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

Private Client Webinar IHT planning – is time running out? 13 October 2020

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

3 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

4 Tax planning Wills – who needs one? 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

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

6 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.  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

7 Joint property discount Wife dies a few years later Property now worth 1,350k Husband dies with NRB trust Her share worth £950k £1.2m T W 15% discount Property in trust has increased to circa. £400K Trust Wife’s estate worth £855k (10% discount) receives £855k less her NRB of £325k = £530k £382K £530k @40% = £212k IHT NRB trust has saved £68k IHT

8 If in doubt include a NRB Will Trust Protects from Saves IHT in its Protects the care costs, Two years to wind own right RNRB remarriage or up if not needed bankruptcy

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

10 Lifetime trusts   Cash Add surplus £650K per  Assets with a gain income couple to   APR/BPR Add NRB every avoid 20%  Land with hope seven years IHT value Family trust for generations Mitigate income tax and to come CGT IHT free

11 Deeds of variation Redirect to a Introduce an discretionary NRB trust trust  Correct missed opportunities  Signatories must be 18 Deeds of Variation and have capacity  Within two years  No consideration Other Redirect a changes to gift and avoid ensure RNRB the seven is utilised year rule

12 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

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

14 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

15 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

16 Shared occupancy gift (2) What is occupancy ?  Occupancy not defined ‘ordinary meaning’  You can occupy more than one property, can be 2 nd 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

17 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

18 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?

19 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

20 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)

21 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

22 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

23 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

24 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)