Capital Tax Planning in changing times Brooks Macdonald National - - PowerPoint PPT Presentation

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Capital Tax Planning in changing times

Brooks Macdonald National Academy 8 May 2019 at Merchant Taylor’s Hall, London

John D. Bunker Head of Knowledge Development,

Tax Trusts and Estates, Irwin Mitchell Private Wealth

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• 1. Capital Tax planning: key themes in May 2019

1.1 Brexit & Minority government means 1.2 Reviews of (1) Taxation of Trusts – by HMRC (2) Inheritance Tax (IHT) - by OTS* 1.3 Increasing HMRC attacks on “tax avoidance”. 1.4 Make the most of Tax reliefs and exemptions 2.1-2.4 Main Residence (PPR) Relief: What is being done to restrict CGT relief on main residences? 3.1-3.8 Residence Nil Rate Band (RNRB): How to help the moderately wealthy make the most of RNRB to save IHT? 4.1-4.5 Deeds of Variation and DOTAS: the issues to watch.

Capital Tax Planning in changing times

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• 1. Brexit & Minority government means:

– Little time for new tax legislation; – Look at tax cases & HMRC Guidance

• for any changes in Tax policy;

– Meantime, tax policy for medium term:

• 2 Reviews – of Taxation of Trusts & IHT

1.1 Capital Tax planning: key themes in May 2019

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• 2. Reviews of (1) Taxation of Trusts – by HMRC

– Nov 2018: a “green paper” consultation, concluded Feb 2019; – Seeking to balance proper family/personal uses of trusts

• & apparent use of trusts to hide true ownership of assets

– Await proposals for specific changes

(2) Inheritance Tax (IHT) - by OTS*

– 1st part of report – Nov 2018 - focussed on simplifying process

• To improve the customer journey!

– 2nd part due out in Spring 2019 – on the difficult issues

• (* Office of Tax Simplification is semi-independent in HM Treasury)

1.2 Capital Tax planning: key themes-May 2019: Reviews by HMRC & OTS

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• 3. Increasing HMRC attacks on “egregious tax avoidance”!

– HMRC seek to restrict “Tax planning” more & more – Watch DOTAS application to IHT After DOTAS IHT Guidance: encourage making wills – Don’t leave tax planning to Deeds of Variation!

• Testamentary Freedom to make wills

= cannot be attacked by HMRC

• But varying a will to use a tax relief/ allowance could be

– See part 4 below.

1.3 Capital Tax planning: key themes-May 2019: Attacks on tax avoidance

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• 4. Make the most of Tax reliefs and exemptions;

But HMRC limiting scope of reliefs & exemptions e.g. – CGT: Main residence (PPR) exemption

• PPR exemption much litigated in Tax Tribunals;
• PPR under Budget attack – change due April 2020:

– See part 2.

– IHT: Residence Nil Rate Band (RNRB)

• Many traps for the unwary

– See part 3.

1.4 Capital Tax planning: key themes - May 2019: Make good use of Reliefs & Exemptions

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• Principal Private Residence (PPR) Relief for main homes
• HMRC attack many cases of short term residence

– Factors to help show permanence? – Be careful & get timing right.

• Election for PPR if 2 or more residences,

– within 2 years of any combination of residences changing; – Subject to new residence rules since April 2015; – Worth making, even if choose the more obvious main home;

• Can always change, once made,
• or a question of fact;

– Experience with SDLT shows HMRC often establish different view.

2.1 Main Residence (PPR) Relief:

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2.2 PPR Relief: 2 changes due in April 2020

• Budget Nov 2018: 2 changes to take effect in April 2020

– Consultation on details due in Spring 2019

• 1. Final period exemption: to be reduced to only 9 months?

– Final period exemption allows time to sell one PPR

• if need to move before sold
• & invaluable on divorce/separation

– Major reduction from 18 months

• 2. Letting Relief to be abolished

– Currently a proportion of gain, up to max £40K can be relieved – To be replaced by a narrow type of rent a room relief – Await news on transitional relief?

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2.3 PPR Relief: Preparing for April 2020

• Bizarre timing, with uncertainty in economy/housing market
• Many clients need to keep records for potential CGT:

– All purchase & improvement costs etc. – NB most blaze about CGT: assume no tax to pay on main residence

• One further major change due in April 2020:

– All CGT on residential property to be payable within 30 days – So clients need to get figures sorted in advance,

• Can no longer wait until Jan, 9 months after year end!

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• PPR is invaluable if qualify

– But increasingly contentious, as has been abused;

• So don’t take it for granted

– Encourage clients to take care of details

• including record keeping

– Gifts of residential property = disposals for CGT;

• & actual tax may be payable 30 days after gift.
• Separating couples need to plan ahead

– to avoid risk of CGT being payable.

2.4 PPR Relief: Preparing for April 2020 (2)

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• How to help the moderately wealthy

– make the most of RNRB to save IHT?

• RNRB now worth £150K in 2019/20

– Or £300K if have a late spouse’s unused RNRB C/F – increases to £175K in 20/21 – So next year reach £500K each

• incl NRB of £325K &
• the target £1m tax free estate for a married couple/CPs

3.1 Residence Nil Rate Band (RNRB) planning

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• RNRB only works if meet all the rules, incl:

– Leaving the right form of residential interest

• Includes some trust interests

– to descendants who “closely inherit”

• Includes step children – but not children of unmarried partner
• So real issues for unmarried couples

– May be a trust solution

• Trusts are a crucial part of planning,

– can answer many –not all- problems!

• Opportunities to vary wills & trusts in 2 years post death

– Can often make RNRB work better.

3.2 RNRB: closely inheriting homes

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• £2m taper threshold

– A key element of RNRB – RNRB reduces by £1 for every £2 of capital over £2m

= 60% marginal IHT rate on band of capital over £2m!

• £2m includes value of any aggregated trust

– e.g. IPDI –where deceased had a life interest

• But disregards BPR & APR: so no deduction of these reliefs

– So many may assume taper N/A when it will deny them RNRB

3.3 RNRB reduced by Taper if over £2m

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• Major planning open to all with £1m- 5m of assets
• Can he/she reduce assets below £2m?

– Assets in own name & Life interest (aggregable) trust

• Pensions in trust not included in the estate for £2m;

– So is there scope to hold back the pension? – Or pass onto family by designating to Drawdown (FAD)?

• While we still have the beneficial pension death benefit rules!

– Instead spending capital that is potentially subject to 60% IHT?

• Meet living needs with reassuring help of cash flow analysis

3.4 RNRB: planning to avoid taper -pensions

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• Spouses & Civil partners should review their Estate planning:

– Legal (wills & trusts), Tax & Financial planning – Financial planning review » (1) in joint lives, ideally ahead of retirement & » (2) after 1st death, before draw on pension

• Can they arrange assets so they don’t lose 1 or even both RNRBs?

– Capital passing (outright or in trust) to surviving spouse » can take estate over the £2m threshold » = lose RNRB on 2nd death

3.5 RNRB: planning to avoid taper -spouses

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• Key planning issue for spouses:

– to use or not use the NRB & the RNRB on 1st death

• Consider setting up Nil Rate Band Discretionary Trust

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• n 1st death

– better by Will – could be Deed of Variation –but see DOTAS – Surviving spouse can use home/assets & have income if needed – But if NRB D/T kept as a Relevant property trust » not aggregated » & not included in the estate for £2m threshold.

• In some cases worth using the RNRB on 1st death too- as well as NRB

3.6 RNRB: planning – spouses & NRB D/T

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– Using the NRB by NRB D/T can take out of estate:

• £325K NRB

– Up to £380K of value with a 15% discount

» NRB can sometimes be used by appropriating interest in house

• A 2nd NRB if 1st spouse to die was widowed & a TNRB = £650K
• Extra value if any APR or BPR:

– If 100% APR/BPR can go into NRB D/T + £325K on top – If 50% APR/BPR can put £650K of value into trust = £325K

– Spouse can still have use of assets,

• but not included in estate for £2m

– & RNRB can be used by a share of property to trust for children

3.7 RNRB: planning – spouses & NRB D/T

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• RNRB has many more complex elements
• Review estate planning with moderately wealthy

– for single & widowed, cohabiting & married couples » Re use of assets –look at future IHT » What is inherited? What to pass on? – May be legal/tax solutions – not just trusts » E.g. ISAs to spouse, not trust, if can use & spend!

• Death bed planning an option – as last resort

– Gifts completed before die, can reduce estate below £2m » even though don’t survive 7 years » & revoking trust Life interest can = deemed gift .

3.8 RNRB: estate planning solutions

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• DOTAS: if reasonable to expect an informed observer

– to conclude 2 conditions are met: (1) one of main reasons for arrangement is avoiding or reducing:

– IHT charge on entry into a trust, 10 yearly or exit charge; – a GROB or a POAT charge where no benefit reserved; » i.e. a lot of mainstream lifetime planning

(2) Involves one or more contrived or abnormal steps – Without which could not have obtained tax advantage;

4.1 Deeds of Variation and DOTAS

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• Many life assurance arrangements covered by

– Specific exception for related arrangements

• where follows established practice &
• HMRC indicated acceptance in writing before 1.4.18

– E.g. discounted gift trusts

• But tread carefully with any new structures

– Watch for anything that might be contrived or abnormal steps

4.2 DOTAS: Life assurance arrangements

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• HMRC Guidance on DOTAS issued 29 March 2018:
• 3 examples that breach condition 1

– even though use statutory exceptions:

• E.g. 6: Deeds of Variation – see 4.3 below
• E.g. 9: Gift, continued occupation + pay full consideration
• E.g. 10: Gift of share of property used by both donor & donee

– So need to ask: any contrived or abnormal steps

• that would breach condition 2?

4.3 DOTAS: what might be caught?

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• HMRC example of what is OK: redirecting legacy to exempt beneficiary
• Asked HMRC about a surviving spouse making a DOV:

– To set up a Nil Rate Band Discretionary Trust,

• of which spouse a beneficiary

– i.e. mainstream IHT planning

• HMRC response:

– couldn’t say would be OK, only – that might be breach of condition 1

• S. 142 IHTA only stops 1 of 3 possible breaches

– So need to see if any steps are contrived or abnormal

• But no guidance from HMRC on such steps!

4.4 DOTAS & Deeds of Variation (DoV):

what might be caught?

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• Setting up a Nil Rate Band Discretionary Trust,

– of which spouse a beneficiary – is mainstream IHT planning

• So don’t stop doing these DoVs,

– just try to avoid adding – any contrived or abnormal steps

• Encourage making wills,

– as cannot be attacked under DOTAS!

4.5 DOTAS & Deeds of Variation (DoV):

what might be caught? Conclusions

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• Any questions?

Capital Tax Planning in changing times

25 Disclaimer This material is for guidance and is not a substitute for legal advice. Irwin Mitchell LLP is a limited liability partnership registered in England & Wales, with number OC343897 and is authorised and regulated by the Solicitors Regulation Authority. The word ‘partner’, used in relation to the LLP, refers to a member of the LLP or any employee of, or consultant to, the LLP (or any affiliated firm) who is a lawyer with equivalent standing and qualifications. A list of the members of the LLP and of those non-members who are designated as partners, is displayed at the LLP’s registered office: Riverside East, 2 Millsands, Sheffield, S3 8DT.

Contact details

John D Bunker LL.B CTA TEP

Solicitor, Chartered tax adviser and lecturer Head of Knowledge Development, Tax Trusts and Estates, Irwin Mitchell Private Wealth Direct dial 01243 813152 Mobile: 07801 012737 John.bunker@irwinmitchell.com

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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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Irwin Mitchell nationally

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