Til death do us part… more IHT issues

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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 Of course the surviving spouse may have his or her circumstances significantly altered since such an agreement was originally made, so may also be reluctant to release funds if they believe that they are needed.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

How does HMRC know about gifts?

Dominic Thomas
Oct 2015 • 3 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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