SUCCESSION PLANNING: UK citizens not discussing inheritance with their families | STEP

Source: SUCCESSION PLANNING: UK citizens not discussing inheritance with their families | STEP

 

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Molatof!  More information on the Trusts Register

HMRC are now introducing an online registration process, in order both to streamline its function, as well as to comply with new anti-money-laundering legislation – called the Money Laundering Terrorist Financing and Transfer of Funds Regulations 2017 (Molatof, anyone?)

Trustees have an obligation to keep good records and accounts, not only for beneficiaries, but also for the Inland Revenue (HMRC).

Until recently, trustees did not have to supply details to the Inland Revenue of who was going to receive money from a trust – but this has changed.

Trustees have always been under an obligation to report income and gains, as well as reporting on the 10 year anniversary Inheritance Tax charge – if you are a trustee and you think you may not have failed to keep up to date, then your solicitor or accountant can help you keep on track, with a “trusts checkup”.

HMRC are now introducing an online registration process, in order both to streamline its function, as well as to comply with new anti-money-laundering legislation – called the Money Laundering Terrorist Financing and Transfer of Funds Regulations 2017 (Molatof, anyone?).  HMRC issued a newsletter about the upcoming changes in April – and suggested that the system would be online this month.  The Molatof regulations were published today, and it seems that it will be a few more weeks whilst HMRC tests the system to see whether it is working correctly.

The Molatof regulations mean that not only do trustees have to supply their details, but also they have to supply the names of beneficiaries and how they benefit – and in addition to their names, will also ask for National Insurance Numbers – and if a National Insurance Number is not available, addresses and passport details may be required.

HMRC have set themselves a deadline of the system going live by 5th October 2017 – for all trusts which have a tax consequence, information on the existence of the trust must be provided on or before 31 January 2018

Probate fees – a tax by any other name

 

The Ministry of Justice announced the consultation on probate fees last week.

 

https://consult.justice.gov.uk/digital-communications/fee-proposals-for-grants-of-probate/supporting_documents/probateconsultation.pdf

 

 

It is thought that new fee increases could be made effective from as soon as April 1 2016 – and there are many practitioners across the country who believe that this set of fee increases on probate fees is unjust, disproportionate and unfair.

 

Not only might these fees be unfair and disproportionate (the actual task of getting the grant of probate is already covered by the cost of the existing court fee) but the potential to charge quite high values of fees is seen by some as being similar to a tax.  Except the power to increase a tax is something that is given far higher scrutiny, both in the budget and in reactions to the budget – there is opportunity for more careful examination of the impact that increases in the tax burden will have on the behaviour of the populace – indeed, sometimes the reason for increasing taxes is so that the behaviour of the public is modified – towards the purchase of cars that consume less fuel, towards the purchase of particular types of alcohol – it is the primary example of applying a “nudge” philosophy – or behaviourist psychology techniques – encourage certain types of behaviour by reward, discourage certain behaviour by withholding reward (or rather, by making the retained money in your wallet significantly less).

 

Value of estate (before inheritance tax)             Existing fee       Proposed fee

Below £50,000 or exempt                                            £215                £0

Exceeds £50,000 but does not exceed £300,000    £215                £300

Exceeds £300,000 but does not exceed £500,000   £215                £1,000

Exceeds £500,000 but does not exceed £1m               £215                £4,000

Exceeds £1m but does not exceed 1.6m                       £215                £8,000

Exceeds £1.6m but does not exceed £2m                     £215                £12,000

Above £2m                                                                          £215                £20,000

 

Why would these increases be unfair?  Everything has to be paid for?

 

The probate court fees are already appropriate – the costs that are already being charged cover the cost of obtaining a one off service – this is a finite transaction – there are no ongoing case management issues – once the grant has issued, the court has no need for further supervision and intervention.  As a fee for a service, the fee is suitable.  To increase the fee so that it substantially exceeds the cost is unjust and unfair.

 

Obtaining a grant of probate is the rite of passage in most estates where there are assets that exceed £25,000 or thereabouts, since banks and building societies are frequently willing to release that sort of money without the need for any formalities.  In addition, there are many people who own assets jointly with a spouse or partner – and in those cases where assets are owned jointly, there is no need for a grant of probate in order for the asset to belong to the survivor.

 

So that’s alright then – all we have to do is to put assets in joint names and we’re golden?

 

Well, yes and no – just because assets are in joint names doesn’t mean that this is the best thing for an individual.  Putting assets in joint names whilst you are alive means that the other person can spend your money as if it was their own – potentially wiping out your savings and leaving you in a difficult situation.  If you were a vulnerable elderly person, you might be taken advantage of.

 

Putting assets in joint names can also have the effect that you are treated for some purposes as if you had made a gift of what you own – if the relationship you have with the other joint owner should become difficult, or they should themselves be in financial difficulties, your own money might be lost.

 

Just because someone receives money by survivorship after death does not mean that Inheritance Tax should not be paid on the estate.  Although the application for the grant of probate normally triggers the requirement to pay Inheritance Tax, the obligation to account for Inheritance Tax still applies, whether or not a grant of probate is required.  This is something that the public might easily not be aware of.  Failure to account to the Inland Revenue for tax that is due causes penalties in itself.  Failure to pay the tax that is due can cause penalties, and is likely to result in charges for underpaid tax and the interest on that tax.  Potentially, this means that problems can be stored up for the future, all because there was a desire not to pay this probate fee.    Trying to untangle what taxes should have been paid, the penalties and interest will be very stressful for families later on.

 

What do I do if I’m single? 

 

Good point  – you are going to need a grant of probate.  No matter who you leave your money to – even if you leave all that you have to charity, this bill will still have to be paid.  There is no Inheritance Tax to pay when you leave all your assets to charity, but still the probate fee will apply.

 

I thought it was free to leave everything to my wife?  Now you say she will have to pay?

 

Your executors will have to pay the probate fee, even if all that you have passes outright to your wife.  If you have made arrangements to give your wife everything for life, and then to go to your children (perhaps because you have been married before) then even though there is no Inheritance Tax to pay, there will be a probate fee.

 

How will my executors pay those massive fees?

 

Yes, that’s a problem.  When it is Inheritance Tax, you can pay a portion of your tax bill in instalments if your money is tied up in your house.   Usually your bank will only allow payments to be made for Inheritance Tax and for your funeral bill.  Perhaps the banks will start to allow payments to be made for probate fees.  It might take them a little while to get structures in place though.  Until then, it will be for your executors to produce the money out of their own pocket.  If they don’t have the money, they will have to borrow it.

 

This really sounds like a bad idea – who thought it up?

 

Yes it does.  And I can’t actually point to the Chancellor of the Exchequer and blame him for making the rules.  Still – it is “open for consultation” so feel free to comment directly.

Residential Nil Rate Band – downsizing calculations

PDF The draft clauses dealing with the downsizing element of the new RNRB are out today.

The RNRB is available from 6 April 2017 and the relief for downsizing or disposals will apply for deaths after that date where the disposal occurred on or after 8 July 2015.

So, working out, with the aid of a cold towel, what the calculations might actually mean is going to be important – particularly if this is potentially an area where not only the estate planning department need to know what they are talking about, but need to find a way of recording the information through the conveyancing department for most residential property sales that took place since the summer, where it is anticipated that the clients have a total estate value exceeding £650,000 (or £325,000 for non married persons).

I hope Professor Lesley King will do another talk with worked examples – that would help.

Budget 2015 and initial thoughts.

Budget statement in pdf from Inland Revenue

Some of the things I think this means.

Terms:

Although this refers to a “main residence nil rate band” the personal representatives can elect for any property owned and lived in by the deceased to count as the residence for this purpose.  The term is not related to the main residence or Principal Private Residence.  Potentially, each spouse could have a separate private residence, therefore.

The residence nil rate band (which if someone else has not already labelled it thus, I shall call it the “RNRB”) can be transferred to a spouse and remain intact.  This applies no matter when the first death occurs, so long as the second death occurs after the start of the tax year 2017-18.

The RNRB might end up, therefore, also being called the TRNRB when claimed on the death of the second spouse. There will be new additional forms to complete in addition to the IHT402 and the IHT217.  There will need to be new evidential burdens to show that a recipient falls within the class of acceptable beneficiaries called “descendants”.

The NRB as we know and love it applies at the current rate until the tax year 2021-2 commences.  It applies to all transfers whether intervivos or on death.

The RNRB applies only where there is a residential property in which the deceased has resided (or the spouse of the deceased???) and where the “proceeds of sale of that property” or the property itself pass to a linear descendant of the deceased (or of the deceased’s former spouse??).  The bits in brackets are where I am less certain of the detail.  One thing is clear – the definition of what is considered “linear descendants” is different from the standard definition of “issue” or “bloodline” since it includes not only the usual adopted children and children of the bloodline but also step children and foster children.

Things I am not sure about:

I don’t understand quite how you can quantify the foster children – but perhaps it is possible to prove that an individual is a foster child or has been one at any date.  Similarly, step children.  But then again, this gives an allowance for those children, rather than penalising them or giving them an entitlement.

I am not sure about the “proceeds of sale” aspect of things.  The Inland Revenue states that identifying what has been the proceeds of sale of a family home and making sure that there is a credit for this will be something that will be the subject of a consultation paper shortly.  Presumably, there is some paperwork required for Inheritance Tax purposes on the sale of a family home – so where downsizing from any home worth less than £2,400,000 is potentially eligible for this – so as to preserve the relief on this home.  This will be something that all conveyancing solicitors will need to know about as well, since otherwise it would not be something that would be mentioned to the client.  Few clients associate the sale of their home with the need to consider how it fits in with estate planning.

Does this now mean that flexible life interest trusts now need to be altered so as to take account of this potential future relief?  A “FLIT” by which I mean a discretionary trust, subject to a prior life interest.  I think it does.  Because the whole flexibility of these relies on the discretionary trust *not* being an individual or descendant.  Time to review these I think, and adjust expectations and drafting accordingly.

I think the new legislation means that (at least initially) if you are worth £2.4 million or more, then this RNRB is useless to you.

I also think this means that if you are selling up so that you can free up capital to make potentially exempt transfers, then you have to weigh up carefully whether doing so means that you will lose out on the RNRB.  The RNRB *only* applies on death, and does not apply to PETS that become chargeable.  Worst case scenario is that you free up funds, give some away to your children and do not survive the seven years.  When I say “some”, I mean if you give away more than one Nil Rate Band’s worth of gifts.  So – PETs will have to be limited to below £325,000 for each individual donor if they are within 7 years of death, or statistically likely to be so.  Or in other words, there is no such limitation, but without advice on the pros and cons, the decision should not be taken without, for example, more seriously considering term life insurance, in the very least.

 

In conclusion:

Possibilities of legal involvement in people’s affairs seem to have increased.  And in a way that doesn’t seem right – why should the taxpayer be hemmed in at every turn?  Why not just increase the whole of the NRB to £500,000 each – and not have this extra complication?  What about those childless couples who want to leave their money to nieces and nephews?  Why is this budget not making it easier for the rich to pay tax, rather than harder for the middle income people to manage the burden of it?  This extra complexity just means more work for the civil servants, more bad luck for the childless, more work for lawyers, more fees for professional advice.   And the extra complexity is not actually needed – it doesn’t close any major loopholes or planning issues where “clever lawyers/accountants” have been finding “loopholes”.

The law’s delay…

On telephoning the Inland Revenue to find out the progress of my P1001, signed and sent back to them over a month ago, I am told that they are currently experiencing a postal backlog of FOURTEEN WEEKS!

Since the P1001 authorises me to speak to the Inland Revenue on behalf of the Personal Representative, who, quite understandably is grieving and has instructed me to deal with the estate on his behalf – I cannot communicate effectively with them.

A reply will be expected in September, by which time I might have finished the (rest of the) administration with some time to spare…

Deed of Variation – getting it wrong, (S142 IHTA)

Deed of Variation – getting it wrong | Withersworldwide.

Referring to the recent case of Vaughan-Jones v Vaughan-Joneswhere a deed of variation was effected in the estate of the husband.  The will of the husband had left assets both to the wife and also to the children.  The amounts left to the children exceeded the Nil Rate Band, and therefore an immediate IHT liability arose on the death.  The deed of variation was completed less than a week before the deadline (before the 2nd anniversary of death) but most importantly, failed to contain the election for Inheritance Tax which arguably was the whole point of the document.

The election for Inheritance Tax is the part of the document that enables, for Inheritance Tax purposes, the deed to be considered as if it was the wish of the deceased, rather than the wish of those who actually inherit.  To fail to include that election makes the document pretty useless – “ineffective”.  The reported case permitted the court to rectify this omission.

The Wither’s article reveals, however, that in the process of arguing the case, it was revealed that the deed of variation was not entered into freely – that the widow (to whom all was transferred so as to secure the 100% spousal relief) and children had participated in the deed in order that the widow would later give the assets back to the children.

A key part of the legistation permitting the election is that it cannot apply where there is any associated financial bargain (or “consideration”) with the election:

142Alteration of dispositions taking effect on death.

(1)Where within the period of two years after a person’s death—

(a)any of the dipositions (whether effected by will, under the law relating to intestacy or otherwise) of the property comprised in his estate immediately before his death are varied, or

(b)the benefit conferred by any of those dispositions is disclaimed,

by an instrument in writing made by the persons or any of the persons who benefit or would benefit under the dispositions, this Act shall apply as if the variation had been effected by the deceased or, as the case may be, the disclaimed benefit had never been conferred.

[F1(2)Subsection (1) above shall not apply to a variation unless the instrument contains a statement, made by all the relevant persons, to the effect that they intend the subsection to apply to the variation.

(2A)For the purposes of subsection (2) above the relevant persons are—

(a)the person or persons making the instrument, and

(b)where the variation results in additional tax being payable, the personal representatives.

Personal representatives may decline to make a statement under subsection (2) above only if no, or no sufficient, assets are held by them in that capacity for discharging the additional tax.]

(3)Subsection (1) above shall not apply to a variation or disclaimer made for any consideration in money or money’s worth other than consideration consisting of the making, in respect of another of the dispositions, of a variation or disclaimer to which that subsection applies.

(4)Where a variation to which subsection (1) above applies results in property being held in trust for a person for a period which ends not more than two years after the death, this Act shall apply as if the disposition of the property that takes effect at the end of the period had had effect from the beginning of the period; but this subsection shall not affect the application of this Act in relation to any distribution or application of property occurring before that disposition takes effect.

(5)For the purposes of subsection (1) above the property comprised in a person’s estate includes any excluded property but not any property to which he is treated as entitled by virtue of section 49(1) above [F2or section 102 of the Finance Act 1986].

(6)Subsection (1) above applies whether or not the administration of the estate is complete or the property concerned has been distributed in accordance with the original dispositions.

(7)In the application of subsection (4) above to Scotland, property which is subject to a proper liferent shall be deemed to be held in trust for the liferenter.

Finance Act 1986 Sch. 19, para. 24,with effect from 18March 1986.