Til death do us part… more IHT issues

Solomons-financial-advisor-wimbledon-blogger

Til death do us part…

If you have ever taken marriage vows, you were probably not bothered by the inheritance tax advantage that couples enjoy. More accurately, it is of course the beneficiaries of the estate that will actually enjoy any inheritance tax benefit from marriage.

This is because everyone has a “nil rate band” and whilst much has been made of this “allowance” it is a personal one, so a couple naturally has a doubling advantage. Sometimes people set up their finances so that on the first death, an amount of assets is released from the estate to the beneficiaries, rather than them having to wait for their inheritance.

This does come with some rather obvious potential snags – such as where does the money come from to be released and how best to achieve this. Of course the surviving spouse may have his or her circumstances significantly altered since such an agreement was originally made, so may also be reluctant to release funds if they believe that they are needed.

Nil Rate Wedding Bands

It is quite a common practice for solicitors and Will writers to include the transfer of the “nil rate band” upon death, so you ought to think through if this is right for you. Just because it was good advice at the time does not mean that it will remain best advice.

Think about how the money might be released and to whom. If it does pass to your children, please remember that around 1 in 3 marriages end in divorce, so should that happen to one of your children, the inheritance might be “diluted” as a result of divorce. This is where Trusts can protect family wealth as the money isn’t paid to an individual but to a Trust. The Trustees, then will be directed by the terms of the Trust and depending on how it is set up have discretion about how to pay funds.

IHT402

IHT402 is a form that is used to transfer the nil rate band and any unused relief. It is worth downloading and having a look at (click on this text to open a pdf of it). You should review your Will regularly to ensure that it remains suitable. However perhaps more importantly, the bigger question you should reflect on before gifting or transferring any substantial sum is to ensure that you aren’t going to run out of funds yourself. Hence a financial plan will keep you up to date and on track and rather vitally, will explore this fundamental concern.

Dominic Thomas
Solomons IFA

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

Til death do us part… more IHT issuesDominic2023-12-01T12:19:53+00:00

As safe as houses… more IHT

As safe as houses…. more IHT

You have probably heard that the nil rate band or inheritance tax allowance is increasing on a main residence, provided that it is inherited by your family and provided that it isn’t worth too much. As probably intended, many are under the impression that this new “£500,000” allowance has started… it hasn’t and many will not see the benefit.

For starters, the new “Main Residence Nil Rate Band” … MRNRB is being gradually introduced from April 2017 starting with an extra £100,000 rising each tax year by £25,000 until the full extra £175,000 becomes applied from April 2020. However if the net value of the estate is worth more than £2m, then this extra allowance is gradually lost. I think that’s called giving with one hand and taking with the other and of course is ignored by those who think that this is a tax break for the super rich…. reality is quite different.

IH405

IHT405 is the form you use to tell HMRC about all of your properties upon death. Have a look at the form, the valuation of a property (or plural) can and will make a considerable difference to the value of an estate. If you have a second (or further) property, then please keep really good records about it. This includes dates and purchase prices, valuations, work done, insurance costs and so on. You need to be fastidious in your record keeping… not least because these records may also be pretty vital whilst you are alive.

Getting your house/s in order

If you have acquired property over the years, perhaps just for your own family use or perhaps as a commercial concern to generate rental income, this all needs accounting…(sorry for stating the obvious). The value of property obviously changes and there is some degree of flexibility in how this is valued for probate… on the basis that what someone will actually pay for a property is more fluid than a simple figure.

As an aside, landlords that are off-setting interest against rental income, thereby reducing profit and tax, are having the amount permitted altered (another feature of the last Budget). So beware! Also as an aside, those with second properties that have soared in value are loaded with capital gains and thus subject to capital gains tax. There are ways to manage this… which I shall outline at another time – but be advised that there are solutions that may appeal.

Dominic Thomas
Solomons IFA

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

As safe as houses… more IHTDominic2023-12-01T12:19:53+00:00

How does HMRC know about gifts?

Dominic Thomas
Oct 2015 • 5 min read

How does HMRC know about gifts?

You may have been very generous with your wealth and given lots of money to your beneficiaries or charity prior to your death, but how on earth does HMRC or the Executors of your estate know to correctly offset these gifts (if appropriate) against your estate?

Probably the simple answer is that if it isn’t recorded, it would seem difficult to prove a gift was made. There are a variety of issues – the annual giving allowance (£3,000) does not need to be reported, but frankly it would seem wise to record the fact that the amount is actually gifted… all helping to demonstrate the accuracy of the story behind the information.

Here’s the link to take a look at form IHT403 – which is essentially a list of gifts and transfers that you have made within the last 7 years. In short, you really need to know the dates of the gift (within a tax year), the beneficiary, a description and the value of the gift.

Inheritance tax can get rather complicated with terms like “Pre Owned Assets” “Gifts with Reservation” “Lifetime Transfers” and more. So it’s rather important that the source of gifts is documented. To my mind it makes sense that you provide a brief written, dated document to the recipient of your gift and ideally your financial planner and possibly Accountant if you have one. Certainly retain a copy within your records – but remember passwords are all well and good when you are alive, but when you aren’t here to tell anyone what they are…

Gifts from Income

I don’t wish to drown you with detail, but it is possible to make gifts from income, provided that this is not to your detriment or deliberately reduce the value of your estate for IHT planning. If that sounds like an oxymoron… well, that’s the state of the tax system.

How do you demonstrate legitimate regular gifts from income? without a summary of your tax year income and expenditure I’d suggest that it will be fairly “difficult”. A business doesn’t have this problem – there are obvious accounts, or at least there should be, but as individuals perhaps the rule of thumb ought to be – think of yourself as a business – which means keep details carefully.

Taking a look at the last page of the form IHT403, you will observe that HMRC will request details of income and expenditure for the last 7 years. Could you provide this for yourself today? if not, how on earth will your Executors?…. hence one of the reasons we ask clients to update us with income and expenditure information every tax year… enabling us to help them build up a record – but also to do all the other sensible financial planning stuff – like helping reduce income taxes, checking that our assumptions about future lifestyle costs are broadly right and where it’s all going… and ideally to help them catch rather more of it than they otherwise would. So yes, those forms are rather important both whilst you are alive or deceased.

In practice, it is possible that HMRC might even wish to go even further back in time, perhaps as much as 14 tax years prior to death…. so my advice is to get your “ducks in a row” – which has several important positive by-products.

Better budgeting
Better financial planning
Lower income taxes
Reduced costs
Longer-lasting wealth…

You heard it here – make an HMRC form your best financial planning tool!

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How does HMRC know about gifts?Dominic2024-03-13T10:42:33+00:00

Marriage is not an IHT exemption

Save yourself some time, if you aren’t married or haven’t been married or don’t ever plan to marry you really don’t need to read this item, but if you have, are or do… well its one for you to take a look at.

Let me begin by correcting myself – marital assets are generally exempt from IHT (inheritance tax). However what is not exempt is the need to report these to HMRC upon the death of one or both of the parties. This is all part of the continuing series about IHT and how it inter-relates with your financial planning today – and how the information that is requested once you have died isn’t easy to trace and leaves your Executors – perhaps your nearest and dearest, with a headache.

IHT404

This is a form that HMRC use for you to report jointly owned assets (click to see). Now please be careful, this needs some thought and you may have already made some changes to jointly owned assets – perhaps “giving” them to your spouse to help reduce your combined taxes, or perhaps you have been persuaded to adjust the ownership details of your home by a solicitor intending to help you to reduce inheritance tax.

I meet lots of different people as you may imagine and many couples take different views about money, in essence these boil down to – everything is private and separate or everything is jointly owned and some couples delegate financial management to just one of them, with the other playing a very minor role (which usually troubles both in the event that “something were to happen”).

Clarity

So if you have been married or are married, please take a look at the HMRC form IHT404. Download it and then complete it fully, keep a copy, ensure your spouse has a copy and also send your financial planner a copy too.

This is a form for the Inland Revenue (HMRC) so its not to be trifled with, the dates of purchase, values and share of ownership are not “minor details” this is your account of what you have together. I’m not bothered about how old you are, unless you can tell me exactly when you will die, this is a form all married people need to get sorted out in advance and keep under review. So, if that’s you… its your task for today… another way to show your spouse that you care!

Dominic Thomas
Solomons IFA

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

Marriage is not an IHT exemptionDominic2023-12-01T12:19:54+00:00

Where are you originally from?

Where are you from originally?

Today, this may sound like a loaded question, so let me explain. The UK has a plethora of international tax agreements. Financial planning is always set in a context – it can be done in almost any country and is a growing profession in northern Europe, India and China. A financial planner needs to understand where you are deemed resident and where you are deemed domiciled as this has considerable impact on any planning in the present, but also in the event of your death.

Global Death Duties

The world seems smaller because of our ability to communicate and travel much more easily, within a few hours, you could be… well, the other side of the world. Britain’s multi-cultural history might be reasonably easy to plot, but how about your own? If you aren’t here to correctly explain the where, when and why… who has the accurate details?

IHT401

The form IHT401 asks for a full history (take a look by clicking the link). The information requested covers some of what you may think is obvious (where you are from, your nationality etc) but also details about your education and employment. If you were not born in Britain, even if you have lived here since before you could walk, this is a form that you should prepare for your Executors. It has implications for where you are taxed and how much tax your estate will pay in the event of your death

Do yourself and your estate a favour..

The information requested by HMRC is probably easy for you to put together reasonably quickly, so can I urge you to do so. It will always be much harder for someone else to collate and verify your history, so make it easy for them to do so – by getting it done yourself.

This is more than a casual glance at LinkedIn with information of your career to date (assuming that your online CV is accurate). Naturally any Executor will need to check the information, so make this easy for them to find – provide it in a safe place or even in advance to each of them.

To my mind it makes sense for a financial planner to hold this same information about you as well – because investments that you make need to be set in the context of potential global taxes and of course ensure that the advice is suitable, appropriate and rather obviously – legal!

So, if you weren’t born in the UK – please take a moment to download the IHT401 form and fill it in, saving it to your records and if you are a client and haven’t done so already, send me a copy. Don’t put it off any longer.

Dominic Thomas
Solomons IFA

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

Where are you originally from?Dominic2023-12-01T12:19:55+00:00

What if you had died yesterday?

There’s no escaping this highly sensitive topic – death. It comes to us all eventually. However I’d like to take a different approach to this topic in relation to your financial planning, it will be a short series that I hope will be of value to you and yours.

Can I first of all challenge you to simply have a look through the HMRC (Inland Revenue) form called IHT400. It is the starting point for those charged with administering your estate. Yes I am serious. However far off death hopefully is, what if you’d been hit by the proverbial bus yesterday? Who would pick up this task and how do you expect them to complete it? Here is the link (open a new window – so that you don’t leave this page).

HMRC IHT400

OK, assuming that your estate does need to be reported (i.e. worth more than £325,000) and you moved past the double-speak, does anything strike you?

Stating the obvious…

I’m not going to approach this line by line, but to highlight some basic points. Whoever has to complete this form has a huge task ahead of them… perhaps you have done this for someone else already?… I have several times. The guidance notes document that accompanies IHT400 runs to nearly 100 pages…. the NOTES!

So let’s face a few key facts

You have 12 months to complete the form
After 6 months interest is charged
You need a lot of personal information, matters of record – marriages, births, deaths
You probably need a family tree
You need tax information, NI number, tax reference etc
You need a valid Will
You need a list of gifts and disposals
All banking information, investments, pensions and life assurance
All assets on a worldwide basis
All liabilities and debt
Details about Trusts and exemptions
Details of your income and expenses for the last 7 years
There are another subsequent 21 forms IHT401-IHT430

If experience has taught me anything, it’s that getting most people to put this sort of information together isn’t easy – because it’s an arduous, daunting task. Yet this is what we leave others to do for us in a time of stress. Yes a solicitor can do this for you, but actually most, if not all of the information is within your possession, it’s simply that it’s not easy to extract or perhaps understand.

Who else has this information? well…. we do… if you have kept us up to date…. which is one of the many reasons for requesting it. So… imagine that yesterday was your last. You are not here to tell your loved ones and/or Executors where everything is neatly filed (!)…. so where to begin? may I suggest we address this now? You could even start by printing off IHT400 and putting in some of the information you already know…. you can see where I’m going with this can’t you.

Dominic Thomas
Solomons IFA

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

What if you had died yesterday?Dominic2023-12-01T12:19:55+00:00

Where there’s a Will – part 2

I asked Alex Truesdale for her thoughts on the ruling by the Court of Appeal and am thankful for her very valuable insight, here are her thoughts and observations.

The Court of Appeal’s judgment in this long-running dispute confirms that disinherited children are permitted by a 1975 statute to challenge their parents’ Wills if reasonable provision for their maintenance is not made. “Maintenance” means the child’s cost of daily living at whatever level is appropriate to them. The question of what is “reasonable” is dealt with by the court exercising its discretion to consider a number of factors laid down by statute, including the child’s needs and circumstances, the needs and circumstances of the beneficiary who has inherited instead, and the parent’s conduct. Here, Arden LJ endorses the lower court’s description of Melita Jackson’s conduct towards her daughter Heather Illot, since their 1978 estrangement, as “unreasonable, capricious and harsh”, before replacing the lower court’s £50,000 award with a sum of £163,000. This, Arden LJ reasoned, would allow Mrs Illot to purchase her house, receive a modest income, and potentially arrange a pension through equity release, all without compromising her state benefits.

This is not new Law

None of this is new law. But it is inevitable that this high profile victory for Heather Ilott – albeit one which sees her receiving just over 1/3 of her late mother’s estate – will encourage further challenges to Wills which seek to disinherit family members, particularly if there is no connection between a testator and the charity which has benefited from a windfall legacy. A costs order has yet to be made but will be considerable: Melita Jackson’s insistence that her executors defend to the hilt any attempt by her daughter to contest the Will will already have eroded the value of her estate, and so now the charities themselves face a smaller residual legacy and their own costs bill. There may be a further appeal to the Supreme Court, but I would suspect that the charities will take a view on the reputational as well as financial damage they risk in prolonging a dispute which has run since 2004 and, arguably, since the estrangement in 1978.

Where does this leave testamentary capacity? Much as it was before – the award made in this case turns on its own facts, and does not represent any further curtailment of one’s freedom to leave one’s estate as one pleases, so we should all still be making Wills.

Think ahead and think carefully

However, I would encourage those who do wish to exclude family members from their Wills to leave contemporaneous evidence of their reasoning not only to exclude a particular beneficiary, but also to favour other beneficiaries. This is particularly important if, in the case of charities, the testator has no connection with, or history of donations to, charity during their lifetime. I have been instructed on a number of cases where we have done just that by way of a side letter, to try to avoid the washing of too much dirty linen during probate, a process which makes Wills public. And those asked to act as executors should always check whether they are risking accepting a poisoned chalice that may compel their involvement in a protracted legal battle. As in this case, that may, sadly, become the testator’s most enduring legacy.

Alexandra Truesdale MIPW

Alex Truesdale Wills Limited | Registered in England and Wales no 7275445 | Registered office: 27 Mizen Close Cobham Surrey KT11 2RJ

Alex Truesdale Wills Limited is a member of the Institute of Professional Willwriters and complies with its Code of Practice

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

Where there’s a Will – part 2Dominic2023-12-01T12:20:06+00:00

Where there’s a Will…

Perhaps you know the saying.. “where there’s a Will, there’s a crowd”, well it seems that there may have been a landmark ruling in the Court of Appeal. This could impact anyone wishing to disinherit their own children.

The potential landmark ruling was handed down by Lady Justice Arden at the Court of Appeal on 27 July 2015 throws into question the “security” of a number of Wills.

Long story short – Heather Ilott challenged her late mother’s Will of 2002. The original Will made by her mother Melita Jackson, expressly prohibited her only daughter from any inheritance from her estate, leaving the entire estate to animal charities. This all stemmed from a family event in 1978 when Heather then 17, eloped with her boyfriend, who she later married. Mrs Jackson died in 2004 and the Will was initially challenged by her daughter and she was awarded £50,000 of the £486,000 estate. An appeal was initially denied, but this week was upheld by Lady Justice Arden. Heather Ilott was awarded £164,000 about a third of the estate.

“Unreasonable, capricious and harsh”

Lady Justice Arden, ruled that the exclusion of her daughter from an inheritance was unreasonable, capricious and harsh. Ruling that she should have a greater share of the estate.

Needless to say this prompts a few concerns and questions. Firstly it has taken 11 years to agree the terms of Probate and settle the Will. Secondly the original Will, despite being “crystal clear” was overturned, not completely, but essentially opening the way for more legal challenges to Executors. Of course, the animal charities have also lost a reasonable amount too – presumably having an impact on their planning somewhere.

The number of Wills challenged each year continues to rise which rather affirms the statement that where there’s a Will, there’s a crowd. Most people do not understand what is involved when someone dies, having little or no grasp of the lengthy delays that can occur. This case has been rolling on for 11 years!

You can see the ruling by clicking here.

Dominic Thomas
Solomons IFA

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

Where there’s a Will…Dominic2023-12-01T12:20:07+00:00

A Matter of Life and Death

A matter of life and death

It is one of the strangest aspects of conversations that I have with clients. It gets stranger and perhaps more difficult the older they become. We have to talk about a matter of life and death.

In essence, when all is said and done, financial planning is about trying to ensure that your money does not run out before you die. So we need to have a conversation about when that might be. We don’t know the answer. Death is a daily part of life, yet something that most of us manage to avoid talking about.

The motivation behind the question is obviously to attempt to make money last long enough, however it is also designed to prompt thoughts about what is life about, what do you want from it during this brief sojourn on this wonderful planet?

Thoughts may turn too quickly to estate planning and reducing inheritance tax, rather than considering the true inheritance that is being left…. the memory and impact of .. well…you!

I might (will) point to the financial impact of your loss to those dependant upon you, be they family or your business, but we all know that its much bigger and deeper than that don’t we. So good financial planning can take care of financial loss, but great financial planning will hopefully remind and inspire you to ensure that you make the most of the life you have now.

Another way to view death – acceptance

A dear friend of mine, who has had more than her fair share of grief drew my attention to this short video about death (and life). It combines images from various films and words of Alan Watts. It is worth taking the 3 minutes to watch it.

Dominic Thomas
Solomons IFA

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

A Matter of Life and DeathDominic2023-12-01T12:20:07+00:00

Estates: Inheritance Tax

So it’s 8th July already and into the second half of the Wimbledon Championships. Looking at your own life, which half do you imagine you are in? (ouch… didn’t see that coming!). Like most people inheritance tax (often referred to as IHT) probably isn’t something that is top of your current concerns (you don’t pay it) however it is a tax that generates more ire than most. In essence, inheritance tax is paid by the Executors of an estate following someone’s death. The amount of tax due will depend on the value of the estate and how it was arranged.

Today the Chancellor will give yet another Budget, but this one, the first as a Conservative Government. Like many I shall be waiting to hear what he says and see how he plans to deliver it. One of the pre-election manifesto promises was to increase the threshold for inheritance tax, perhaps to £1,000,000 for a couples main residence.

He may be less willing to follow through with this now as it was announced that in April HMRC collected £397m as inheritance tax payments, the largest in a single month and way above the longer term average of £260m a month. In fact March, April and May 2015 saw over £1bn of inheritance tax paid to HMRC. If interested, you can see the various taxes collected by HMRC from the data they published at the start of the month, just click here.

The Budget 8 July 2015

We shall simply have to wait for the Chancellor to tell us how and if he intends to adjust the nil rate band (the amount an estate can be worth before any inheritance tax is payable). The nil rate band has been frozen at £325,000 since 2009 and had historically increased with inflation each year, but of course that was before the credit crunch. As ever our APP will be updated with all the changes as quickly as possible (usually before the end of the day). Don’t forget it’s free and easy to use.

Pensions and ISAs are now IHT friendly

The main gripe is that property has continued to soar in value and is invariably the main asset that is left once someone dies. The pension freedom rules have enabled pension funds to be exempt from inheritance tax (though some taxes may apply) and ISAs are able to be passed on to a surviving spouse (previously they would have lost the tax-free status of an ISA).

As a result more people, or rather estates have been brought into the inheritance tax threshold, probably not the original intention of the tax. However the Chancellor will be seeking some wriggle room to keep things as they are given that it raises such significant sums for the Treasury.

A 40% tax rate

As of this morning, inheritance tax is charged at 40% on the excess value of estates worth £325,000. Each individual has a nil rate band and so a couple effectively has a nil rate band of £650,000. In addition, for those that have been previously married to someone now deceased, it is possible to use part of their allowance too.

Dominic Thomas
Solomons IFA

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

Estates: Inheritance TaxDominic2023-12-01T12:40:17+00:00