13 October 2020 Content 1. What does the future hold? 2. Planning - - PowerPoint PPT Presentation

IHT planning – is time running out? 13 October 2020

Private Client Webinar

Content

• 1. What does the future hold?
• 2. Planning with the NRB in Wills - Stuart
• 3. Business/Agricultural interests & Wills – Stuart
• 4. Family Trusts – Stuart
• 5. Planning with the main residence (gifts with

lease back & shared occupancy) – Camilla

• 6. Property portfolios companies (freezer shares

etc) - Camilla

• 7. Family investment companies – Camilla
• 8. Summary

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What does the future hold? APPG (IIF) report published 29 January 2020

• Suggested overhaul of IHT
• 10% to 20% on all transfers of value – lifetime gifts reported by simple form
• Removal of all reliefs and exemptions except annual gifts, spouse and charity
• Loss of BR/AR – is this tenable?
• Removal of RNRB, possible increase of ordinary NRB
• Removal of CGT uplift on death
• Automatic “holdover” on gift/death
• Due to Covid-19 not yet received Government’s attention

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Couples who have

• Assets over £1m
• Jointly owned property
• Business property or agricultural property

Tax planning wills also provide asset protection and cater for complex families – beyond scope of this webinar

Tax planning Wills – who needs one?

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NRB trusts in Wills

Assets in the Will Trust will increase in value Reduces the value of the survivor’s estate Asset protection Allows 3+NRBs to be claimed Takes advantage of Joint Property Discount

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• Husband and Wife have no children
• House – worth £1.2m on first death
• Increases to £1.35m on second death
• Wills – all to survivor – fully spouse exempt on first death.
• Second death: £1,350k - £650k = £700k @40% = £280k IHT

How does joint property discount work

HMRC accepts that a share of a jointly owned property is not worth the respective % of the whole. Applies 15% discount for jointly owned property that is occupied and 10% for unoccupied property.

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Joint property discount

Wife dies a few years later Property now worth 1,350k Her share worth £950k Property in trust has increased to circa. £400K Wife’s estate worth £855k (10% discount) £855k less her NRB of £325k = £530k £530k @40% = £212k IHT NRB trust has saved £68k IHT

£1.2m Trust receives £382K T W

15% discount Husband dies with NRB trust

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If in doubt include a NRB Will Trust

Saves IHT in its

• wn right

Protects the RNRB Protects from care costs, remarriage or bankruptcy Two years to wind up if not needed

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Wills and business and agricultural property

APR & BPR assets APR/BPR trust + NRB Cross Option Agreement or sale of assets Cash in trust – passes IHT free Distributions or loans to survivor

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Lifetime trusts

£650K per couple to avoid 20% IHT Family trust for generations to come IHT free

• Cash
• Assets with a gain
• APR/BPR
• Land with hope

value Mitigate income tax and CGT

• Add surplus

income

• Add NRB every

seven years

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Deeds of variation

Deeds of Variation Redirect a gift and avoid the seven year rule Introduce an NRB trust Other changes to ensure RNRB is utilised

• Correct missed
• pportunities
• Signatories must be 18

and have capacity

• Within two years
• No consideration

Redirect to a discretionary trust

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Planning with the main residence

• Property has historically been a favoured asset class
• The main residence is often the single most valuable asset
• Limited options to plan due to tax avoidance legislation eg; GRoBs, Pre-owned Asset

Tax, General Anti Avoidance Regulation & Disclosure of Tax Avoidance Schemes

• However, there are still ‘vanilla’ options available that are accepted by HMRC as

legitimate tax planning

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RNRB – 60% marginal rate

Estate Value

£2m £2.35m £2.7m Full loss of one RNRB Full loss of two RNRBs No loss of RNRB Up to £700,000 potentially exposed to a 60% effective tax rate

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RNRB – while we still have it...

• Due to the value of property, can be key in terms of reducing the estate below the £2m

threshold

• Can save £140K immediately, with further substantial savings after three years and then

seven years

• If a gift of the qualifying residential interest is made, it is important that there is no

‘reservation of benefit’ and that the donor has sufficient other assets to pass to direct descendants to enable the RNRB to be claimed (no tracing)

• ‘Use it or lose it’ – introduce gift on first death

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Shared occupancy gift

• Exemption from the GROB rules dates back to a Hansard statement in 1986, legislation

effective from 9 March 1999

• Applies to a gift of a share of an interest in land (an undivided share)

‘Section 102B(4) of the Finance Act 1986 (a) the donor and the donee occupy the land; and (b) the donor does not receive any benefit, other than a negligible one, which is provided by or at the expense of the donee for some reason connected with the gift.’

• Opportunity where you share occupancy with your adult child

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Shared occupancy gift (2)

What is occupancy?

• Occupancy not defined ‘ordinary meaning’
• You can occupy more than one property, can be 2nd property
• You do not need to be there all the time
• HMRC guidelines suggest:
• You need to be more than just a guest
• Some element of control
• Storing possessions is evidence of occupation
• Freedom to use the property as and when you wish
• Donor must not receive a benefit:
• Donee should only pay the expenses they incur and no more. Best if Donor covers

the lion share

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Shared occupancy gift (3)

• You gift a share of the property – what is a share?
• HMRC has indicated than anything above a per capita gift will be challenged.

https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14332

• ‘where the donor only retained a very small proportion of the property in comparison

to the level of occupation’ – see the DOTAS guidance

• Up to a 50% gift if one adult child lives with parents

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Shared occupancy gift (4)

• The gift is a PET – Seven year rule, taper after three years
• Gift can be via transfer of legal title and/or beneficial interest
• Needs to be a gift of a specific share of the beneficial interest ‘undivided share’
• No CGT on the gift due to principal private residence relief (PPR)
• Consider PPR going forward. Is it the main residence of the donee?

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Shared occupancy gift (5)

What happens if:

• Shared occupancy ceases
• If the donee leaves, there will be a GROB – pay market rent?
• Donor or donee dies
• Donor dies – insurance for IHT liability? What does donee’s Will do?
• Property is sold
• Consider CGT (does PRR relief apply to donee’s share?)
• Proceeds will be split according to beneficial ownership
• Consider flexible Will
• Balance up estate with other siblings if possible
• Lost NRB if donor dies within seven years

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Gift with lease back

• Suitable for individuals in retirement in good health with sufficient cash/investments to

fund the rent and other outgoings

• The gift is a PET
• GRoB/POAT avoided by paying full market rent
• Security of tenure through appropriate lease granted by donee(s) to donor
• Can gift part only of the house
• Gift to discretionary trust if below NRB (otherwise 20% entry charge)

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Gift with lease back (2)

What is Market Rent?

• Must be full consideration in money or monies worth (market rent)
• If rent drops below market rent at any point a GRoB will arise (another seven year period

to drop out of account)

• Ideally each party represented by property agents/surveyors and own legal

representatives – but not essential (can make it a contractual obligation to pay market rent do becomes a debt of the estate)

• Market rent taxed in the hands of recipients of the gift (children) and subject to income

tax – fairly tax neutral

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Gift with lease back (3)

What type of Lease?

• No formal lease or AST – no security of tenure
• Fixed term – SDLT may be an issue
• Lease for Life – SDLT favourable
• Treated as being initially for a fixed one year terms for SDLT usually some

years before SDLT is payable

• Section 149(6), LPA 1925 converts a lease for life to a 90 year term – be

careful that the drafting is correct

• Gift of part – use a co-ownership agreement instead

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Gift with lease back (4)

What about CGT?

• Important to have PPR relief on the gift
• Gain going forward will not qualify for PPR relief or uplift on death of tenant (donor)
• CGT on the gain going forward @ 28% v IHT on the whole value @ 40%
• Helpful to have multiple donees or if it is likely that the family home will not be sold
• If gift tax introduced, this planning will no longer be possible

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Other options with the family home

• Downsize
• Release cash to gift (or spend)
• Invest in a Business Relievable portfolio – exempt in two years
• Put BR portfolio into trust (double wrap)
• Retain the RNRB (down sizing provisions)
• Consider cost of moving
• Equity release
• Under used for estate planning
• Release cash to gift (or spend)
• Cannot be invested in BR portfolio (since 2014 legislative changes)

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Property portfolios – how to mitigate IHT?

• Outright gift will trigger CGT – usually prohibitive
• Transfer into trust will trigger 20% entry – usually prohibitive.
• Sell individual properties, pay CGT and gift proceeds – worth considering while CGT

rates remain favourable but lose uplift on death

• Usually only viable option is to ‘stop the rot’ and use a company structure to gift future

gain

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Property portfolios – incorporation

• CGT Incorporation Relief
• Section 162 Taxation of Chargeable Gains Act 1992
• Applies to sole traderships or partnership but depends on scale/nature of existing

business

• Ramsay case demonstrated a need for 20 hrs+ per week working in the business
• Is not claimed, given automatically

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Property portfolios – incorporation (2)

• SDLT relief:
• If a genuine partnership has operated for several years from which the partners (i.e.

husband and wife) have received the majority of their income

• Need registered partnership with HMRC, partnership agreement, partnership

accounts etc.

• The ownership of the company must match the ownership of the partnership
• SDLT relief must be claimed

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Property portfolios – new share class

• Once incorporated, create a new share class (B shares)
• B shares receive future economic rights eg; any capital gain going forward and future

dividend rights

• A shares retain a limited right to dividends say for the next 10 to 20 years
• A shares - capital value is frozen
• Gift shares to children – PET at nominal value, no CGT
• As years pass A shares reduce in value and B shares increase
• A shares benefit from CGT uplift on death

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Family Investment Company

What is it?

• Just a limited company with family members as owners
• Parents usually founders with new shares being issued to children:
• A shares – controlling shares (can have dividend rights)
• B shares – non-voting but with economic rights (capital growth & dividend rights)
• Works best with cash loan from founders to the company (interest free payable on

demand)

• Loan repayments tax free
• Capital growth sheltered from IHT
• Sheltered from income tax until profits extracted.

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Family Investment Company (2)

Future IHT mitigation

• Loan still exposed to IHT
• B shares are gifted to children at nominal value no gain – PET
• Seven year rule irrelevant due to nominal value
• No restriction as to value of loan
• No entry, exit or periodic charges
• Assets in the company under parents’ control
• Payment of dividends under parents’ control
• B shares can be gifted to a family trust for further asset protection from children's divorce
• r bankruptcy

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• Consider advanced planning strategies for the main residence, often the most valuable asset of

the estate

• Utilise property portfolio companies to avoid normal CGT / SDLT pitfalls that normally come with

estate planning with property

• Consider a Family Investment Company for clients with substantial cash (over £1m)

Estate planning summary

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• Planning with NRB and RNRB in Wills can save significant

amounts of inheritance tax

• Use trusts in Wills to receive AR / BR assets – lock in relief

and reduce survivor’s estate

• Use Lifetime trusts to further reduce IHT – appropriate in

many circumstances

• Deeds of variation provide flexibility to carry out this

planning post death

Estate planning summary (2)

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Any questions?

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Camilla Bishop

Speakers

Head of Private Client, Brighton 01273 744228 Camilla.Bishop@dmhstallard.com

Stuart Price

Associate, Private Client 01273 744253 Stuart.Price@dmhstallard.com