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”.

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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…

What is a grant of probate?

A grant of probate is the word used to describe the process of confirming the right of named individuals to deal lawfully with the estate of a person who has died.

If a person has died leaving a will, then the people who are named as executors are those people entitled to take out the grant of probate. The authority of an executor to act stems from the will itself, and is confirmed by the grant of probate.

If the person has died without leaving a will, or has died leaving a will, but the executors have predeceased, then there is a statutory order of who is entitled to take out the grant of letters of administration. The authority of the administrators stems from the grant of letters of administration itself.

In order to pass through the process of the court, the executors, or prospective administrators must complete an oath, whereby they swear the extent of the estate, the full name and address of the person who has died, details of the deceased’s birth and death and age at death, together with any other names by which the deceased was known. The Personal Representatives also swear that the deceased was domiciled in England and Wales and that the will attached was the last known will of the deceased.

In addition to citing the basic facts, the PRs also state that the estate was of a certain value. They then go on to promise that they will deliver up to the court accounts of the estate if requested, will gather in and distribute the assets and pay the liabilities lawfully.

If the assets are relatively few, and Inheritance Tax does not need to be paid (and there are no complicating features of the estate), then the probate registry will accept a short Inland Revenue form citing the values of the items in the estate. If the value of the estate is high (or if there are complicating features) then the longer form needs to be filled in. This long form asks more detailed questions, but both documents need to be completed with a care for the detail that is appropriate – it is not enough to make an estimate of value if you are not making an effort – if in doubt, employ someone who can tell you how much that Meissen china or that Georgian silverware is worth. If your dad was into antiques, then get a valuation – if it is all reproduction, then perhaps it might not be a high value after all. If you are claiming a transferrable tax band, then you will also need to be able to show this on the relevant form – whether it is a short form that is appropriate or a long form.

So – you tell the Inland Revenue what the estate is worth, and pay the tax (or a proportion of the tax). You take the oath and swear (on the Bible, Koran, other religious text, or solemnly affirm) the oath saying you will do the right thing. And then submit the documents to the probate registry, who, in due course, send a grant of probate. Congratulations – the will has been proved, is now a document of public record, against which you can be held to account. You may now collect in the assets, pay debts, and deal with the estate according to the law. In the case of there being no will – your authority starts now, and you may collect in assets and enter into contracts on behalf of the estate (as opposed to in your own name).