wealth likely to be passed down between generations, those in line for inheritance could end up being over- reliant on their expected windfall. #e key will be to ensure younger generations are able to get involved and understand how to handle the wealth they will be inheriting, as well as being able to make good decisions about the wealth that they generate themselves. You need to consider who will receive what and whether you want to pass your wealth during your lifetime or on death. #ese decisions then need to be balanced by the tax implications of any proposed planning. #is is especially important at what can be a highly stressful time. By making advanced preparations, the burden of "ling complicated Inheritance Tax returns can be reduced. It’s worth noting that UK Inheritance Tax receipts exceed £3 billion from 17,900 estates in 2019[3].O Source data: [1] Kings Court Trust, ‘Passing on the Pounds – !e rise of the UK’s inheritance economy’. [2] Resolution Foundation, Intergenerational Commission. ‘!e million dollar be-question’. [3] Prudential 2019. 09 | GUIDE TO INHERITANCE TAX PLANNING Making provision for Inheritance Tax needs to be in balance with the plan for your other "nancial priorities. E$ective estate preservation planning could save a family a potential Inheritance Tax bill amounting to hundreds of thousands of pounds. Inheritance Tax was introduced in 1986. It replaced Capital Transfer Tax, which had been in force since 1975 as a successor to Estate Duty. Inheritance Tax planning has become more important than ever, following the government’s decision to freeze the £325,000 lifetime exemption, with in&ation eroding its value every year and subjecting more families to Inheritance Tax. AUTOMATIC RIGHTS Inheritance Tax is usually payable on death. When a person dies, their assets form their estate. Any part of an estate that is le! to a spouse or registered civil partner will be exempt from Inheritance Tax. #e exception is if a spouse or registered civil partner is domiciled outside the UK. Unmarried partners, no matter how long-standing, have no automatic rights under the Inheritance Tax rules. However, there are steps people can take to reduce the amount of money their bene"ciaries have to pay if Inheritance Tax a$ects them. Where a person’s estate is le! to someone other than a spouse or registered civil partner (i.e. to a non-exempt bene"ciary), Inheritance Tax will be payable on the amount that exceeds the £325,000 Nil-Rate Band (NRB) threshold. #e threshold is currently frozen at £325,000 until the tax year 2021/22. DECEASED SPOUSE Every individual is entitled to a NRB (that is, every individual is entitled to leave an amount of their estate up to the value of the NRB threshold to a non-exempt beneficiary without incurring Inheritance Tax). If a widow or widower of the deceased spouse has not used their entire NRB, the NRB applicable at the time of death can be increased by the percentage of the NRB unused on the death of the deceased spouse, provided the executors make the necessary elections within two years of your death. To calculate the total amount of Inheritance Tax payable on a person’s death, gi!s made during their lifetime that are not exempt transfers must also be taken into account. Where the total amount of non-exempt gi!s made within seven years of death plus the value of the element of the estate le! to non-exempt bene"ciaries exceeds the nil-rate threshold, Inheritance Tax is payable at 40% on the amount exceeding the threshold. TAPERED AWAY #is percentage reduces to 36% if the estate quali"es for a reduced rate as a result of a charity bequest. In some circumstances, Inheritance Tax can also become payable on the lifetime gi!s themselves – although gi!s made between three and seven years before death could qualify for taper relief, which reduces the amount of Inheritance Tax payable. From 6 April 2017, an Inheritance Tax Residence Nil-Rate Band (RNRB) was introduced in addition to the standard NRB. It’s worth currently up to £175,000 for the 2021/22 tax year. It starts to be tapered away if an Inheritance Tax estate is worth more than £2 million on death. RESIDENTIAL PROPERTY Unlike the standard NRB, it’s only available for transfers on death. It’s normally available if a person leaves a residential property that they’ve occupied as their home outright to direct descendants. It might also apply if the person sold their home or downsized from 8 July 2015 onwards. If spouses or registered civil partners don’t use the RNRB on "rst death – even if this was before 6 April 2017 – there are transferability options on the second death. PERSONAL REPRESENTATIVES Executors or legal personal representatives typically have six months from the end of the month of death to pay any Inheritance Tax due. The estate can’t pay out to the beneficiaries until this is done. The exception is any property, land or certain types of shares where the Inheritance Tax can be paid in instalments. Beneficiaries then have up to ten years to pay the tax owing, plus interest.O M O R E F A M I L I E S S U B J E C T T O I N H E R I T A N C E T A X Balancing your plan with other "nancial priorities is key 10 | GUIDE TO INHERITANCE TAX PLANNING 11 | GUIDE TO INHERITANCE TAX PLANNINGIt’s important to make sure that a!er you die, your assets and possessions go to the people and organisations you choose, such as family members and charities you want to support. Wills and Inheritance Tax planning more broadly are sensitive subjects for households across the UK and are o!en thought of as slightly taboo topics. However, the global coronavirus (COVID-19) pandemic has focused minds and given us space to think. And it seems that it’s prompted more people to take action, from making changes to existing Wills to encouraging them to think about writing one for the "rst time. But worryingly, three in "ve (59%) UK adults have not written a Will, new research[1] reveals. #is equates to 31 million people, whose property, "nancial and other assets could be le! to someone they have not chosen when they die. Of those who have not written a Will yet, 22% are over the age of 75 and 39% are aged 65-74. Worryingly, a third (32%) of those aged 75+ haven’t even started thinking about writing a Will yet.    STARTED THINKING ABOUT WRITING A WILL Since the start of lockdown, those aged between 25-34 have, however, started the Will writing process or made changes to their existing one. During this period, a "!h (21%) of 25-34-year-olds started thinking about writing a Will for the "rst time and one in ten (12%) wrote one. A further 30% updated an existing Will. Respondents were also asked if they had a Lasting Power of Attorney (LPA) in place yet, "nding that just 12% of UK adults had an LPA in place before the COVID-19 lockdown. However, 6% said they had engaged a legal professional or the O%ce of the Public Guardian during the pandemic to put an LPA in place. TYPES OF LASTING POWER OF ATTORNEY HEALTH AND WELFARE LPAS A Health and Welfare LPA allows you to appoint an Attorney to make decisions about matters such as: „ Your medical care „ Where you live „ Your daily routine, such as what you eat and what you wear „ Whom you have contact with „ Whether you have life-sustaining treatment – although only if you have given express permission PROPERTY AND FINANCIAL AFFAIRS LPAS A Property and Financial A$airs LPA gives your Attorney the power to do things such as: „ Buy and sell your property „ Pay your bills „ Collect your pension or bene"ts „ Manage your bank accounts   EMOTIONAL AND FINANCIAL PRESSURE A Will can provide peace of mind that not only will the correct bene"ciaries bene"t from any estate distribution, but also that it is done as e%ciently as possible. But only 13% of UK adults have written a living Will, which is used to provide advanced decisions on refusing medical treatments if you become terminally ill or lose the ability to make decisions around medical treatment yourself. A further 6% said they had made a living Will, now more commonly called an ‘advance decision.’ While no one likes to think about their own mortality, getting your house in order by having the right legal instructions can take away much of the emotional and "nancial pressure at a very di%cult time. Taking the "rst step is always the most di%cult but puts you as the benefactor in the driving seat.   ESPECIALLY IMPORTANT IF YOU HAVE CHILDREN A Will can help reduce the amount of Inheritance Tax that might be payable on the value of the property and money you leave behind. Writing a Will is especially important if you have children or other family who depend on you "nancially, or if you want to leave something to people outside your immediate family. If you die without a valid Will, you will be dying intestate and your estate will pass to those entitled under the intestacy rules. Under the intestacy rules, your estate could pass to unintended bene"ciaries and leave your loved ones in a very di%cult situation at an already emotionally challenging time.O Source data: [1] Research from Canada Life 25/09/20 M A K I N G A W I L L !ree in "ve UK adults have not made provision The introduction of the Residence Nil-Rate Band (RNRB) has made it easier for some individuals to pass on the family home. #e rise in property prices throughout the UK means that even those with modest assets may exceed the £325,000 Nil-Rate Band (NRB) for Inheritance Tax. On 6 April 2017 the RNRB band came into e$ect. It provides an additional nil-rate band where an individual dies a!er 6 April 2017, owning a residence which they leave to direct descendants. During the 2021/22 tax year the maximum RNRB available is £175,000. Just like the standard NRB, any unused RNRB on the "rst death of a married couple or registered civil partners has the potential to be transferable even if the "rst death occurred before 6 April 2017. However, the RNRB does come with conditions and so may not be available or available in full to everyone. #e current legislation requires the NRB, RNRB and threshold for the RNRB taper to increase in line with the Consumer Prices Index (CPI) in each year from 2021/22. TAXABLE ESTATE #e RNRB is set against the taxable value of the deceased’s estate – not just the value of the property. Unlike the existing NRB, it doesn’t apply to transfers made during an individual’s lifetime. For married couples and registered civil partners, any unused RNRB can be claimed by the surviving spouse’s or registered civil partner’s personal representatives to provide a reduction against their taxable estate. Where an estate is valued at more than £2 million, the RNRB will be progressively reduced by £1 for every £2 that the value of the estate exceeds the threshold. Special provisions apply where an individual has downsized to a lower value property or no longer owns a home when they die. LIFETIME GIFTS In determining whether the £2 million threshold is breached, it is necessary to ignore reliefs and exemptions. #is means that business relief and agricultural relief are ignored when determining the value of the estate for the RNRB, even though they are taken into account to calculate the liability to Inheritance Tax. As the £2 million is based on the value of the assets owned at the time of death, it does not include any lifetime gi!s made by the deceased, even if they were made within seven years of death and are included in the Inheritance Tax calculation. DIRECT DESCENDANTS #e £2 million threshold is frozen until 5 April 2021, a!er which, like the standard NRB and Inheritance Tax RNRB, it will increase in line with CPI. In the 2021/22 tax year, estates of £2.35 million or greater will not bene"t from an RNRB. #e amount of RNRB available to be set against an estate will be the lower of the value of the home, or share, that’s inherited by direct descendants and the maximum RNRB available when the individual died. DECEASED SPOUSE Where the value of the property is lower than the maximum RNRB, the unused allowance can’t be o$set against other assets in the estate but can be transferred to a deceased spouse or registered civil partner’s estate when they die, having le! a residence to their direct descendants. A surviving spouse or registered civil partner’s personal representatives may claim any unused RNRB available from the estate of the "rst spouse or registered civil partner to die. RESIDENTIAL INTEREST #is is subject to the second death occurring on or a!er 6 April 2017 and the survivor passing a residence they own to their direct descendants. #is can be any home they’ve lived in – there’s no requirement for them to have owned or inherited it from their late spouse or registered civil partner. In order to pass on a qualifying residential interest and use the Inheritance Tax RNRB, the property needs to be ‘closely inherited’. #is means that the property must be passed to direct descendants. SPECIAL GUARDIAN For these purposes, direct descendants are lineal descendants of the deceased – children, grandchildren and any remoter descendants together with their spouses or registered civil partners, including their widow, widower or surviving registered civil partner. Also included are a step, adopted or fostered child of the deceased, or a child to which the deceased was appointed as a guardian or a special guardian when the child was under 18. Direct descendant doesn’t include nephews, nieces, siblings and other relatives. If an individual, a married couple or registered civil partners do not have any direct descendants that qualify, they will be unable to use the RNRB. DEEMED RESIDENCE #e facility to claim unused RNRB applies regardless of when the "rst death occurred – if this was before it was introduced, then 100% of a deemed RNRB of £175,000 can be claimed, unless the value of the "rst I N H E R I T A N C E T A X R E S I D E N C E N I L - R A T E B A N D Passing on your wealth in the right way is key for its preservation 12 | GUIDE TO INHERITANCE TAX PLANNING spouse or registered civil partner’s estate exceeded £2 million, and tapering of the RNRB applies. #e unused RNRB is represented as a percentage of the maximum RNRB that was available on "rst death – meaning the amount available against the survivor’s estate will bene"t from subsequent increases in the RNRB. DEED OF VARIATION #e transferable amount is capped at 100% – claims for unused RNRB from more than one spouse or registered civil partner are possible but in total can’t be more than 100% of the maximum available amount. Under the RNRB provisions, direct descendants inherit a home that’s le! to them which becomes part of their estate. #is could be under the provisions of the deceased’s Will, under the rules of intestacy or by some other legal means as a result of the person’s death – for example, under a deed of variation. MAIN RESIDENCE #e RNRB applies to a property that’s included in the deceased’s estate and one in which they have lived. It needn’t be their main residence, and no minimum occupation period applies. If an individual has owned more than one home, their personal representatives can elect which one should qualify for RNRB. #e open market value of the property will be used less any liabilities secured against it, such as a mortgage. Where only a share of the home is le! to direct descendants, the value and RNRB is apportioned. COMPLEX AREA A home may already be held in Trust when an individual dies or it may be transferred into Trust upon their death. Whether the RNRB will be available in these circumstances will depend on the type of Trust, as this will determine whether the home is included in the deceased’s estate, and also whether direct descendants are treated as inheriting the property. #is is a complex area, and HM Revenue & Customs provides only general guidance, with a recommendation that a solicitor or Trust specialist should be consulted to discuss whether the RNRB applies. DOWNSIZING ADDITION Estates that don’t qualify for the full amount of RNRB may be entitled to an additional amount of RNRB – a downsizing addition if the following conditions apply: the deceased disposed of a former home and either downsized to a less valuable home or ceased to own a home on or after 8 July 2015; the former home would have qualified for the RNRB if it had been held until death; and at least some of the estate is inherited by direct descendants. The downsizing addition will generally represent the amount of ‘lost’ RNRB that could have applied if the individual had died when they owned the more valuable property. However, it won’t apply where the value of the replacement home they own when they die is worth more than the maximum available RNRB. It’s also limited by the value of other assets left to direct descendants. PLANNING TECHNIQUES #e downsizing addition can also apply where an individual hasn’t replaced a home they previously disposed of – provided they leave other assets to direct descendants on their death. #e deceased’s personal representatives must make a claim for the downsizing addition within two years of the end of the month in which the individual died. Di$erent planning techniques are available to address a potential Inheritance Tax liability, and these can be incorporated into the "nancial arrangements of any individual whose estate is likely to exceed the threshold.O 13 | GUIDE TO INHERITANCE TAX PLANNING Inheritance Tax exemptions can be achieved by means of making certain exempt transfers, which apply in a number of cases including wedding gi!s, life assurance premiums, gi!s to your family and charitable giving. If appropriate, you can transfer some of your assets while you’re alive – these are known as lifetime transfers. Whilst we are all free to do this whenever we want, it is important to be aware of the potential implications of such gi!s with regard to Inheritance Tax. #e two main types are ‘potentially exempt transfers’ and ‘chargeable lifetime transfers’. EXEMPT TRANSFERS Potentially exempt transfers are lifetime gi!s made directly to other individuals, which includes gi!s to Bare Trusts. A similar lifetime gi! made to most other types of Trust is a chargeable lifetime transfer. #ese rules apply to non- exempt transfers: gi!s to a spouse are exempt, so are not subject to Inheritance Tax. Where a potentially exempt transfer fails to satisfy the conditions to remain exempt – because the person who made the gift died within seven years – its value will form part of their estate. Survival for at least seven years, on the other hand, ensures full exemption from Inheritance Tax. A chargeable lifetime transfer is not conditionally exempt from Inheritance Tax. If it is covered by the Nil-Rate Band (NRB) and the transferor survives at least seven years, it will not attract a tax liability, but it could still impact on other chargeable transfers. SEVEN YEARS Chargeable lifetime transfers that exceed the available NRB when they are made result in a lifetime Inheritance Tax liability. Failure to survive for seven years results in the value of the chargeable lifetime transfers being included in the estate. If the chargeable lifetime transfers are subject to further Inheritance Tax on death, a credit is given for any lifetime Inheritance Tax paid. Following a gi! to an individual or a Bare Trust (a basic Trust in which the bene"ciary has the absolute right to the capital and assets within the Trust, as well as the income generated from these assets), there are two potential outcomes: survival for seven years or more, and death before then. #e former results in the potentially exempt transfer becoming fully exempt and no longer "guring in the Inheritance Tax assessment. In other case, the amount transferred less any Inheritance Tax exemptions is ‘notionally’ returned to the estate. TAX CONSEQUENCES Anyone utilising potentially exempt transfers for tax migration purposes, therefore, should consider the consequences of failing to survive for seven years. Such an assessment will involve balancing the likelihood of surviving for seven years against the tax consequences of death within that period. Failure to survive for the required seven-year period results in the full value of the potentially exempt transfers being notionally included within the estate; survival beyond then means nothing is included. It is taper relief L I F E T I M E T R A N S F E R S Giving away money from your estate to reduce your Inheritance Tax bill 14 | GUIDE TO INHERITANCE TAX PLANNING which reduces the Inheritance Tax liability (not the value transferred) on the failed potentially exempt transfers a!er the full value has been returned to the estate. EARLIER TRANSFERS #e value of the potentially exempt transfers is never tapered. #e recipient of the failed potentially exempt transfers is liable for the Inheritance Tax due on the gi! itself and bene"ts from any taper relief. #e Inheritance Tax due on the potentially exempt transfers is deducted from the total Inheritance Tax bill, and the estate is liable for the balance. Lifetime transfers are dealt with in chronological order upon death; earlier transfers are dealt with in priority to later ones, all of which are considered before the death estate. If a lifetime transfer is subject to Inheritance Tax because the NRB is not su%cient to cover it, the next step is to determine whether taper relief can reduce the tax bill for the recipient of the potentially exempt transfers. SLIDING SCALE #e amount of Inheritance Tax payable is not static over the seven years prior to death. Rather, it is reduced according to a sliding scale dependant on the passage of time from the giving of the gi! to the individual’s death. No relief is available if death is within three years of the lifetime transfer. For survival for between three and seven years, taper relief at the following rates is available. TAPER RELIEF #e rate of Inheritance Tax gradually reduces over the seven-year period – this is called taper relief. It works like this: *How long ago was the gi# made? **How much is the tax reduced? *0-3 years **No reduction 3-4 years 20% 4-5 years 40% 5-6 years 60% 6-7 years 80% MORE THAN 7 YEARS NO TAX TO PAY It’s important to remember that taper relief only applies to the amount of tax the recipient pays on the value of the gi! above the NRB. #e rest of your estate will be charged with the full rate of Inheritance Tax – usually 40%. DONOR PAYS The tax treatment of chargeable lifetime transfers has some similarities to potentially exempt transfers but with a number of differences. When a chargeable lifetime transfer is made, it is assessed against the donor’s NRB. If there is an excess above the NRB, it is taxed at 20% if the recipient pays the tax or 25% if the donor pays the tax. #e same seven-year rule that applies to potentially exempt transfers then applies. Failure to survive to the end of this period results in Inheritance Tax becoming due on the chargeable lifetime transfers, payable by the recipient. #e tax rate is the usual 40% on amounts in excess of the NRB, but taper relief can reduce the tax bill, and credit is given for any lifetime tax paid. GIFT OF CAPITAL #e seven-year rules that apply to potentially exempt transfers and chargeable lifetime transfers could increase the Inheritance Tax bill for those who fail to survive for long enough a!er making a gi! of capital. If Inheritance Tax is due in respect of a failed potentially exempt transfer, it is payable by the recipient. If Inheritance Tax is due in respect of a chargeable lifetime transfer on death, it is payable by the trustees. Any remaining Inheritance Tax is payable by the estate. APPROPRIATE TRUST #e Inheritance Tax di$erence can be calculated and covered by a level or decreasing term assurance policy written in an appropriate Trust for the bene"t of whoever will be a$ected by the Inheritance Tax liability and in order to keep the proceeds out of the settlor’s Inheritance Tax estate. Which is more suitable and the level of cover required will depend on the circumstances. If the potentially exempt transfers or chargeable lifetime transfers are within the NRB, taper relief will not apply. However, this does not mean that no cover is required. Death within seven years will result in the full value of the transfer being included in the estate, with the knock-on effect that other estate assets up to the value of the potentially exempt transfers or chargeable lifetime transfers could suffer tax that they would have avoided had the donor survived for seven years. ESTATE LEGATEES A seven-year level term policy could be the most appropriate type of policy in this situation. Any additional Inheritance Tax is payable by the estate, so a Trust for the benefit of the estate legatees will normally be required. Where the potentially exempt transfers or chargeable lifetime transfers exceed the NRB, the tapered Inheritance Tax liability that will result from death a!er the potentially exempt transfers or chargeable lifetime transfers are made can be estimated. ‘GIFT INTER VIVOS’ A special form of ‘gift inter vivos’ (a life assurance policy that provides a lump sum to cover the potential Inheritance Tax liability that could arise if the donor of a gift dies within seven years of making the gift) is put in place (written in an appropriate Trust) to cover the gradually declining tax liability that may fall on the recipient of the gift. Trustees might want to use a life of another policy to cover a potential liability. Taper relief only applies to the tax: the full value of the gi! is included within the estate, which in this situation will use up the NRB that becomes available to the rest of the estate a!er seven years. WHOLE OF LIFE COVER #erefore, the estate itself will also be liable to additional Inheritance Tax on death within seven years, and depending on the circumstances, a separate level term policy written in an appropriate trust for the estate legatees might also be required. Where an Inheritance Tax liability continues after any potentially exempt transfers or chargeable lifetime transfers have dropped out of account, whole of life cover written in an appropriate Trust should also be considered. O 15 | GUIDE TO THE FUTURE OF RETIREMENT 16 | GUIDE TO INHERITANCE TAX PLANNINGThinking about death isn't easy. Talking about it is even harder. #e reality of our own mortality is a tough subject, but a discussion will ensure your assets are le! to the right people. If you want to be sure your wishes are met a!er you die, then it’s important to have a Will. A Will is the only way to make sure your money and possessions that form your estate go to the people and causes you care about. Unmarried partners, including same-sex couples who don’t have a registered civil partnership, have no right to inherit if there is no Will. One of the main reasons also for drawing up a Will is to mitigate a potential Inheritance Tax liability. STATUTORY RULES Where a person dies without making a Will, the distribution of their estate becomes subject to the statutory rules of intestacy (where the person resides also determines how their property is distributed upon their death, which includes any bank accounts, securities, property and other assets they own at the time of death), which can lead to some unexpected and unfortunate consequences. #e bene"ciaries of the deceased person that they want to bene"t from their estate may be disinherited or le! with a substantially smaller proportion of the estate than intended. Making a Will is the only way for an individual to indicate whom they want to bene"t from their estate. Failure to take action could compromise the long-term "nancial security of the family. IMPLICATIONS OF DYING WITHOUT MAKING A WILL „ Assets people expected to pass entirely to their spouse or registered civil partner may have to be shared with children „ An unmarried partner doesn’t automatically inherit anything and may need to go to court to claim for a share of the deceased’s assets „ A spouse or registered civil partner from whom a person is separated, but not divorced, still has rights to inherit from them „ Friends, charities and other organisations the person may have wanted to support will not receive anything „ If the deceased person has no close family, more distant relatives may inherit „ If the deceased person has no surviving relatives at all, their property and possessions may go to the Crown LEGAL RESPONSIBILITY Without a Will, relatives who inherit under the law will usually be expected to be the executors (someone named in a Will, or appointed by the court, who is given the legal responsibility to take care of a deceased person’s remaining "nancial obligations) of your estate. #ey might not be the best people to perform this role. Making a Will lets the person decide the people who should take on this task. Where a Will has been made, it’s important to review it regularly to take account of changing circumstances. Unmarried partners have no right to inherit under the intestacy rules, nor do step-children who haven’t been legally adopted by their step-parent. Given today’s complicated and changing family arrangements, Wills are o!en the only means of ensuring legacies for children of earlier relationships. SIMPLIFYING THE DISTRIBUTION OF ESTATES FOR A SURVIVING SPOUSE OR REGISTERED CIVIL PARTNER Changes to the intestacy rules covering England and Wales, which became e$ective on 1 October 2014, were aimed at simplifying the distribution of an estate and could mean a surviving spouse or registered civil partner receives a larger inheritance than under the previous rules. Making a Will is also the cornerstone for Inheritance Tax and estate planning. Before making a Will, a person needs to consider: „ Who will carry out the instructions in the Will (the executor/s) „ Nominating guardians to look a!er children if the person dies before they are aged 18 „ Making sure people the person cares about are provided for L E A V I N G Y O U R L E G A C Y B E H I N D Considerations when making a Will 17 | GUIDE TO INHERITANCE TAX PLANNING„ What gi!s are to be le! for family and friends, and deciding how much they should receive „ What provision should be taken to minimise any Inheritance Tax that might be due on the person’s death PREPARING A WILL Before preparing a Will, a person needs to think about what possessions they are likely to have when they die, including properties, money, investments and even animals. Prior to an estate being distributed among beneficiaries, all debts and the funeral expenses must be paid. When a person has a joint bank account, the money passes automatically to the other account holder, and they can’t leave it to someone else. Estate assets may include: „ A home and any other properties owned „ Savings in bank and building society accounts „ Insurance, such as life assurance or an endowment policy „ Pension funds that include a lump sum payment on death „ National Savings, such as Premium Bonds „ Investments such as stocks and shares, investment trusts, Individual Savings Accounts „ Motor vehicles „ Jewellery, antiques and other personal belongings „ Furniture and household contents Liabilities may include: „ Mortgage(s) „ Credit card balance(s) „ Bank overdra!(s) „ Loan(s) „ Equity release JOINTLY OWNED PROPERTY AND POSSESSIONS Arranging to own property and other assets jointly can be a way of protecting a person’s spouse or registered civil partner. For example, if someone has a joint bank account, their partner will continue to have access to the money they need for day-to-day living without having to wait for their affairs to be sorted out. There are two ways that a person can own something jointly with someone else: AS TENANTS IN COMMON (CALLED ‘COMMON OWNERS’ IN SCOTLAND) Each person has their own distinct shares of the asset, which do not have to be equal. #ey can say in their Will who will inherit their share. AS JOINT TENANTS (CALLED ‘JOINT OWNERS’ IN SCOTLAND) Individuals jointly own the asset so, if they die, the remaining owner(s) automatically inherits their share. A person cannot use their Will to leave their share to someone else. PARTIAL INTESTACY #is can sometimes happen even when there is a Will, for example, when the Will is not valid, or when it is valid but the bene"ciaries die before the testator (the person making the Will). Intestacy can also arise when there is a valid Will but some of the testator’s (person who has made a Will or given a legacy) assets were not disposed of by the Will. #is is called a ‘partial intestacy’. Intestacy therefore arises in all cases where a deceased person has failed to dispose of some or all of his or her assets by Will, hence the need to review a Will when events change. O 18 | GUIDE TO INHERITANCE TAX PLANNINGT R U S T S ‘Ring-fencing’ assets to protect family wealth for future generations Trusts are used to protect family wealth for future generations, reducing the inter-generational &ow of Inheritance Tax and ensuring bloodline protection for your estate from outside claims. #e way in which assets held within Trusts are treated for Inheritance Tax purposes depends on whether the choice of bene"ciaries is "xed or discretionary. #e most popular types of Trust commonly used for Inheritance Tax planning can usually be written on either an ‘absolute’ or a ‘discretionary’ basis and the taxation treatment is very di$erent for each. A Trust is a "duciary arrangement that allows a third-party, or trustee, to hold assets on behalf of a bene"ciary or bene"ciaries. Once the Trust has been created, a person can use it to ‘ring-fence’ assets. Trusts terms: „ Settlor – the person setting up the Trust. „ Trustees – the people tasked with looking a!er the Trust and paying out its assets. „ Bene"ciaries – the people who bene"t from the assets held in Trust. 19 | GUIDE TO INHERITANCE TAX PLANNINGBare Trusts are also known as ‘Absolute’ or ‘Fixed Interest Trusts’, and there can be subtle di$erences. #e settlor – the person creating the Trust – makes a gi! into the Trust which is held for the bene"t of a speci"ed bene"ciary. If the Trust is for more than one bene"ciary, each person’s share of the Trust fund must be speci"ed. For lump sum investments, a!er allowing for any available annual exemptions, the balance of the gi! is a potentially exempt transfer for Inheritance Tax purposes. As long as the settlor survives for seven years from the date of the gi!, it falls outside their estate. #e Trust fund falls into the bene"ciary’s Inheritance Tax estate from the date of the initial gi!. With Loan Trusts, there isn’t any initial gi! – the Trust is created with a loan instead. And with Discounted Gi! plans, as long as the settlor is fully underwritten at the outset, the value of the initial gi! is reduced by the value of the settlor’s retained rights. INCOME EXEMPTION When family protection policies are set up in Bare Trusts, regular premiums are usually exempt transfers for Inheritance Tax purposes. #e normal expenditure out of income exemption o!en applies, as long as the cost of the premiums can be covered out of the settlor’s excess income in the same tax year, without a$ecting their normal standard of living. Where this isn’t possible, the annual exemption o!en covers some or all of the premiums. Any premiums that are non-exempt transfers into the Trust are potentially exempt transfers. Special valuation rules apply when existing life policies are assigned into family Trusts. #e transfer of value for Inheritance Tax purposes is treated as the greater of the open market value and the value of the premiums paid up to the date the policy is transferred into Trust. PARENTAL SETTLEMENT #ere’s an adjustment to the premiums paid calculation for unit-linked policies if the unit value has fallen since the premium was paid. #e open market value is always used for term assurance policies that pay out only on death, even if the value of the premiums paid is greater. With a Bare Trust, there are no ongoing Inheritance Tax reporting requirements and no further Inheritance Tax implications. With protection policies, this applies whether or not the policy can acquire a surrender value. Where the Trust holds a lump sum investment, the tax on any income and gains usually falls on the bene"ciaries. #e most common exception is where a parent has made a gi! into Trust for their minor child or stepchild, where parental settlement rules apply to the Income Tax treatment. TRUST ADMINISTRATION #erefore, the Trust administration is relatively straightforward, even for lump sum investments. Where relevant, the trustees simply need to choose appropriate investments and review these regularly. With a Bare Trust, the trustees look a!er the Trust property for the known bene"ciaries, who become absolutely entitled to it at age 18 (age 16 in Scotland). Once a gi! is made or a Protection Trust set up, the bene"ciaries can’t be changed, and money can’t be withheld from them beyond the age of entitlement. #is aspect may make them inappropriate to many clients who’d prefer to retain a greater degree of control. TRUST FUND With a Loan Trust, this means repaying any outstanding loan. With a Discounted Gi! Trust, it means securing the settlor’s right to receive their "xed payments for the rest of their life. With protection policies in Bare Trusts, any policy proceeds that haven’t been carved out for the life assured’s bene"t under a Split Trust must be paid to the Trust bene"ciary if they’re an adult. Where the bene"ciary is a minor, the trustees must use the Trust fund for their bene"t. Di%culties can arise if it’s discovered that a Trust bene"ciary has predeceased the life assured. In this case, the proceeds belong to the legatees of the deceased bene"ciary’s estate, which can leave the trustees with the task of tracing them. #e fact that bene"ciaries are absolutely entitled to the funds also means the Trust o$ers no protection of the funds from third-parties, for example, in the event of a bene"ciary’s divorce or bankruptcy. O B A R E T R U S T S Held for the bene"t of a speci"ed bene"ciary With a Discretionary Trust, the settlor makes a gi! into Trust, and the trustees hold the Trust fund for a wide class of potential bene"ciaries. #is is known as ‘settled’ or ‘relevant’ property. For lump sum investments, the initial gi! is a chargeable lifetime transfer for Inheritance Tax purposes. It’s possible to use any available annual exemptions. If the total non-exempt amount gi!ed is greater than the settlor’s available Nil-Rate Band (NRB), there’s an immediate Inheritance Tax charge at the 20% lifetime rate – or e$ectively 25% if the settlor pays the tax. OTHER PLANNING #e settlor’s available NRB is essentially the current NRB less any chargeable lifetime transfers they’ve made in the previous seven years. So in many cases where no other planning is in place, this will simply be the current NRB, which is £325,000 up to 2021/22. #e Residence Nil-Rate Band (RNRB) isn’t available to Trusts or any lifetime gi!ing. Again, there’s no initial gi! when setting up a Loan Trust, and the initial gi! is usually discounted when setting up a Discounted Gi! plan. Where a cash gi! exceeds the available NRB, or an asset is gi!ed which exceeds 80% of the NRB, the gi! must be reported to HM Revenue & Customs (HMRC) on an IHT 100. FAMILY PROTECTION When family protection policies are set up in Discretionary Trusts, regular premiums are usually exempt transfers for Inheritance Tax purposes. Any premiums that are non- exempt transfers into the Trust will be chargeable lifetime transfers. Special valuation rules for existing policies assigned into Trust apply. As well as the potential for an immediate Inheritance Tax charge on the creation of the Trust, there are two other points at which Inheritance Tax charges will apply. #ese are known as ‘periodic charges’ and ‘exit charges’. Periodic charges apply at every ten-yearly anniversary of the creation of the Trust. INVESTMENT BOND Exit charges may apply when funds leave the Trust. #e calculations can be complex but are a maximum of 6% of the value of the Trust fund. In many cases, they’ll be considerably less than this – in simple terms, the 6% is applied on the value in excess of the Trust’s available NRB. However, even where there is little or, in some circumstances, no tax to pay, the trustees still need to submit an IHT 100 to HMRC. Under current legislation, HMRC will do any calculations required on request. For a Gi! Trust holding an investment bond, the value of the Trust fund will be the open market value of the policy – normally its surrender value. RETAINED RIGHTS For a Loan Trust, the value of the trust fund is the bond value less the amount of any outstanding loan still repayable on demand to the settlor. Retained rights can be recalculated as if the settlor was ten years older For Discounted Gi! schemes, the value of the Trust fund normally excludes the value of the settlor’s retained rights – and in most cases, HMRC are willing to accept pragmatic valuations. For example, where the settlor was fully underwritten at the outset, and is not terminally ill at a ten- yearly anniversary, any initial discount taking account of the value of the settlor’s retained rights can be recalculated as if the settlor was ten years older than at the outset. OPEN MARKET If a protection policy with no surrender value is held in a Discretionary Trust, there will usually be no periodic charges at each ten-yearly anniversary. However, a charge could apply if a claim has been paid out and the funds are still in the Trust. In addition, if a life assured is in severe ill health around a ten-yearly anniversary, the policy could have an open market value close to the claim value. If so, this has to be taken into account when calculating any periodic charge. D I S C R E T I O N A R Y T R U S T S Wide class of potential bene"ciaries 20 | GUIDE TO INHERITANCE TAX PLANNING CHARGEABLE EVENT Where Discretionary Trusts hold investments, the tax on income and gains can also be complex, particularly where income-producing assets are used. Where appropriate, some of these complications could be avoided by an individual investing in life assurance investment bonds, as these are non-income-producing assets and allow trustees to control the tax points on any chargeable event gains. Bare Trusts give the trustees discretion over who bene"ts and when. #e Trust deed will set out all the potential bene"ciaries, and these usually include a wide range of family members, plus any other individuals the settlor has chosen. #is gives the trustees a high degree of control over the funds. #e settlor is o!en also a trustee to help ensure their wishes are considered during their lifetime. TRUST PROVISIONS In addition, the settlor can provide the trustees with a letter of wishes identifying whom they’d like to bene"t and when. #e letter isn’t legally binding but can give the trustees clear guidance, which can be amended if circumstances change. #e settlor might also be able to appoint a protector, whose powers depend on the Trust provisions, but usually include some degree of veto. Family disputes are not uncommon, and many feel they’d prefer to pass funds down the generations when the bene"ciaries are slightly older than age 18. A Discretionary Trust also provides greater protection from third parties, for example, in the event of a potential bene"ciary’s divorce or bankruptcy, although in recent years this has come under greater challenge. O 21 | GUIDE TO INHERITANCE TAX PLANNING FlexibleTrusts are similar to a fully Discretionary Trust, except that alongside a wide class of potential bene"ciaries, there must be at least one named default bene"ciary. Flexible Trusts with default bene"ciaries set up in the settlor’s lifetime from 22 March 2006 onwards are treated in exactly the same way as Discretionary Trusts for Inheritance Tax purposes. Di$erent Inheritance Tax rules apply to older Trusts set up by 21 March 2006 that meet speci"ed criteria and some Will Trusts. All post-21 March 2006 lifetime Trusts of this type are taxed in the same way as fully Discretionary Trusts for Inheritance Tax and Capital Gains Tax purposes. DEFAULT BENEFICIARY For Income Tax purposes, any income is payable to and taxable on the default bene"ciary. However, this doesn’t apply to even regular withdrawals from investment bonds, which are non-income-producing assets. Bond withdrawals are capital payments, even though chargeable event gains are subject to Income Tax. As with Bare Trusts, the parental settlement rules apply if parents make gi!s into Trust for their minor children or stepchildren. SIGNIFICANT DIFFERENCES When it comes to bene"ciaries and control, there are no signi"cant di$erences between fully Discretionary Trusts and this type of Trust. #ere will be a wide range of potential bene"ciaries. In addition, there will be one or more named default bene"ciaries. Naming a default bene"ciary is no more binding on the trustees than providing a letter of wishes setting out whom the settlor would like to bene"t from the Trust fund. #e trustees still have discretion over which of the default and potential bene"ciaries actually bene"ts and when. Some older Flexible Trusts limit the trustees’ discretionary powers to within two years of the settlor’s death, but this is no longer a common feature of this type of Trust. O F L E X I B L E T R U S T S W I T H D E F A U L T B E N E F I C I A R I E S Discretion over which of the default and potential bene"ciaries actually bene"t 22 | GUIDE TO INHERITANCE TAX PLANNING These Trusts are o!en used for family protection policies with critical illness or terminal illness bene"ts in addition to life cover. Split Trusts can be Bare Trusts, Discretionary Trusts or Flexible Trusts with default bene"ciaries. When using this type of Trust, the settlor/life assured carves out the right to receive any critical illness or terminal illness bene"t from the outset, so there aren’t any gi! with reservation issues. In the event of a claim, the provider normally pays any policy bene"ts to the trustees, who must then pay any carved-out entitlements to the life assured and use any other proceeds to bene"t the Trust bene"ciaries. TRADE-OFF If terminal illness benefit is carved out, this could result in the payment ending up back in the life assured’s Inheritance Tax estate before their death. A carved-out terminal illness benefit is treated as falling into their Inheritance Tax estate once they meet the conditions for payment. Essentially, these types of Trust o$er a trade-o$ between simplicity and the degree of control available to the settlor and their chosen trustees. For most, control is the more signi"cant aspect, especially where any lump sum gi!s can stay within a settlor’s available Inheritance Tax NRB. MAXIMUM CONTROL Keeping gi!s within the NRB and using non-income-producing assets such as investment bonds can allow a settlor to create a Trust with maximum control, no initial Inheritance Tax charge and limited ongoing administrative or tax burdens. In other cases, for example, grandparents funding for school fees, the Bare Trust may o$er advantages. #is is because tax will fall on the grandchildren, and most of the funds may be used up by the age of 18. #e considerations are slightly di$erent when considering family protection policies, where the settlor will o!en be dead when policy proceeds are paid out to bene"ciaries. POLICY PROCEEDS A Bare Trust ensures the policy proceeds will be payable to one or more individuals, with no uncertainty about whether the trustees will follow the deceased’s wishes. However, this can also mean that the only solution to a change in circumstances, such as divorce from the intended bene"ciary, is to start again with a new policy. Settlors are often excluded from benefiting under Discretionary and Flexible Trusts. Where this applies, this type of Trust isn’t suitable for use with joint life, first death protection policies if the primary purpose is for the proceeds to go to the survivor. O S P L I T T R U S T S Family protection policies 23 | GUIDE TO INHERITANCE TAX PLANNING L A S T I N G P O W E R O F A T T O R N E Y Taking control of decisions even in the event you can’t make them yourself A Lasting Power of Attorney (LPA) enables individuals to take control of decisions that a$ect them, even in the event that they can’t make those decisions for themselves. Without them, loved ones could be forced to endure a costly and lengthy process to obtain authority to act for an individual who has lost mental capacity. An individual can create a LPA covering their property and "nancial a$airs and/or a separate LPA for their health and welfare. It’s possible to appoint the same or di$erent attorneys in respect of each lasting power of attorney, and both versions contain safeguards against possible misuse. OWN FINANCIAL AFFAIRS It’s not hard to imagine the difficulties that could arise where an individual loses the capacity to manage their own financial affairs and, without access to their bank account, pension and investments, family and friends could face an additional burden at an already stressful time. LPA and their equivalents in Scotland and Northern Ireland should be a consideration in all financial planning discussions and should be a key part of any protection insurance planning exercise. Planning for mental or physical incapacity should sit alongside any planning for ill health or unexpected death. LOSING MENTAL CAPACITY Commencing from 1 October 2007, it is no longer possible to establish a new Enduring Power of Attorney (EPA) in England and Wales, but those already in existence remain valid. #e attorney would have been given authority to act in respect of the donor’s property and "nancial a$airs as soon as the EPA was created. At the point the attorney believes the donor is losing their mental capacity, they would apply to the O%ce of the Public Guardian (OPG) to register the EPA to obtain continuing authority to act. SIMILAR PROVISIONS IN SCOTLAND Similar provisions to LPAs apply in Scotland. #e ‘granter’ (donor) gives authority to their chosen attorney in respect of their "nancial and property matters (‘continuing power of attorney’) and/or personal welfare (‘welfare power of attorney’). #e latter only takes e$ect upon the granter’s mental incapacity. Applications for powers of attorney must be accompanied by a certi"cate con"rming the granter understands what they are doing, completed by a solicitor or medical practitioner only. LPAs don’t apply to Northern Ireland. Instead, those seeking to make a power of attorney appointment over their "nancial a$airs would complete an EPA. #is would be e$ective as soon as it was completed and would only need to be registered in the event of the donor’s loss of mental capacity with the High Court (O%ce of Care and Protection). CONCERNING MEDICAL TREATMENT It’s usual for the attorney to be able to make decisions about the donor’s "nancial a$airs as soon as the LPA is registered. Alternatively, the donor can state it will only apply where the donor has lost mental capacity in the opinion of a medical practitioner. A LPA for health and welfare covers decisions relating to an individual’s day-to-day wellbeing. The attorney may only act once the donor lacks mental capacity to make the decision in question. The types of decisions covered might include where the donor lives and decisions concerning medical treatment. LIFE-SUSTAINING TREATMENT #e donor also has the option to provide their attorney with the authority to give or refuse consent for life-sustaining treatment. Where no authority is given, treatment will be provided to the donor in their best interests. Unlike the registration process for an EPA, registration for both types of LPA takes place up front and is not dependent on the donor’s mental capacity. An attorney must act in the best interest of the donor, following any instructions and considering the donor’s preferences when making decisions. !ey must follow the Mental Capacity Act Code of Practice which establishes "ve key principles: 1. A person must be assumed to have capacity unless it’s established he or she lacks capacity. 2. A person isn’t to be treated as unable to make a decision unless all practicable steps to help him or her do so have been taken without success. 3. A person isn’t to be treated as unable to make a decision merely because he or she makes an unwise decision. 4. An act done, or decision made, under the Act for or on behalf of a person who lacks capacity must be done, or made, in his or her best interests. 5. Before the act is done, or the decision is made, regard must be had to whether the purpose for which it’s needed can be as e$ectively achieved in a way that is less restrictive of the person’s rights and freedom of action. 24 | GUIDE TO INHERITANCE TAX PLANNING 25 | GUIDE TO INHERITANCE TAX PLANNINGLEGALLY BINDING DUTIES A donor with mild dementia might be provided with the means to purchase items for daily living, but otherwise their "nancial matters are undertaken by their attorney. #e code of practice applies a number of legally binding duties upon attorneys, including the requirement to keep the donor’s money and property separate from their own or anyone else’s. Anyone aged 18 or over who has mental capacity and isn’t an undischarged bankrupt may act as an attorney. A trust corporation can be an attorney for a property and "nancial a$airs LPA. In practice, attorneys will be spouses, family members or friends, or otherwise professional contacts such as solicitors. REPLACEMENT ATTORNEY Where joint attorneys are being appointed, the donor will state whether they act jointly (the attorneys must make all decisions together), or jointly and severally (the attorneys may make joint decisions or separately), or jointly for some decisions (for example, the sale of the donor’s property) and jointly and severally in respect of all other decisions. An optional but useful feature of the LPA is the ability to appoint a replacement attorney in the event the original attorney is no longer able to act. #e donor can leave instructions and preferences, but if they don’t their attorney will be free to make any decisions they feel are correct. Instructions relate to things the attorney should or shouldn’t do when making decisions – not selling the donor’s home unless a doctor states the donor can no longer live independently or a particular dietary requirement would be examples. ‘CERTIFICATE PROVIDER’ Preferences relate to the donor’s wishes, beliefs and values they would like their attorney to consider when acting on their behalf. Examples might be ethical investing or living within close proximity of a relative. #e following apply to both forms of LPA. A ‘certi"cate provider’ must complete a section in the LPA form stating that as far as they are aware, the donor has understood the purpose and scope of the LPA. A certi"cate provider will be an individual aged 18 or over and either, someone who has known the donor personally well for at least two years; or someone chosen by the donor on account of their professional skills and expertise – for example, a GP or solicitor. CONCERNS OR OBJECTIONS #ere are restrictions on who may act as a certi"cate provider – these include attorneys, replacement attorneys, family members and business associates of the donor. A further safeguard is the option for the donor to choose up to "ve people to be noti"ed when an application for the LPA to be registered is being made. #is allows any concerns or objections to be raised before the LPA is registered, which must be done within "ve weeks from the date on which notice is given. #e requirement to obtain a second certi"cate provider where the donor doesn’t include anyone to be noti"ed has now been removed as part of the O%ce of the Public Guardian (OPG) review of LPAs. COURT OF PROTECTION A person making a LPA can have help completing it, but they must have mental capacity when they "ll in the forms. Otherwise, those seeking to make decisions on their behalf will need to apply to the Court of Protection for a deputyship order. #is can be expensive and time-consuming and may require the deputy to submit annual reports detailing the decisions they have made. #ere are strict limits on the type of gi!s attorneys can make on the donor’s behalf. Gi!s may be made on ‘customary occasions’, for example, birthdays, marriages and religious holidays, or to any charity to which the donor was accustomed to donating. Gi!s falling outside of these criteria would need to be approved by the Court of Protection. An example would be a gi! intended to reduce the donor’s Inheritance Tax liability. O 26 | GUIDE TO INHERITANCE TAX PLANNINGWhether you have earned your wealth, inherited it or made shrewd investments, you will want to ensure that as little of it as possible ends up in the hands of HM Revenue & Customs. With careful planning and professional "nancial advice, it is possible to take preventative action to either reduce or mitigate a person’s bene"ciaries’ Inheritance Tax bill – or mitigate it altogether. #ese are some of the main areas to consider. 1. MAKE A WILL A vital element of e$ective estate preservation is to make a Will. Making a Will ensures an individual’s assets are distributed in accordance with their wishes. #is is particularly important if the person has a spouse or registered civil partner. Even though there is no Inheritance Tax payable between both parties, there could be tax payable if one person dies intestate without a Will. Without a Will in place, an estate falls under the laws of intestacy – and this means the estate may not be divided up in the way the deceased person wanted it to be. 2. MAKE ALLOWABLE GIFTS A person can give cash or gi!s worth up to £3,000 in total each tax year, and these will be exempt from Inheritance Tax when they die. #ey can carry forward any unused part of the £3,000 exemption to the following year, but they must use it or it will be lost. Parents can give cash or gi!s worth up to £5,000 when a child gets married, grandparents up to £2,500, and anyone else up to £1,000. Small gi!s of up to £250 a year can also be made to as many people as an individual likes. 3. GIVE AWAY ASSETS Parents are increasingly providing children with funds to help them buy their own home. #is can be done through a gi!, and provided the parents survive for seven years a!er making it, the money automatically moves outside of their estate for Inheritance Tax calculations, irrespective of size. 4. MAKE USE OF TRUSTS Assets can be put in an appropriate Trust, thereby no longer forming part of the estate. There are many types of Trust available and they can be set up simply at little or no charge. They usually involve parents (settlors) investing a sum of money into a Trust. The Trust has to be set up with trustees – a suggested minimum of two – whose role is to ensure that on the death of the settlors, the investment is paid out according to the settlors’ wishes. In most cases, this will be to children or grandchildren. #e most widely used Trust is a Discretionary Trust, which can be set up in a way that the settlors (parents) still have access to income or parts of the capital. It can seem daunting to put money away in a Trust, but they can be unwound in the event of a family crisis and monies returned to the settlors via the bene"ciaries. 5. NORMAL EXPENDITURE OUT OF INCOME RULE As well as considering putting lump sums into an appropriate Trust, people can also make monthly contributions into certain savings or insurance policies and put them into an appropriate Trust. #e monthly contributions are potentially subject to Inheritance Tax, but if the person can prove that these payments are not compromising their standard of living, they are exempt. 6. PROVIDE FOR THE TAX If a person is not in a position to take avoiding action, an alternative approach is to make provision for paying Inheritance Tax when it is due. #e tax has to be paid within six months of death (interest is added a!er this time). Because probate must be granted before any money can be released from an estate, the executor may have to borrow money or use their own funds to pay the Inheritance Tax bill. #is is where life assurance policies written in an appropriate Trust come into their own. A life assurance policy is taken out on both a husband’s and wife’s life with the proceeds payable only on second death. #e amount of cover should be equal to the expected Inheritance Tax liability. By putting the policy in an appropriate Trust, it means it does not form part of the estate. #e proceeds can then be used to pay any Inheritance Tax bill straight away without the need for the executors to borrow. O P R E S E R V I N G W E A L T H F O R F U T U R E G E N E R A T I O N S Factors likely to have a lasting and positive impact on wealth 27 | GUIDE TO INHERITANCE TAX PLANNINGIf you do not plan for what happens to your assets when you die, more of your estate than necessary could be exposed to Inheritance Tax. You want to be sure that the right people will get the right amounts at the right time – and that they are ready to receive potentially large sums. From essential estate planning, such as the establishment of Wills and Power of Attorney, to options such as making the most of exemptions, giving away excess income and creating Trusts, there are numerous estate planning possibilities. Everyone has di$erent requirements and motivations – the right solutions for you are the ones that suit your personal circumstances. We can work with you to discover what these are. Our estate planning advice service is designed to help you maximise your wealth and minimise a potential Inheritance Tax bill. Whether building a "nancial plan with you from the start or reviewing your existing arrangements, we can provide professional "nancial advice to help guide you through the process to de"ning your goals and recommend a tailored strategy to meet your individual needs that will be &exible enough to adapt as your life changes. To "nd out more, please contact us – we look forward to hearing from you. I N C O N C L U S I O N Estate planning possibilities This guide is for your general information and use only, and is not intended to address your particular requirements. The content should not be relied upon in its entirety and shall not be deemed to be, or constitute, advice. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of the content. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts. Levels and bases of, and reliefs from, taxation are subject to change and their value depends on the individual circumstances of the investor. The value of your investments can go down as well as up and you may get back less than you invested. All figures relate to the 2021/22 tax year, unless otherwise stated. NEED TO START PLANNING TO PASS ON YOUR WEALTH TO THE NEXT GENERATION? If you’ve not made the right arrangements, your family may be faced with an unexpected or large Inheritance Tax bill to pay in the event of your premature death. It’s a complex area of financial planning, but with the right professional advice it can reduce or mitigate the amount of tax payable. To review your current situation or to discuss the options available, please contact us for further information – we look forward to hearing from you. Goldmine Media, Rivers Lodge, West Common, Harpenden, Hertfordshire, AL5 2JD. Articles are copyright protected by Goldmine Media Limited 2021. 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