Will writing and inheritance planning...doing nothing is not an option
4 April 2008
Managing Director, Worldwide Financial Planning, Writes:
A friend of mine asked me about making a will at my 40th birthday last week! He asked me when I might be making a will as clearly time was ‘getting on’. I had made one some 19 years before and have changed ...
4 April 2008
Managing Director, Worldwide Financial Planning, Writes:
A friend of mine asked me about making a will at my 40th birthday last week! He asked me when I might be making a will as clearly time was ‘getting on’. I had made one some 19 years before and have changed it more than five times.
I reminded him of the story of the two old men at the bar, when one stunned the other with the comment that he was glad he was old. ‘Well, you see, given my date of birth, if I wasn’t old, the alternative isn’t pretty’. Another chap beside us added ‘well you are only old when you sleep in separate rooms…...from your teeth’. Parties!
Many people have commented to me that there is no need to make a will until much later in life. This is not true. If you have a family you will need to consider who should look after them should something happen to you. If you have a reasonable estate, the laws of intestacy will simply decide who gets your money rather than you.
I can see how difficult a decision it is. These choices will bring up issues in your mind you didn’t know existed. How do you decide who should look after your children!
The excellent aspect of making a will is that it can be changed as much as you want. That was my simple motivation, as you can easily fret and consider too much now what impact the decision you will make now will have later – serious boomerang thinking, which will lead to procrastination.
Another reason given for not making a will was that the new Inheritance tax rules meant you now don’t have to give away the first nil rate band of £300,000 on first death.
Well, that too, is a common mistake.
Faced with the opposition claiming they were going to increase the nil rate band to £1 million, the current government decided they needed to do something quickly.
But why would a government who needs money give it away, I thought? Clearly the opposition didn’t have it to give away and would probably have altered the capital gains rules on death to regain the estimated £4 billion revenue loss.
It is when you look a little closer you can see that the issues are more in relation to long term care or future reliance on the state. Inheritance tax only attacks 40% of your assets in excess of the nil rate band, but care costs attack almost 100%.
My (cynical but probably very accurate) view is that care costs, or any costs where we can become more reliant on the state could easily be the target. In a nation where we are living longer, the ratio of workers and taxpayers to retired people is shrinking. It would appear that the burden of maintaining benefits at retirement could fall in the hands of those who are retired but who have resources.
The changes to the Inheritance tax rules can easily allow you to become apathetic about your planning but my view is that you should consider using your trust planning as before.
Consider that on first death you can give your tenancy in common in your house into trust for example. Your surviving spouse would now be able to live there as normal.
What is the surviving spouse’s value of the house worth? In the open market, a house is worth what someone is prepared to pay for it. What would you pay for a half share in a house when you have to share the property with someone else forever?
How would you ever sell that ownership on? Exactly, it’s virtually valueless. This simple planning is a method of reducing your estate by using the options available within a will. There are countless other methods that allow you to achieve the same outcome without really losing control of your estate. Doing nothing is not an option.
If you have a query on inheritance tax or estate planning call Peter on 0845 230 9876 or e-mail info@wwfp.net and take a look at our section on Inheritance Tax
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
Managing Director, Worldwide Financial Planning, Writes:
A friend of mine asked me about making a will at my 40th birthday last week! He asked me when I might be making a will as clearly time was ‘getting on’. I had made one some 19 years before and have changed it more than five times.
I reminded him of the story of the two old men at the bar, when one stunned the other with the comment that he was glad he was old. ‘Well, you see, given my date of birth, if I wasn’t old, the alternative isn’t pretty’. Another chap beside us added ‘well you are only old when you sleep in separate rooms…...from your teeth’. Parties!
Many people have commented to me that there is no need to make a will until much later in life. This is not true. If you have a family you will need to consider who should look after them should something happen to you. If you have a reasonable estate, the laws of intestacy will simply decide who gets your money rather than you.
I can see how difficult a decision it is. These choices will bring up issues in your mind you didn’t know existed. How do you decide who should look after your children!
The excellent aspect of making a will is that it can be changed as much as you want. That was my simple motivation, as you can easily fret and consider too much now what impact the decision you will make now will have later – serious boomerang thinking, which will lead to procrastination.
Another reason given for not making a will was that the new Inheritance tax rules meant you now don’t have to give away the first nil rate band of £300,000 on first death.
Well, that too, is a common mistake.
Faced with the opposition claiming they were going to increase the nil rate band to £1 million, the current government decided they needed to do something quickly.
But why would a government who needs money give it away, I thought? Clearly the opposition didn’t have it to give away and would probably have altered the capital gains rules on death to regain the estimated £4 billion revenue loss.
It is when you look a little closer you can see that the issues are more in relation to long term care or future reliance on the state. Inheritance tax only attacks 40% of your assets in excess of the nil rate band, but care costs attack almost 100%.
My (cynical but probably very accurate) view is that care costs, or any costs where we can become more reliant on the state could easily be the target. In a nation where we are living longer, the ratio of workers and taxpayers to retired people is shrinking. It would appear that the burden of maintaining benefits at retirement could fall in the hands of those who are retired but who have resources.
The changes to the Inheritance tax rules can easily allow you to become apathetic about your planning but my view is that you should consider using your trust planning as before.
Consider that on first death you can give your tenancy in common in your house into trust for example. Your surviving spouse would now be able to live there as normal.
What is the surviving spouse’s value of the house worth? In the open market, a house is worth what someone is prepared to pay for it. What would you pay for a half share in a house when you have to share the property with someone else forever?
How would you ever sell that ownership on? Exactly, it’s virtually valueless. This simple planning is a method of reducing your estate by using the options available within a will. There are countless other methods that allow you to achieve the same outcome without really losing control of your estate. Doing nothing is not an option.
If you have a query on inheritance tax or estate planning call Peter on 0845 230 9876 or e-mail info@wwfp.net and take a look at our section on Inheritance Tax
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
Basics for Inheritance Tax Planning
27 February 2008
Managing Director, Worldwide Financial Planning, Writes:
Inheritance tax has undoubtedly become much easier after the government's change of heart in relation to the nil rate band, but still today, many people are not making use of some of the basic aspects of this planning that they should be.
In ...
27 February 2008
Managing Director, Worldwide Financial Planning, Writes:
Inheritance tax has undoubtedly become much easier after the government's change of heart in relation to the nil rate band, but still today, many people are not making use of some of the basic aspects of this planning that they should be.
In April you will be allowed to give away a nil rate band of £312,000 per person. That’s good news. The old situation used to occur where you had to use that nil rate band on first death or you lost it. This has now been removed by the chancellor and on first death you no longer need to use it as it can be used on second death. Indeed you can also use a nil rate band from the past for a deceased spouse if it has not been used.
Without going into any complex tax planning ideas, there are a number of simple options that you can consider which are being missed.
Each year you have an annual exemption of £3000 that you can use. Most forget that it can also be carried forward for one year. As we are close to the tax year end, if you haven’t used last year's allowance, you should now use both, giving you an allowance of £6000. Of course post April 5th 2008 you can give a further £3000 away.
Many of us get into the habit of using our Isa allowance each year but forget we have the £3000 allowance above. For younger beneficiaries it is also a good idea to use a trust to give the money to, to hold until they reach 18.
There are a range of other exempt gifts that can be made including: Gifts to a spouse or civil partner, maintenance payments, wedding gifts, gifts to institutions and charities, small gifts, and also an often missed one, which is normal gifts from income.
The gifts out of normal income is an area you should consider. It is commonly believed that you can only give away the normal annual exemption above, but you can actually give away considerable amounts of capital each year in excess of this £3000. As long as your gift is regular, and is out of normal income, you will be allowed to gift as much as you want.
The most common (and appalling) method I see in inheritance tax planning is the approach taken to insure against the tax. Basically an adviser calculates your estate value, takes off the nil rate band, and then multiplies the remainder (excess) by 40%. This is the amount that he deems your beneficiaries would have to pay on death. He then insures you, so that on second death the death benefit is paid to your beneficiaries so they can pay the tax and release the estate.
This obviously isn’t tax planning, it’s a straight forward guarantee that the Revenue get their money. All you are simply doing is ensuring the Revenue get the money and you are paying for it during your lifetime through life insurance premiums. So in short you are paying the tax in advance.
Whilst in twenty years of planning we have less than five cases on our books where we have used life cover, it is a regular default option for many advisers. My view is that it was never an effective approach to the planning, it didn’t mitigate the tax and should very rarely, if ever, have been used.
The biggest concern however, is the issue that has arisen since the chancellor's change as mentioned above, where he has allowed you to use both the nil rate bands on second death.
There are now thousands of people with life insurance in place to cover the tax who no longer need it, who are (if they weren’t before) wasting their money. If you are in that situation revisit this cover and use your money for something that you need to use it for!
If you have an Inheritance tax query for Peter call 01208 816667 or e-mail info@wwfp.net and take a look at our section on Inheritance Tax Planning.
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
Managing Director, Worldwide Financial Planning, Writes:
Inheritance tax has undoubtedly become much easier after the government's change of heart in relation to the nil rate band, but still today, many people are not making use of some of the basic aspects of this planning that they should be.
In April you will be allowed to give away a nil rate band of £312,000 per person. That’s good news. The old situation used to occur where you had to use that nil rate band on first death or you lost it. This has now been removed by the chancellor and on first death you no longer need to use it as it can be used on second death. Indeed you can also use a nil rate band from the past for a deceased spouse if it has not been used.
Without going into any complex tax planning ideas, there are a number of simple options that you can consider which are being missed.
Each year you have an annual exemption of £3000 that you can use. Most forget that it can also be carried forward for one year. As we are close to the tax year end, if you haven’t used last year's allowance, you should now use both, giving you an allowance of £6000. Of course post April 5th 2008 you can give a further £3000 away.
Many of us get into the habit of using our Isa allowance each year but forget we have the £3000 allowance above. For younger beneficiaries it is also a good idea to use a trust to give the money to, to hold until they reach 18.
There are a range of other exempt gifts that can be made including: Gifts to a spouse or civil partner, maintenance payments, wedding gifts, gifts to institutions and charities, small gifts, and also an often missed one, which is normal gifts from income.
The gifts out of normal income is an area you should consider. It is commonly believed that you can only give away the normal annual exemption above, but you can actually give away considerable amounts of capital each year in excess of this £3000. As long as your gift is regular, and is out of normal income, you will be allowed to gift as much as you want.
The most common (and appalling) method I see in inheritance tax planning is the approach taken to insure against the tax. Basically an adviser calculates your estate value, takes off the nil rate band, and then multiplies the remainder (excess) by 40%. This is the amount that he deems your beneficiaries would have to pay on death. He then insures you, so that on second death the death benefit is paid to your beneficiaries so they can pay the tax and release the estate.
This obviously isn’t tax planning, it’s a straight forward guarantee that the Revenue get their money. All you are simply doing is ensuring the Revenue get the money and you are paying for it during your lifetime through life insurance premiums. So in short you are paying the tax in advance.
Whilst in twenty years of planning we have less than five cases on our books where we have used life cover, it is a regular default option for many advisers. My view is that it was never an effective approach to the planning, it didn’t mitigate the tax and should very rarely, if ever, have been used.
The biggest concern however, is the issue that has arisen since the chancellor's change as mentioned above, where he has allowed you to use both the nil rate bands on second death.
There are now thousands of people with life insurance in place to cover the tax who no longer need it, who are (if they weren’t before) wasting their money. If you are in that situation revisit this cover and use your money for something that you need to use it for!
If you have an Inheritance tax query for Peter call 01208 816667 or e-mail info@wwfp.net and take a look at our section on Inheritance Tax Planning.
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
Surviving spouses and Inheritance Tax - the nil rate band implications
20th November 2007
Reader Writes:
Your recent column on inheritance tax (IHT) mentioned the change in the pre budget report and that IHT had just become much easier. I have just considered there may well be quite a gap between the first and second death so I was wondering what needs to happen ...
20th November 2007
Reader Writes:
Your recent column on inheritance tax (IHT) mentioned the change in the pre budget report and that IHT had just become much easier. I have just considered there may well be quite a gap between the first and second death so I was wondering what needs to happen on first death and what a surviving spouse should now do if their spouse has pre deceased them.
For those who haven’t read the previous column, the pre budget report has allowed for a surviving spouse to use any proportion of the nil rate band for IHT that has not been used on first death.
This will in effect mean that it is quite simple for people with estates of £600,000 and below to mitigate their IHT completely. Where previously on first death an individual had to give away assets to anyone other than their spouse to use their nil rate band, they will now not be forced to do so, and can use the first and second nil rate bands on second death. Great news.
If on first death a percentage of the nil rate band is used, this is lost on second death. For example, on first death £30,000 is given away to the children, this represents 10% of the nil rate band at the time of £300,000. The unused amount is £270,000 (90% of the nil rate band at the time (of £300,000).
Let’s, for the sake of an example, say that the survivor lives another ten years, at which point the nil rate band is £500,000. The nil rate band unused on first death was 90% so the unused portion would now be 90% of £500,000 which is £450,000.
This has a number of benefits. Consider the old scenario where all the assets were held in the husband’s name. If the wife dies she has no assets to use for her nil rate band and as such there is a complete waste of £120,000 in tax. Further to the change announced above if we hadn’t used the nil rate band on first death, we could still use it on second death even though the spouse dying first, had no assets in her name.
The claim for the unused proportion is made after second death and there is no need to make it before. You will need the death certificate for the first person to die; the marriage certificate or civil partnership certificate for the couple; if the spouse or civil partner left a Will, a copy of it; a copy of the grant of probate/Confirmation, and if a Deed of Variation or other similar document was executed to change the people who inherited the estate of the spouse or civil partner, a copy of it.
You will have 24 months after the second death to make the claim for the unused nil rate band.
On that basis it is important to keep an exact record of what has been given away on first death so the information can be used on second death.
If you haven’t possession of the documents, a copy of the information can be obtained at the Court Service (for England & Wales www.hmcourts-service.gov.uk, for Scotland www.scotcourts.gov.uk, and for Northern Ireland www.courtsni.gov.uk), and the General Register Office (for England & Wales www.gro.gov.uk for Scotland www.gro-scotland.gov.uk, and for Northern Ireland www.groni.gov.uk).
These will give you the value of the first estate that was declared for Probate and will also provide information about who inherited the assets that passed under the deceased’s Will or intestacy (if someone hasn’t made a will).
However, it will not provide any information about other assets that are chargeable when someone dies such as assets owned jointly with another person; assets held in trust; any lifetime gifts made by the first to die in the 7 years before their death; where the first to die was over 75, any alternatively secured pension fund from which they received a pension.
If you have a query on Inheritance Tax call Peter on 0845 230 9876 or e-mail info@wwfp.net and take a look at our section on Inheritance Tax Planning.
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
Reader Writes:
Your recent column on inheritance tax (IHT) mentioned the change in the pre budget report and that IHT had just become much easier. I have just considered there may well be quite a gap between the first and second death so I was wondering what needs to happen on first death and what a surviving spouse should now do if their spouse has pre deceased them.
For those who haven’t read the previous column, the pre budget report has allowed for a surviving spouse to use any proportion of the nil rate band for IHT that has not been used on first death.
This will in effect mean that it is quite simple for people with estates of £600,000 and below to mitigate their IHT completely. Where previously on first death an individual had to give away assets to anyone other than their spouse to use their nil rate band, they will now not be forced to do so, and can use the first and second nil rate bands on second death. Great news.
If on first death a percentage of the nil rate band is used, this is lost on second death. For example, on first death £30,000 is given away to the children, this represents 10% of the nil rate band at the time of £300,000. The unused amount is £270,000 (90% of the nil rate band at the time (of £300,000).
Let’s, for the sake of an example, say that the survivor lives another ten years, at which point the nil rate band is £500,000. The nil rate band unused on first death was 90% so the unused portion would now be 90% of £500,000 which is £450,000.
This has a number of benefits. Consider the old scenario where all the assets were held in the husband’s name. If the wife dies she has no assets to use for her nil rate band and as such there is a complete waste of £120,000 in tax. Further to the change announced above if we hadn’t used the nil rate band on first death, we could still use it on second death even though the spouse dying first, had no assets in her name.
The claim for the unused proportion is made after second death and there is no need to make it before. You will need the death certificate for the first person to die; the marriage certificate or civil partnership certificate for the couple; if the spouse or civil partner left a Will, a copy of it; a copy of the grant of probate/Confirmation, and if a Deed of Variation or other similar document was executed to change the people who inherited the estate of the spouse or civil partner, a copy of it.
You will have 24 months after the second death to make the claim for the unused nil rate band.
On that basis it is important to keep an exact record of what has been given away on first death so the information can be used on second death.
If you haven’t possession of the documents, a copy of the information can be obtained at the Court Service (for England & Wales www.hmcourts-service.gov.uk, for Scotland www.scotcourts.gov.uk, and for Northern Ireland www.courtsni.gov.uk), and the General Register Office (for England & Wales www.gro.gov.uk for Scotland www.gro-scotland.gov.uk, and for Northern Ireland www.groni.gov.uk).
These will give you the value of the first estate that was declared for Probate and will also provide information about who inherited the assets that passed under the deceased’s Will or intestacy (if someone hasn’t made a will).
However, it will not provide any information about other assets that are chargeable when someone dies such as assets owned jointly with another person; assets held in trust; any lifetime gifts made by the first to die in the 7 years before their death; where the first to die was over 75, any alternatively secured pension fund from which they received a pension.
If you have a query on Inheritance Tax call Peter on 0845 230 9876 or e-mail info@wwfp.net and take a look at our section on Inheritance Tax Planning.
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
The new inheritance tax threshold - what does it mean for me?
22nd October 2007
Managing Director, Worldwide Financial Planning, Writes:
I wonder how many people like me saw the fact that the pre budget report had announced the Inheritance tax threshold had doubled and then fainted. What better news I thought…Until I read it. Basically the nil rate band is the amount you ...
22nd October 2007
Managing Director, Worldwide Financial Planning, Writes:
I wonder how many people like me saw the fact that the pre budget report had announced the Inheritance tax threshold had doubled and then fainted. What better news I thought…Until I read it. Basically the nil rate band is the amount you can transfer to anyone other than your spouse free of inheritance tax. Whatever you transfer in excess of this is charged at 40%.
Currently the nil rate band is £300,000. To hear it had doubled to £600,000 was fantastic! That would mean joint couples would now have an estate of £1.2m. Unfortunately not. The doubling they are referring to leaves the tax payer in pretty much the same position as before. Up to now, the tax payer had one nil rate band per person which is a total of £600,000 – what they say they are raising it to. So in real terms there is no increase at all, and the net change to the tax payer is zero.
Having poured the cold water all over their headlines, there is good news. Up to now there was considerable paperwork to complete on first death to use the first nil rate band. Let me give you an example: A person dies and he owns a house with his wife. It’s valued at £600,000. Clearly if he gives his £300,000 to his wife there wont be any inheritance tax (it’s called an inter spouse exemption). The problem is he has lost that £300,000 exemption. On second death the spouse uses her nil rate band but there is a tax bill of 40% of £300,000 to pay now! Disaster.
To mitigate this, on first death we needed to use the first nil rate band by giving away up to the £300,000. This causes difficulties because we must give away half a house or half an estate where the surviving spouse still needs it!
This is where you bring in the solicitor and Independent Financial Adviser and we charge you fees to set up trusts to get round the issue. The trusts can be inflexible and are not really ideal for all, and they can cause complications later.
With the change in the rules there is no real need to make any changes or alterations on first death as the two nil rate bands can be used on second death. This is the most welcome aspect of planning I have seen in most of my financial planning years.
For me I don’t have to think of a million complications about what happens to my estate on first death. How much do I leave to my children? At what age can I allow them to have it? What if I leave it to my children and they split up, forcing my wife to sell her portion of the property to pay off the outgoing son in law. The worry and concern can spin the tax payer into indecision and they don’t put any plans in place.
It’s now much simpler to leave the plans on first death negating the need for any complicated trusts etc. My wife can keep the estate and on second death can use both the nil rate bands!
In a rush of blood and with a potential election in his mind (or not) he went further, and this is really good news.
Any survivor of a marriage who dies after the 9th of October 2007 will also be able to go back and use the unused nil rate band of the deceased spouse, no matter when they have died. This is fantastic news and all those who are sitting with an estate where the nil rate band wasn’t used on first death are in a wonderful position to go back and use it on second death. This is a potential gift of £120,000 from the tax man and is welcomed.
Naturally if the Gord giveth he taketh away – so…he advised that the nil rate band would increase closer to house prices. That’s a bit late, we are at the peak of a market, does that mean the nil rate band will now start to fall? Also (for another column), the rules on capital gains tax are being changed, and whilst more simple, may mean you need to take some action now. More on that later.
If you have a query on Inheritance Tax or if you have a financial query, call 0845 230 9876 to speak to Peter McGahan, an Independent Financial Adviser or e-mail info@wwfp.net
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
Managing Director, Worldwide Financial Planning, Writes:
I wonder how many people like me saw the fact that the pre budget report had announced the Inheritance tax threshold had doubled and then fainted. What better news I thought…Until I read it. Basically the nil rate band is the amount you can transfer to anyone other than your spouse free of inheritance tax. Whatever you transfer in excess of this is charged at 40%.
Currently the nil rate band is £300,000. To hear it had doubled to £600,000 was fantastic! That would mean joint couples would now have an estate of £1.2m. Unfortunately not. The doubling they are referring to leaves the tax payer in pretty much the same position as before. Up to now, the tax payer had one nil rate band per person which is a total of £600,000 – what they say they are raising it to. So in real terms there is no increase at all, and the net change to the tax payer is zero.
Having poured the cold water all over their headlines, there is good news. Up to now there was considerable paperwork to complete on first death to use the first nil rate band. Let me give you an example: A person dies and he owns a house with his wife. It’s valued at £600,000. Clearly if he gives his £300,000 to his wife there wont be any inheritance tax (it’s called an inter spouse exemption). The problem is he has lost that £300,000 exemption. On second death the spouse uses her nil rate band but there is a tax bill of 40% of £300,000 to pay now! Disaster.
To mitigate this, on first death we needed to use the first nil rate band by giving away up to the £300,000. This causes difficulties because we must give away half a house or half an estate where the surviving spouse still needs it!
This is where you bring in the solicitor and Independent Financial Adviser and we charge you fees to set up trusts to get round the issue. The trusts can be inflexible and are not really ideal for all, and they can cause complications later.
With the change in the rules there is no real need to make any changes or alterations on first death as the two nil rate bands can be used on second death. This is the most welcome aspect of planning I have seen in most of my financial planning years.
For me I don’t have to think of a million complications about what happens to my estate on first death. How much do I leave to my children? At what age can I allow them to have it? What if I leave it to my children and they split up, forcing my wife to sell her portion of the property to pay off the outgoing son in law. The worry and concern can spin the tax payer into indecision and they don’t put any plans in place.
It’s now much simpler to leave the plans on first death negating the need for any complicated trusts etc. My wife can keep the estate and on second death can use both the nil rate bands!
In a rush of blood and with a potential election in his mind (or not) he went further, and this is really good news.
Any survivor of a marriage who dies after the 9th of October 2007 will also be able to go back and use the unused nil rate band of the deceased spouse, no matter when they have died. This is fantastic news and all those who are sitting with an estate where the nil rate band wasn’t used on first death are in a wonderful position to go back and use it on second death. This is a potential gift of £120,000 from the tax man and is welcomed.
Naturally if the Gord giveth he taketh away – so…he advised that the nil rate band would increase closer to house prices. That’s a bit late, we are at the peak of a market, does that mean the nil rate band will now start to fall? Also (for another column), the rules on capital gains tax are being changed, and whilst more simple, may mean you need to take some action now. More on that later.
If you have a query on Inheritance Tax or if you have a financial query, call 0845 230 9876 to speak to Peter McGahan, an Independent Financial Adviser or e-mail info@wwfp.net
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
Using your nil rate band to create debts against your estate
17 May 2007
Reader Writes:
I read your articles over the last few weeks on inheritance tax and splitting trusts. I wonder if you could explain how the recent case will affect those who use their nil rate band to create debts against their estate.
The Phizackerley case you are referring to ...
17 May 2007
Reader Writes:
I read your articles over the last few weeks on inheritance tax and splitting trusts. I wonder if you could explain how the recent case will affect those who use their nil rate band to create debts against their estate.
The Phizackerley case you are referring to has shown once again that the Revenue are adamant to close down any opportunity for assets to be passed free of Inheritance tax and this case has not been popular.
In simple terms, we all have an amount we can give away on first death free of Inheritance tax. This is called the nil rate band (currently £300,000). We can give what we wish between spouses and there is no liability to tax at all. Whilst this is nice, it is not effective for tax planning as all the deceased spouse’s assets will then be added to the survivor’s who in turn has an exaggerated inheritance tax problem.
To avoid this, it is good to use the first nil rate band on death, but many avoid it as they do not wish to lose control of their assets. To circumnavigate this, a trust is normally created on first death with the deceased’s nil rate band transferred into it.
The benefit of the trust is that the surviving spouse can still benefit from the assets after death and on second death there is a second nil rate band which can be used, which is that of the survivor. All nice and simple really, so joint estates of £600,000 or less have no real issue in mitigating the tax.
There is an added benefit that the survivor can also borrow out of that trust and create debts against their estate which means that, with careful planning, estates of £900,000 or less should have no need for any Inheritance tax.
That was all very simple until the Phizackerley case above.
The case involved Dr Phizackerley’s wife who died leaving her half share in the property to a trust as an IOU. Dr Phizackerley then borrowed that capital back and this is where the problem sits. The special commissioner in the case stated that Dr Phizackerley had paid for the whole house, despite the couple being classed as beneficial tenants in common, and therefore any loan from the trust technically originated from him and not his wife – so he was lending money from himself to himself.
This really only complicates matters where the deceased, who creates the trust on death, has not contributed to the estate (now we are contentious). The commissioner has basically stated that as Mrs Phizackerley has never worked, the half share she had in the house didn’t actually belong to her and that is why Dr Phizackerley has loaned to himself effectively. Had Mrs Phizackerley worked, it could be proven she had contributed to the purchase and the loan scheme above would have been fine. Had Dr Phizackerley not borrowed, once again, the arrangement would have been fine.
The hilarious aspect to this, is that it cuts across the progress in other aspects of law, particularly divorce, where the contributions of the wife - whether she works outside the home or not - are deemed equal to those of the husband through his working outside the home.
It seems there is clearly a double standard here and I would expect some developments.
One point to look for however, is that of capital gains tax.
When property is placed into a trust, there is the future potential capital gains tax to consider. Whilst any gain on your personal home has no capital gains tax liability (currently), any gain on the share of the property within a trust is liable to capital gains tax. A method of circumnavigating this is to use an IOU, or a promissory note instead. As there is no property in the trust (just an IOU) there is no CGT – if structured properly.
Worldwide Financial Planning Ltd are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
Reader Writes:
I read your articles over the last few weeks on inheritance tax and splitting trusts. I wonder if you could explain how the recent case will affect those who use their nil rate band to create debts against their estate.
The Phizackerley case you are referring to has shown once again that the Revenue are adamant to close down any opportunity for assets to be passed free of Inheritance tax and this case has not been popular.
In simple terms, we all have an amount we can give away on first death free of Inheritance tax. This is called the nil rate band (currently £300,000). We can give what we wish between spouses and there is no liability to tax at all. Whilst this is nice, it is not effective for tax planning as all the deceased spouse’s assets will then be added to the survivor’s who in turn has an exaggerated inheritance tax problem.
To avoid this, it is good to use the first nil rate band on death, but many avoid it as they do not wish to lose control of their assets. To circumnavigate this, a trust is normally created on first death with the deceased’s nil rate band transferred into it.
The benefit of the trust is that the surviving spouse can still benefit from the assets after death and on second death there is a second nil rate band which can be used, which is that of the survivor. All nice and simple really, so joint estates of £600,000 or less have no real issue in mitigating the tax.
There is an added benefit that the survivor can also borrow out of that trust and create debts against their estate which means that, with careful planning, estates of £900,000 or less should have no need for any Inheritance tax.
That was all very simple until the Phizackerley case above.
The case involved Dr Phizackerley’s wife who died leaving her half share in the property to a trust as an IOU. Dr Phizackerley then borrowed that capital back and this is where the problem sits. The special commissioner in the case stated that Dr Phizackerley had paid for the whole house, despite the couple being classed as beneficial tenants in common, and therefore any loan from the trust technically originated from him and not his wife – so he was lending money from himself to himself.
This really only complicates matters where the deceased, who creates the trust on death, has not contributed to the estate (now we are contentious). The commissioner has basically stated that as Mrs Phizackerley has never worked, the half share she had in the house didn’t actually belong to her and that is why Dr Phizackerley has loaned to himself effectively. Had Mrs Phizackerley worked, it could be proven she had contributed to the purchase and the loan scheme above would have been fine. Had Dr Phizackerley not borrowed, once again, the arrangement would have been fine.
The hilarious aspect to this, is that it cuts across the progress in other aspects of law, particularly divorce, where the contributions of the wife - whether she works outside the home or not - are deemed equal to those of the husband through his working outside the home.
It seems there is clearly a double standard here and I would expect some developments.
One point to look for however, is that of capital gains tax.
When property is placed into a trust, there is the future potential capital gains tax to consider. Whilst any gain on your personal home has no capital gains tax liability (currently), any gain on the share of the property within a trust is liable to capital gains tax. A method of circumnavigating this is to use an IOU, or a promissory note instead. As there is no property in the trust (just an IOU) there is no CGT – if structured properly.
Worldwide Financial Planning Ltd are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
Inheritance Tax & Gifts
2 May 2007
Reader Writes:
Following last week's column we still have a number of Inheritance Tax questions unanswered.
If I am making gifts or gifts into trusts which order should I do them in?
Take careful advice on this. My article will not do justice to the complexity of this question. The ...
2 May 2007
Reader Writes:
Following last week's column we still have a number of Inheritance Tax questions unanswered.
If I am making gifts or gifts into trusts which order should I do them in?
Take careful advice on this. My article will not do justice to the complexity of this question. The difference relates to gifts into a discretionary trust or indeed a gift straight into a bare trust. A discretionary trust is normally used where you want the flexibility to change beneficiaries at a later stage. A bare trust won't give you that flexibility.
Let's assume all gifts into the trusts are within the current nil rate band. In the first example the gift is made into the bare trust of £285,000 in 2006. A gift is subsequently made into a discretionary trust of £285,000. Eighteen months later the client dies. A complicated assessment for tax occurs at the tenth anniversary of the trust to calculate any periodic charges which of course in turn will affect any exit charges.
By writing the bare trust first the client may disadvantage themselves from a tax point of view. It boils down to the fact that if the failed PET is made after the chargeable lifetime transfer no value is added in for it in the calculations for the ten year periodic charge.
In the example I was using, assuming fair growth rates in the trust, the ten year tax charge can be cut by 90%. Take it from me, it's complicated so ensure you receive good advice.
If I have an existing trust, do I need to do anything about it post the Finance act 2006?
Yes you do. You have until 6th April 2008 to make a decision on any existing trusts. Accumulation and maintenance trusts are affected. If you have such a trust you won't need to make any changes as long as the beneficiaries become absolutely entitled to the proceeds of the trust at age eighteen. If they aren't, you are allowed to vary the trust pre 6th April 2008 to ensure this happens. If you don't, the trust will fall into the new regime and all the periodic and exit charges that go with it. There is also an option to simply wind the trust up now.
There are a few exceptions to this where the new proposals to trusts will not apply. Trusts for bereaved minors, trusts created on death which give an immediate interest in possession and trusts created for the benefit of a disabled person.
The revenue have also pointed to a change in the current reporting thresholds. Currently when you make a chargeable lifetime transfer you have to complete an IHT100 form. This is applicable where a gift is in excess of £10,000 or total gifts in the ten years are in excess of £40,000. This is a ridiculous level and is expected to be increased to £200,000. Although the revenue have said they are happy to do this, they have not taken numerous opportunities to put it in place.
Finally if you want to make any changes to any life insurance policies ensure they are within the 'allowable variations'. If they are not and a pre 22nd March 2006 policy is varied the whole policy, not just the increased amount, will become relevant property and subject to the new regime. As you can see, it's a complicated subject to seek advice from your Solicitor and Independent Financial Adviser.
Worldwide Financial Planning Ltd are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
01/05/07
Reader Writes:
Following last week's column we still have a number of Inheritance Tax questions unanswered.
If I am making gifts or gifts into trusts which order should I do them in?
Take careful advice on this. My article will not do justice to the complexity of this question. The difference relates to gifts into a discretionary trust or indeed a gift straight into a bare trust. A discretionary trust is normally used where you want the flexibility to change beneficiaries at a later stage. A bare trust won't give you that flexibility.
Let's assume all gifts into the trusts are within the current nil rate band. In the first example the gift is made into the bare trust of £285,000 in 2006. A gift is subsequently made into a discretionary trust of £285,000. Eighteen months later the client dies. A complicated assessment for tax occurs at the tenth anniversary of the trust to calculate any periodic charges which of course in turn will affect any exit charges.
By writing the bare trust first the client may disadvantage themselves from a tax point of view. It boils down to the fact that if the failed PET is made after the chargeable lifetime transfer no value is added in for it in the calculations for the ten year periodic charge.
In the example I was using, assuming fair growth rates in the trust, the ten year tax charge can be cut by 90%. Take it from me, it's complicated so ensure you receive good advice.
If I have an existing trust, do I need to do anything about it post the Finance act 2006?
Yes you do. You have until 6th April 2008 to make a decision on any existing trusts. Accumulation and maintenance trusts are affected. If you have such a trust you won't need to make any changes as long as the beneficiaries become absolutely entitled to the proceeds of the trust at age eighteen. If they aren't, you are allowed to vary the trust pre 6th April 2008 to ensure this happens. If you don't, the trust will fall into the new regime and all the periodic and exit charges that go with it. There is also an option to simply wind the trust up now.
There are a few exceptions to this where the new proposals to trusts will not apply. Trusts for bereaved minors, trusts created on death which give an immediate interest in possession and trusts created for the benefit of a disabled person.
The revenue have also pointed to a change in the current reporting thresholds. Currently when you make a chargeable lifetime transfer you have to complete an IHT100 form. This is applicable where a gift is in excess of £10,000 or total gifts in the ten years are in excess of £40,000. This is a ridiculous level and is expected to be increased to £200,000. Although the revenue have said they are happy to do this, they have not taken numerous opportunities to put it in place.
Finally if you want to make any changes to any life insurance policies ensure they are within the 'allowable variations'. If they are not and a pre 22nd March 2006 policy is varied the whole policy, not just the increased amount, will become relevant property and subject to the new regime. As you can see, it's a complicated subject to seek advice from your Solicitor and Independent Financial Adviser.
Worldwide Financial Planning Ltd are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
01/05/07
Inheritance Tax Trust Splits
26 April 2007
Reader Writes:
Following your article on Inheritance Tax Planning I had a number of questions, perhaps you could help?
Indeed, although it may take two weeks of columns to cover your points!
You mentioned that a trust could be split into numerous parts to save future periodic charges and ...
26 April 2007
Reader Writes:
Following your article on Inheritance Tax Planning I had a number of questions, perhaps you could help?
Indeed, although it may take two weeks of columns to cover your points!
You mentioned that a trust could be split into numerous parts to save future periodic charges and in turn exit charges. Is there anything else to consider here?
In previous years to 22nd March 2006 a gift into trust such as the one you are referring to would have been a straight forward potentially exempt transfer (PET). After seven years it was outside your estate and there was no issue with any further tax. Today such trusts fall inside the regime of the old discretionary trust and have a range of new taxes that apply. It's not that you can no longer use this type of trust or gain exactly the same outcome you desire, it just involves a detour courtesy of the new rules. I suppose that's how the financial world works. Hurdles are put in place for you to work out if you go under, over or round but not through - it keeps me in a job which is nice.
On entry to most trusts (other than absolute trusts) there is a charge of 20% of the transfer which is above the nil rate band at the time. Today a gift into trust of £320,000 would attract 20% tax, £4,000 on £20,000. This should be paid by the trustees not the person who set up the trust (settlor) as the figure would be more.
In the above example if the settlor paid the tax it would be grossed up so the transfer of value would be greater. On the tenth anniversary, a periodic charge may apply. The trust value is assessed and if it is more than the nil rate band at that time, a charge of up to 6% could apply to the value over the nil rate band. In my previous article I pointed out that trusts could be split at the outset as on the anniversary each trust is assessed against the nil rate band. So rather than writing one large trust which could be over the nil rate band, better to write numerous which will each be assessed at the tenth anniversary and on exit. In the case of Rysaffe Trustee Co (ci) v IRC (2003) showed exactly that. Numerous trusts were set up on consecutive days. The revenue contended 'that the making of all the settlements were associated operations and the settlor had made one composite settlement by an extended disposition' Park J dealing with the associated operations made the valid point that it was not a valid reason to artificially import the associated operations provisions and to impose the false hypothesis there is only one settlement (trust) when in fact and in law there are actually five. 1.
So there you go! Remember another key point - section 62 IHTA 1984 stated that for a trust to be a related settlement, the settlor had to be the same in each case and the trusts had to be commenced on the same day. Therefore trusts created on different days do not fall within this definition.
If I made an outright gift of over the nil rate band, would I pay any immediate inheritance tax?
No. This becomes a PET and the seven year rule applies. Seek advice on which gift to make first i.e a gift into a trust followed by a PET or vice versa. Remember also a gift into an absolute trust is also a PET and does not suffer any of the aforementioned complications.
If you would like advice on Inheritance Tax planning and gifting or if you have a financial query, call 0845 230 986 or email info@wwfp.net
Source: Skandia Effective use of multiple trusts in trust planning Nov 2006
Worldwide Financial Planning Ltd are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up
26/04/07
Reader Writes:
Following your article on Inheritance Tax Planning I had a number of questions, perhaps you could help?
Indeed, although it may take two weeks of columns to cover your points!
You mentioned that a trust could be split into numerous parts to save future periodic charges and in turn exit charges. Is there anything else to consider here?
In previous years to 22nd March 2006 a gift into trust such as the one you are referring to would have been a straight forward potentially exempt transfer (PET). After seven years it was outside your estate and there was no issue with any further tax. Today such trusts fall inside the regime of the old discretionary trust and have a range of new taxes that apply. It's not that you can no longer use this type of trust or gain exactly the same outcome you desire, it just involves a detour courtesy of the new rules. I suppose that's how the financial world works. Hurdles are put in place for you to work out if you go under, over or round but not through - it keeps me in a job which is nice.
On entry to most trusts (other than absolute trusts) there is a charge of 20% of the transfer which is above the nil rate band at the time. Today a gift into trust of £320,000 would attract 20% tax, £4,000 on £20,000. This should be paid by the trustees not the person who set up the trust (settlor) as the figure would be more.
In the above example if the settlor paid the tax it would be grossed up so the transfer of value would be greater. On the tenth anniversary, a periodic charge may apply. The trust value is assessed and if it is more than the nil rate band at that time, a charge of up to 6% could apply to the value over the nil rate band. In my previous article I pointed out that trusts could be split at the outset as on the anniversary each trust is assessed against the nil rate band. So rather than writing one large trust which could be over the nil rate band, better to write numerous which will each be assessed at the tenth anniversary and on exit. In the case of Rysaffe Trustee Co (ci) v IRC (2003) showed exactly that. Numerous trusts were set up on consecutive days. The revenue contended 'that the making of all the settlements were associated operations and the settlor had made one composite settlement by an extended disposition' Park J dealing with the associated operations made the valid point that it was not a valid reason to artificially import the associated operations provisions and to impose the false hypothesis there is only one settlement (trust) when in fact and in law there are actually five. 1.
So there you go! Remember another key point - section 62 IHTA 1984 stated that for a trust to be a related settlement, the settlor had to be the same in each case and the trusts had to be commenced on the same day. Therefore trusts created on different days do not fall within this definition.
If I made an outright gift of over the nil rate band, would I pay any immediate inheritance tax?
No. This becomes a PET and the seven year rule applies. Seek advice on which gift to make first i.e a gift into a trust followed by a PET or vice versa. Remember also a gift into an absolute trust is also a PET and does not suffer any of the aforementioned complications.
If you would like advice on Inheritance Tax planning and gifting or if you have a financial query, call 0845 230 986 or email info@wwfp.net
Source: Skandia Effective use of multiple trusts in trust planning Nov 2006
Worldwide Financial Planning Ltd are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up
26/04/07
Childrens Savings Plan
18 April 2007
Reader Writes:
I was considering a savings plan for my children and wondered what options are available for me. I understand the government have also changed their mind in relation to gifts into trust for children.
If you look at their actions, it’s quite clear that the government are ...
18 April 2007
Reader Writes:
I was considering a savings plan for my children and wondered what options are available for me. I understand the government have also changed their mind in relation to gifts into trust for children.
If you look at their actions, it’s quite clear that the government are pretty keen to make it as difficult as possible to pass down wealth, via trusts without having their take.
They have made a U-turn, and the revenue commission has announced that gifts to minors through absolute and bare trusts will not be regarded as chargeable lifetime transfers (CLTs) but as potentially exempt transfers (PETs) thus reversing its previous view. This simply means that these trusts will avoid potential entry, 10 year periodic and exit charges which as well as being substantial can be an administrative burden.
As far as savings are concerned, there are a number of options:
CHILD TRUST FUNDS, NATIONAL SAVINGS & INVESTMENTS, FRIENDLY SOCIETY PLANS, INVESTMENT FUNDS such as unit trusts etc and PENSIONS.
The fund options within a child trust fund make this option reasonably unappealing. When we see the child becomes automatically entitled to the cash at age 18, the benefit of the tax break disappears for me completely.
National savings have numerous tax breaks but they vary per product. For premium bonds and certificates there is no further tax to pay and no income is produced which is favourable as you will see in a moment. Children’s bonus bonds have no tax liability and the income is specifically excluded from the £100 rule I will explain in a moment. For long term investments you may well consider deposits such as these unexciting and they are unlikely to outperform equities over such a term.
Friendly society savings plans were sexy when politicians were, but somehow that has drooped and the old poor with profit options available, coupled with higher charges once again make this as appetising as used bath water.
Investment funds are probably my preferred option in terms of flexibility and taxation. There are thousands of fund options available – the widest range. They can be held as a designated account with simply the child’s initial on the application form or as mentioned above in a bare trust. You will see many funds packaged and marketed to parents directly such as ‘The Rupert bear fund’. We currently do not approve any such arrangements due to their excessive fees and underperformance.
Investment bonds are unavailable for children, although a parent could invest for them in an offshore arrangement and when the child turns 18 they could begin to assign segments of the investment bond to the children, ensuring that the gain is within their income tax allowance. The benefit is that the investment can grow free of tax and distributions can be made free of tax – an all round winner.
Pensions allow for a contribution to be made into a stakeholder or personal pension and should be considered for the tax breaks. They have simple administration, and the growth is very tax efficient. Most importantly the contribution enjoys tax relief so the current maximum of £2808 moving into the stakeholder will immediately grow to £3600. On the downsides, the child cannot access the capital to age 55 which will not be too exciting for the Ferrari seeking 18 yr old. Compound growth is vital and these early years’ contributions will go a long way toward ensuring financial security at retirement. For example a contribution of £3600 made at birth would grow to £31,700 (1) at age 65 whereas the same contribution made at age 25 would grow to just £13,700 (2).
Where a parent makes a gift to a child and the ‘income’ payable in any year from that investment is greater than £100, the full amount is taxable as if it was the parent’s. Both parents are naturally treated separately for this rule.
When using the aforementioned investment funds, any tax paid within the designated account can be reclaimed by completing form R85 or doing a tax return for the child. When choosing an investment fund its worth looking at what income will be paid within the fund to ensure you do not breach the rule above.
For a fact sheet on child funds or if you have a financial query, call 0845 230 9876 or email info@wwfp.net
Source 1 and 2: Quotations from Standard Life
Worldwide Financial Planning Ltd are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
17/04/07
Reader Writes:
I was considering a savings plan for my children and wondered what options are available for me. I understand the government have also changed their mind in relation to gifts into trust for children.
If you look at their actions, it’s quite clear that the government are pretty keen to make it as difficult as possible to pass down wealth, via trusts without having their take.
They have made a U-turn, and the revenue commission has announced that gifts to minors through absolute and bare trusts will not be regarded as chargeable lifetime transfers (CLTs) but as potentially exempt transfers (PETs) thus reversing its previous view. This simply means that these trusts will avoid potential entry, 10 year periodic and exit charges which as well as being substantial can be an administrative burden.
As far as savings are concerned, there are a number of options:
CHILD TRUST FUNDS, NATIONAL SAVINGS & INVESTMENTS, FRIENDLY SOCIETY PLANS, INVESTMENT FUNDS such as unit trusts etc and PENSIONS.
The fund options within a child trust fund make this option reasonably unappealing. When we see the child becomes automatically entitled to the cash at age 18, the benefit of the tax break disappears for me completely.
National savings have numerous tax breaks but they vary per product. For premium bonds and certificates there is no further tax to pay and no income is produced which is favourable as you will see in a moment. Children’s bonus bonds have no tax liability and the income is specifically excluded from the £100 rule I will explain in a moment. For long term investments you may well consider deposits such as these unexciting and they are unlikely to outperform equities over such a term.
Friendly society savings plans were sexy when politicians were, but somehow that has drooped and the old poor with profit options available, coupled with higher charges once again make this as appetising as used bath water.
Investment funds are probably my preferred option in terms of flexibility and taxation. There are thousands of fund options available – the widest range. They can be held as a designated account with simply the child’s initial on the application form or as mentioned above in a bare trust. You will see many funds packaged and marketed to parents directly such as ‘The Rupert bear fund’. We currently do not approve any such arrangements due to their excessive fees and underperformance.
Investment bonds are unavailable for children, although a parent could invest for them in an offshore arrangement and when the child turns 18 they could begin to assign segments of the investment bond to the children, ensuring that the gain is within their income tax allowance. The benefit is that the investment can grow free of tax and distributions can be made free of tax – an all round winner.
Pensions allow for a contribution to be made into a stakeholder or personal pension and should be considered for the tax breaks. They have simple administration, and the growth is very tax efficient. Most importantly the contribution enjoys tax relief so the current maximum of £2808 moving into the stakeholder will immediately grow to £3600. On the downsides, the child cannot access the capital to age 55 which will not be too exciting for the Ferrari seeking 18 yr old. Compound growth is vital and these early years’ contributions will go a long way toward ensuring financial security at retirement. For example a contribution of £3600 made at birth would grow to £31,700 (1) at age 65 whereas the same contribution made at age 25 would grow to just £13,700 (2).
Where a parent makes a gift to a child and the ‘income’ payable in any year from that investment is greater than £100, the full amount is taxable as if it was the parent’s. Both parents are naturally treated separately for this rule.
When using the aforementioned investment funds, any tax paid within the designated account can be reclaimed by completing form R85 or doing a tax return for the child. When choosing an investment fund its worth looking at what income will be paid within the fund to ensure you do not breach the rule above.
For a fact sheet on child funds or if you have a financial query, call 0845 230 9876 or email info@wwfp.net
Source 1 and 2: Quotations from Standard Life
Worldwide Financial Planning Ltd are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
17/04/07
'Your home may be repossessed if you do not keep up repayments on your mortgage'.
'Worldwide Financial Planning Ltd are authorised and regulated by the Financial Services Authority. Worldwide is entered on the FSA register www.fsa.gov.uk/register/ under reference 440668
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By clicking on any of the external links within this website you will leave the regulatory site of Worldwide Financial Planning Ltd. Worldwide Financial Planning Ltd are not responsible for the accuracy of the information contained within the linked sites.'
'Worldwide Financial Planning Ltd are authorised and regulated by the Financial Services Authority. Worldwide is entered on the FSA register www.fsa.gov.uk/register/ under reference 440668
Registered office; The Old Carriage Works, Moresk Road, Truro, Cornwall, TR1 1DG. Registered in England and Wales No. 3533548. Contact info@wwfp.net or 01872 222 422
© 2007 Worldwide Financial Planning - this site is intended for UK investors only
By clicking on any of the external links within this website you will leave the regulatory site of Worldwide Financial Planning Ltd. Worldwide Financial Planning Ltd are not responsible for the accuracy of the information contained within the linked sites.'