At what cost an inheritance?

With the continual increase in property values more and more family inheritances are being delayed in Probate.

 

More importantly, because of the overall increase in joint estate values it is not uncommon for Probate to be needed on both first and second death and as a result the process is fast becoming a very expensive and time consuming issue for middle England – in some cases creating a large financial burden rather than leaving a simple bequest.

On death your liability to Inheritance Tax is calculated however the overall tax due may change between the date of death and Grant of Probate because assets may increase or decrease in value.

Your Personal Representatives (PRs), who are often your beneficiaries, are responsible for settling any IHT and possibility Capital Gains Tax before they can settle your estate and HMRC would expect them to consider all assets - including their own - as a potential source from which to pay the tax. 

Often PRs do not have sufficient personal funds to pay the tax, or unencumbered property against which to secure a probate loan which often causes anxiety, stress and lengthy delays.

As a result of being your beneficiary how much of an additional financial commitment might your PRs be inheriting alongside their bequest?

It is frequently said that people are remembered for what they left, rather than for what they did.

Probate, unlike other taxes, does not have a year of assessment but can carry a very big unintentional sting in its tail that can take years to resolve.

How would you like to be remembered?

Helen Wilson

Consultant

Telephone:  +44 (0)20 7893 3456

Email:  getintouch [@] broadstoneltd.co.uk

Death and (Pension Drawdown) Taxes

Further good news in relation to the above was confirmed in the recent Government’s response to the “Freedom of choice in pensions” consultation following the 2014 Budget. 

 

To give a little background, at present when people utilising pension drawdown (or those who are over 75, not in drawdown but have “uncrystallised” pensions) die, the residual “pot” is taxed at 55% - the only exception being when the fund is used to purchase an annuity for the spouse or the spouse carries on with income drawdown.

 

In their response to the consultation, unsurprisingly, the Treasury has acknowledged that a rate of 55% might be “too high” and “needs to be changed”. This mirrors something that financial planners have felt since the rate was raised from the previous tax of 35%.  Interestingly, however, as this is a relatively complex and sensitive area, confirmation of the rate is not due until the Autumn statement, and will not take effect until 2015. 

 

Perhaps more interesting is the speculation within the industry (and within the adviser group at BROADSTONE) of what the new rate will be.  We haven’t got to the point of running a sweepstake, but popular opinions in the office include a parity with Inheritance Tax (40%), perhaps charging the pension fund to the individual pension holder’s marginal income tax rates or a return to the days of 35%.  The outlier is speculation that perhaps the Government will look to allowing wealth to truly span the generations, and maybe allow family members to effectively inherit the pension fund into their own pensions.

 

It will be fascinating to see the final detail of this in the Autumn statement (and see which of the office predictions were right).  One thing that everyone will be pleased about is that from next year 55% tax will no longer apply.

 

Duncan Wilson

Private Client Partner

 

Telephone: +44 (0)20 7893 3456

Email:  getintouch [@] broadstoneltd.co.uk

 

Ways for you and your family to avoid paying inheritance tax on your life assurance policies and pension arrangements

Following the theme of my last blog, where I talked about the effective use of a Will and the services of a professional financial planner, today’s blog outlines some basic thoughts to help avoid the need to pay inheritance tax on life policies and pension plans.

In the case of life policies, these can and should usually be written in trust, as if they aren’t, the death benefits will be paid to the policyholder’s taxable estate, and be subject to inheritance tax. In this situation, a discretionary trust is often suitable, with the policyholder’s partner as the principal potential beneficiary, together if appropriate with any children. This generally brings an additional layer of flexibility and avoids further Inheritance Tax problems in the event of the policyholder’s partner/spouse dying.

In the case of pension plans, an expression of wish in the form of a ‘letter of wishes’ should always be written by the planholder to the scheme trustees indicating the person or persons to whom they would wish the value to be paid in the event of their death – indeed these often form part of the original application process. Some scheme trustees who are unwilling to follow expressions of wishes, insist on paying plan proceeds to the planholder’s estate. Consideration might be given in these cases to switching to a more accommodating pension scheme.

As an alternative to an expression of wish, a formal pilot trust (or ‘spousal by-pass trust’) might be established – especially for larger pension arrangements. This would give the trustees discretion to pay the proceeds to a wide range of potential beneficiaries, including the surviving spouse, but would enable them to ensure that the surviving spouse received only what he or she needed, so that the balance of the fund would not be held in their taxable estate on their death, and therefore avoid inheritance tax.

 

Duncan Wilson

Private Client Partner

Telephone: +44 (0)20 7893 3456

Email:  getintouch [@] broadstoneltd.co.uk