BARBICAN LIFE


Personal Finance Death and taxes revisited Joe Coten brings us some insights on ways of reducing inheritance tax liabilities. S


pring is a time of rebirth and a time for optimism. Without wishing to squash the darling buds of May underfoot, I think it worthwhile revisiting the subject of estate planning.


Unpleasant and unavoidable topics agreed – death and taxes, that is - but more than doubly so when combined, we can also agree! Before the last general election David Cameron talked about increasing the nil rate band (NRB) for inheritance tax (IHT) to £1m. Since then the coalition government has put the nil rate band allowance of £325,000 on hold till 2015. Leaving aside the politics, the impact is clearly significant for any property- owner in the South East, particularly so in the Barbican. The value of your flat will comfortably eat up your allowance in most instances. The ability to use a deceased spouse’s allowance since 2007 will however be helpful for some, in that it reduces the tax bill by £130,000 at current rates in this scenario, however if you own substantial assets over and above your property the full weight of the 40% rate will make itself felt in due course.


There have been a number of specialist products marketed by law firms enabling you to gift your home, and so remove it from your estate for tax purposes, whilst continuing to live in it. The tax charge on pre- owned assets brought in 6 years ago put paid to the majority of these schemes but there are still some out there. I recommend treating these with caution, as government has the power to amend legislation retrospectively and although it was the custom never to do so, that precedent no longer holds good. You could find yourself at the centre of an extremely unpleasant legal mess, if HMRC decides to attack a scheme


that is allowed under the letter of the law but that is after the event viewed to be not in its spirit. If you have in fact already undertaken some trust planning around your property, I would recommend you get the advice professionally reviewed, as the pre- owned asset tax rules affect transactions going back to 1986. Apart from the annual £3,000 gift allowance a useful planning strategy involves making regular payments out of income. So if you can live more than comfortably on your pension income, you can legitimately set up a regular savings scheme in favour of a child or grandchild with the contributions free of IHT. If you do embark on this route it is wise to keep a note on file confirming the arrangement, as HMRC will no doubt be picking over your bank statements after the event.


It is possible to insure against the future tax bill via a whole of life policy written in trust to your beneficiaries. This can be a cheap way of pre-paying the tax bill for married couples as the policy pays out only on the second death. At maximum cover the premiums are reviewed after 10 years and invariably become more expensive. If you start with standard, or whole of life cover, as it is sometimes known, the initial premiums are more expensive but are unlikely to increase much, if at all in the future, depending on reasonable underlying investment performance. In this way you can effectively pay the tax bill in advance by instalments.


Another tax planning strategy involves making outright gifts. You need to first of all make sure that you have sufficient funds to cover your likely care needs. If there is a sum you are confident is going to be superfluous, you can make an immediate gift to a family member.


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Provided you survive seven years there will be no tax charge on the gift. Here again it is possible to take out an insurance policy with a tapering pay out that will cover the tax liability should you die before the seven years are up. Assuming your gift doesn’t exceed the NRB there is no tax due at outset.


Discretionary trusts can be useful planning tools as they give you control over the gifted property. Even if the gift into trust is less than £325,000 and there is no initial tax charge, there are however on-going charges and administrative obligations, which can make them an unattractive option for some. If in addition you die within seven years a portion of your NRB will be used up when HMRC calculates the IHT bill. A more sophisticated packaged


product is available via certain life insurance companies. Put simply this allows you to make a gift for the benefit of your family, for example, and nonetheless allows you to access your money if it is required. The growth on capital within the scheme is immediately IHT free, which is an added bonus. The seven year rule still applies but the ability to have your cake and eat it is certainly attractive. Needless to say this type of flexible trust arrangement is highly specialised and you should take professional advice before embarking on this type of planning.


As estate planning is such a large topic, I’ll keep the rest of my powder dry for the next Barbican Life issue.


Joe Coten


is a member of the Personal Finance Society.


He may be reached on 0207 588 9626.


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