Brooks Macdonald Adviser Academies April / May 2018 John D. Bunker - - PowerPoint PPT Presentation

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Estate planning for £1m to £5m estates: maximising the benefits of the Residence Nil Rate Band Brooks Macdonald Adviser Academies – April / May 2018 John D. Bunker Head of Private Client Knowledge Management,

Tax Trusts and Estates, IM Private Wealth

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Brooks Macdonald Adviser Academies: Technical Presentation

• 1.1-1.4 RNRB & PDB: major tax changes, Estate planning &

working together pro-actively; role of FPs & IMPW

• 2.1-2.10 RNRB: key basics incl traps for wills

Estate planning for £1m- £5m estates:

• 3.1-3.4 Rethinking use of Pensions and other assets
• 4.1-4.6

Spouses: planning wills & trusts to avoid loss of RNRB

• 5.1-5.4 Lifetime gifts to reduce estate below £2m threshold

Estate planning for £1m to £5m estates:

maximising the benefits of the Residence Nil Rate Band

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Irwin Mitchell nationally

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• Irwin Mitchell Private Wealth comprises 4 national teams:

– Tax Trust & Estates – Wills Trust and Estates Disputes – Family and – Residential Property

• Tax Trust & Estates team includes:-

– Will drafting, Inheritance Tax & Estate Planning; – Planning with APR & BPR for farm and business owners; – Trusts: advice and drafting to create, vary, re-arrange and wind up trusts; – Tax & trust compliance: all the advice, accounting, tax and admin; – Estate administration (Probate); – International Tax planning, wealth structuring & estate planning for HNWIs; – Elderly & Vulnerable Clients: a wide range of services including LPAs & COP.

Irwin Mitchell Private Wealth

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1.1 Estate Planning for £1m to £5m estates for RNRB

• Residence Nil Rate Band (RNRB) introduced April 2017

– Major opportunity to save IHT – But lots of traps & hurdles – many unsuspecting clients will not qualify

• Key focus: £2m taper threshold will deny many RNRB

– So how can to maximise RNRB?

• Pension Death Benefit (PDB) tax changes in 2015/17

– ties in with RNRB planning

• So a need to re-think solutions for clients

– Any estate planning pre 2015 needs review

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• Estate planning brings together 3 disciplines:

– Legal – especially wills & trusts, – tax planning – IHT, CGT, Income Tax, SDLT etc. & – financial planning

• Good for lawyers/tax advisers to work with FPs/IFAs

– For long term benefit of clients and mutual benefit – Work together- where clients recognise value paying, for better results

• Combining legal, tax planning and financial planning solutions

1.2 Estate Planning: Legal, tax and financial planning

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1.3 Role of Financial Advisers in major tax changes

• FPs /IFAs have key role in pro-active advice to clients

– Hope to show key points to flag up for attention – with 12 top tips

• Tax reforms mean new opportunities and new traps

– Many will assume they get RNRB when they don’t – Clients don’t know what they don’t know! – So we need to help clients see need for specialist advice – Pro-active advice needed

• To flag up traps or hurdles
• & potential to save tax with re-thinking/ re-structuring
• But may need to “sell” the value of the advice!

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1.4 role of IM Private Wealth in these key tax changes

• We in IM Tax Trust & Estates work closely with FPs / IFAs

– & Investment managers – building long term client relationships - to help achieve aims

• IM can provide integrated legal and tax planning advice

– Working with FPs/IFAs, – including “one-off” estate planning advice

• IM’s Tax Trust & Estates team

– works with other parts of IM Private Wealth

– E.g. Family Asset Protection service

• for protecting capital, e.g. from gifts,

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2.1 RNRB key basics: Major new IHT Relief

• New relief for Inheritance Tax (IHT) from 2017/18

–

Where deceased owned a home – see 2.3/2.4 &

–

Left sufficient of estate to direct descendants –see 2.5 &

–

No need for specific gift –but NB how HMRC treat share of estate –see 2.6

&

–

Estate value not over £2m – or lose RNRB by tapering –see 2.7 &

–

Spouses can C/F unused RNRB to second spouse’s estate –see 2.8 &

–

Real traps for wills, e.g. grandchildren & unmarried families –see 2.9/10

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• RNRB phased in from April 2017 to 2020/21

– Now £125K in 18/19 – £175K in 20/21

• In 2020/21 – reach the magic £1m. for spouses!

– RNRB £175K – + NRB £325K = total £500K each

– Married couple £1 million free of IHT

• Price: NRB frozen for 12 years to 2020/21.

2.2 RNRB key basics: Spouses can leave target £1m! 10

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2.3 RNRB key basics: owned residences

• Where deceased owned a home

– Has to have been occupied as a residence at some time – No need to be main residence

–

includes interests in homes held by life interest trust

• so aggregable with personal estate

–

Can be 2 interests – incl trust – but only one property

• Downsizing addition if sale on/after 8 July 2015

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2.4 RNRB key basics: Tip 1 re owned residences

–

Tip 1: Keep net value of client’s home under review

• As can lose RNRB if don’t own sufficient equity

–

E.g. in 2020/21

»

£175K –or £350K for 2 RNRB

• Can you review value of any property interest(s)

–

& Cf. with RNRB available each year,

–

including any brought forward from a spouse?

»

See 2.8

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2.5 RNRB key basics – direct descendants

• Where sufficient estate left to children & remoter descendants

= property interest is “closely inherited”

– Widely defined including step-children

• spouses and widows of descendants -if do not remarry

– Can be closely inherited through some forms of trust:

• But not a discretionary trust

– Can vary estate or trust within 2 years of death to achieve result

• Deed of variation
• or deed rearranging trust

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2.6 RNRB key basics – No need for specific gift of home

• No need to have specific gift of property interest

–

HMRC treat property as inherited as per shares of residuary estate

–

E.g. 3 x 1/3 share. If Prop £450K 1/3 = £150K

–

if 1 share does not qualify,

–

HMRC say only 2/3 prop gets RNRB

–

= £300K so if 20/21 waste £50K of RNRB.

–

Cannot put will right through Appropriations

• HMRC say
• Tip 2: Ask for copy of will – to see beneficiaries

– including any “mixed estate” where some – not all - closely inherit – Review with lawyers – in lifetime, or after death:

• Worth a quick estimate of estate that is closely inherited
• In case revision to will or variation of estate needed

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• If estate exceeds £2 million – the “taper threshold”

– Lose £1 for every £2 over limit – So = no RNRB if estate:

• 2018/19 = over £2.25m or £2.5m if double RNRB
• “Estate” includes aggregated trust interests

– caught for IHT on death,

– But disregards all exemptions and reliefs - APR/BPR etc

• Effective marginal IHT rate on the top slice over £2m = 60%

2.7 RNRB key basics: Tapered withdrawal estates over £2m. 15

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• Brought-forward allowance

– If “unused” by Deceased spouses estate

• Subject to restriction

– tapered withdrawal if 1st spouse’s estate over £2m. – If one spouse dies after 5.4.17, – then double up RNRB –even if dec’d spouse died pre-6.4.17

» £250K 2018/19 » £350K 2020/21

– Planning issues re whether good to “use” RNRB on 1st death

• See part 4

2.8 RNRB basics: Dec’d Spouse’s Brought-forward allowance

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• Grandchildren: what gifts in will can claim RNRB?

– main options:

• Outright gift , bare trust (no age contingency) or IPDI

– Any age contingency,

• Could appoint out absolutely - or on IPDI trusts - to claim RNRB
• “Stepchildren”: who are included?

– Children of spouse or former spouse – but not children of unmarried partner

• So, many wills need to be reviewed
• Tip 3: Don’t be afraid to query will terms

– e.g. to grandchildren OR “step-children” – & do ask re possible remedies –e.g. variation within 2 years of DOD

2.9 RNRB key basics: Traps re grand-children & stepchildren

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2.10 RNRB key basics: Traps re wills for unmarried couples

• If want surviving partner to have right to live in home,

– no RNRB on first death & no spouse exemption

–

On 2nd death, ½ share to 1st partner’s kids = not gifts to stepchildren

• So no RNRB when capital goes to those children

– Even if “children of the family” & can claim v. estate

• The only RNRB on 2nd partners gift to his/her own children
• Perhaps gift ½ share to IPDI for children of first to die

– Trustees need overriding power of appointment & clear LoW – Value in good independent Trustee to ensure all protected

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• If estate exceeds £2 million: loss of RNRB by “taper”
• Effective marginal IHT rate = 60% on top slice over £2m
• Pension fund value doesn’t count towards £2m estate limit

– & Pension Death Benefit tax changes, from 2015/16 = major new opportunity

• to pass on assets tax effectively :
• Lump sums, pensions or FAD
• Tip 4: Anyone about to start drawing on pension:

– STOP – Take advice on RNRB & PDB changes first

3.1 Planning to maximise benefits of RNRB: Re-thinking planning for RNRB & PDB tax changes

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• If estate exceeds £2 million – the “taper threshold”

– Might £1m now go over £2m on death? – & could £5m be drawn down to £2m on death?

• Pension fund doesn’t count towards £2m –so stop before drawing:

– Why not use pension as client took out for secure retirement income?

• If pension left untouched or less drawdown

= death benefits passed down more tax effectively = better chance of preserving RNRB.

3.2 Planning to maximise benefits of RNRB: Estate planning for £1m- £5m estates: Pensions

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• Tip 5:

Can other cash & investments be drawn down to replace pension?

• Spending capital that would be taxed @ 40% on death;
• r even @ 60% marginal rate if in band over £2m
• Major change for clients who don’t like spending capital
• FPs can show how works with benefit of cash flow modelling
• To show variables; &
• E.g. that capital does not run out, lasts to age 95 or…..

» Use annual CGT exemptions to draw down investments; » Keep ISAs to last, but they are taxable on death;

3.3 Planning to maximise benefits of RNRB : Re-thinking use of assets – non-pension assets

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• Estate planning together
• thinking through options & financial, tax & legal aspects;
• Needs to draw down while preserving client comfort & security;
• But ideal if spend capital to avoid 60% marginal IHT rate;
• Reducing capital to £2m.
• Planning between spouses:
• FP’s input vital to plan ahead for both spouses, &

– review on death of 1st spouse – options for 2nd spouse?

• Does s(he) draw on pensions or save to pass on PDBs?

3.4 Planning to maximise benefits of RNRB : Re-thinking use of assets – the end target

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• Spouses: what is planned in wills on 1st death?
• Typical planning pre RNRB:

– All left by 1st spouse to surviving spouse or an IPDI trust:

• Spouse exemption +
• Transferable NRB = 2 NRBs on 2nd estate
• RNRB C/F to 2nd estate

– Problem: adds to capital on 2nd death –in own name or IPDI trust

• & combined value = more likely total over £2m threshold
• So may lose both RNRBs on 2nd death as a result

– Also risk capital passed to 2nd spouse is “caught” twice

• 1st spouse’s estate over £2m = lose RNRB
• 2nd estate now over limit incl assets from 1st = lose RNRB

4.1 Spouses: planning wills & trusts to maximise RNRB Problem with pre RNRB Will planning

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• Spouses - big question:

– to “use” NRB and/or RNRB on 1st death or not? – either by wills or variation within 2 years of death.

• Tip 6: Don’t forget value of 2 year period to review :–

» Consider Deed of variation by 2nd spouse » Or variation of Discretionary Trust

• If 1st spouse estate below £2m but 2nd well over:

– Use RNRB on 1st death - as may not qualify on 2nd death – & also NRB to reduce 2nd estate?

• If combined estates well over £2m threshold:

– Use both NRB + RNRB to reduce 2nd estate?.

4.2 Spouses: planning wills & trusts to maximise RNRB Wills to help avoid going over £2m & losing RNRB

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• On 1st spouse’s death:
• Consider “use” of NRB by setting up NRB D/T

– Nil Rate Band Discretionary Trust – incl spouse as beneficiary

• trust not aggregated with 2nd estate
• But spouse can access if needs;
• Don’t need a D/T to use NRB, but helps 2nd spouse’s security
• NRB D/T will not use RNRB if kept as RPT

– So although could leave share of property in D/T – Leave sufficient property value in 2nd spouse’s name

• to use 2 x RNRB on 2nd death
• Tip 7: Dust off old NRB D/T’s notes – they are back!

4.3 Spouses: planning wills & trusts to maximise RNRB Wills to use NRB on 1st death: NRB D/T’s

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• Use RNRB on 1st spouse’s death?
• Must be outright gift
• r trust for beneficiary who closely inherits

– But not a Discretionary trust

• So if whole estate on Discr trust –must vary in 2 years of DOD

– Appoint out absolutely or on appropriate trust

• Could leave share of property in IPDI trust for children who closely inherit

– If main home, include spouse as potential beneficiary; – Leave sufficient property value in 2nd spouse’s name

• For 2nd estate to use own RNRB on 2nd death

4.4 Spouses: planning wills & trusts to maximise RNRB Wills to use RNRB on 1st death: not a D/T

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• Option A:
• Roger dies in 2020/21 leaving whole estate value £1.2M,

– incl his £500K share of home to his wife Sally

• When Sally dies, a few years later, her estate worth £2.7M

– incl whole house, now worth £1.4M = no RNRB

• Cf. option B:
• If Roger’s 1/2 house (£500K) had gone to children

– E.g. flexible IPDI trusts, with Sally still a beneficiary – No IHT on Roger’s death = £325K NRB + £175K RNRB – Sally still has £175K RNRB for her estate = 2 RNRBs secured = saves £140K IHT.

• Tip 8: if not done by will:
• use of NRB can be achieved by Deed of Variation

4.5 Spouses: planning wills & trusts to maximise RNRB E.g. Using NRB –doesn’t need to be a D/T

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• Denis and Pamela each widowed in early 2000s, married 2012

– Both late spouses fully used NRBs – Live together in Denis’s house = worth £500K – Pamela’s old home = worth £400K - let out – £450K in total savings

• 1st to die should leave £350K “slice” of house to own children

– So can use their 2 RNRB –incl the C/F RNRB from late spouse

• 2nd to die has own £350K RNRB + £650K NRB + TRNB

– No IHT to pay -£1.35m exempt

• 4 x RNRB between the 2 as both widowed
• Tip 9: Always check if clients widowed;
• if widowed or remarried: consider using 3rd / 4th RNRB

4.6 Spouses: planning wills & trusts to maximise RNRB E.g. remarried widows – using RNRB

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• If using assets effectively –as per part 3,

– & spouses planned wills effectively –as per part 4, – & more needs to be done

• Or little time available –e.g. death bed situation?
• Gifts can bring capital below £2m threshold:

– Gifts –whenever made – not taken into account in estate value for £2m calculation

• Doesn’t matter for RNRB that dies within 7 years of gift
• Even though = a failed PET or chargeable lifetime transfer

5.1 Lifetime gifts to reduce estate below £2m threshold

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• Death bed planning to reduce estate below £2m

– NB: Capacity issues

• NB attorneys can’t make gifts without COP approval
• Lifetime gifts Include terminating life interests in trusts

– Where trust aggregable with Life tenant’s estate – if L/T’s capacity poor – & L/T not trustee

• If limited options, consider gifting property & paying full market rent

– Exemption from Reservation of Benefit – Worth it if e.g. a terminal illness + limited period

• Tip 10: If death bed situation arises – suggest urgent review re gifts

– But make sure gifts completed – e.g. cheques presented for payment

5.2 Lifetime gifts to reduce estate below £2m threshold. Death-bed gifts can work – the last resort! 30

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• Many parents concerned re child’s relationship
• Investec report Jan 2017:
• 1 in 3 parents unwilling to provide financial help to married children

– due to concerns re children's spouses.

• Consider use of a trust

– gift to a trust for children etc. – to protect capital & enable different people to benefit;

• & clients can still retain control!

– Costs involved may be manageable

5.3 Lifetime gifts to reduce estate below £2m threshold Clients concerned re asset protection: securing gifts?

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• Parents could offer gift on basis that child completes:

– Pre-nup (if marrying) – or post-nup (if already married) agreement,

• Must be full disclosure & independent advice

– and/or – Declaration of trust giving child first £x on any sale

• but many details to consider: but can play a part
• IMPW’s Family Asset Protection service – protecting capital, incl. from gifts.
• Tip 11:

Encourage clients are ways to protect capital on gifts:

– trusts & pre-nups etc.

5.4 Lifetime gifts to reduce estate below £2m threshold Clients concerned re asset protection: Pre-nups? 32

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• RNRB: to maximise the benefits, may need to mix:

– Rearranging use of assets, & lifetime gifts & – For married couples – review use of NRB + RNRB on 1st death

• Estate planning:

– Legal, tax & financial panning advice

• FP’s & Inv Managers can work with solicitors & tax advisers

– Be pro-active in raising issues – Don’t assume any solicitor or tax adviser has advised on this

• Or that they have all the expertise
• Tip 12: Don’t be afraid to ask questions
• Even with limited knowledge:
• may raise a crucial issue & make a big difference!

Conclusion: Estate planning: FPs etc. asking questions! 33

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