IHT and Later Life Planning (including some business planning)

Question 1

Comment on the present situation and identify any weaknesses in their financial situation if either Dan or Tara died tomorrow.

Answer 1

 Both Dan and Tara a significant IHT liability on their death
 As they are unmarried, there is no deferral of IHT until 2nd death as the spousal exemption is not available
 This liability is not currently provided for
 The beneficiaries would therefore need to find the money to pay for this from their own resources before the estate could be paid out to them
 At present the survivor would receive joint assets, with sole assets going to the twins
 This may not reflect the wishes of Dan and Tara
 Death benefit nominations have been made

Question 2

Explain the rules of intestacy as they apply to Dan and Tara and how they would differ if they were married.

Answer 2

 As the couple are not married to each other, the twins takes the whole of the sole estate
 Held under trust until they are 18 or married / in a civil partnership if earlier
 This excludes jointly held property which automatically goes to the surviving partner
 If they were married, the surviving partner would receive the joint property, the first £270,000 of the sole estate and 50% of the remaining
estate absolutely
 The twins would receive the other 50% of the remaining estate

Question 3

Explain to Dan and Tara what will happen to their assets on each of their deaths and the IHT implications of this.

Answer 3

 As the main residence is held as joint tenants, the survivor would inherit
by the right of survivorship even though there is no will
 The survivor would also inherit their joint contents/car, NS&I Income Bonds and the Unit Trust
 50% would be included in deceased’s estate for IHT purposes
 As they are not married this is not an exempt transfer so will be chargeable to IHT once NRB exceeded
 The survivor would continue to receive the income from the NS&I Income Bond
 The same can be said of the dividends from the unit trust
 As neither has made a will, their free estate will pass according to the rules of intestacy
 Their individual assets will pass according to the rules of intestacy, i.e. to the twins
 The share in the business would also go to the twins, no IHT should be payable due to business relief being available at 100% (assuming they
survive 2 years)
 As Dan has nominated Tara for his PP, she would receive a tax-free
lump sum (although if she takes this out of the pension fund it will form
part of her estate on her subsequent death)
 As Tara has nominated Dan for her PP, he would receive a tax-free
lump sum of (although if he takes this out of the pension fund it will form
part of his estate on his subsequent death)

Question 4

Outline how setting up Wills would improve the financial situation of the
survivor in the event of death of either Dan or Tara.

Answer 4

 Avoids time delays due to intestacy
 Reduces costs
 Guarantees destination of assets
 Protects survivor in that they could have access to deceased’s assets
 Protects the company – can determine what happens on death
 Assets to pass to survivor then to children
 Can establish will trust
 Can nominate legal guardians for twins
 Ensure future tax efficiency

Question 5

Explain to Dan and Tara the requirements that must be met for a will to be
valid.

Answer 5

 Testator must be over 18
 Of sound mind
 Be under no pressure to make the will
 Will must be made in writing
 Signed by testator
 Signature must be witnessed by 2 independent witnesses (video
witnessing now acceptable)
 Witness must not benefit from will or be the spouse/civil partner of a
beneficiary

Question 6

Explain to Dan and Tara the key duties of the executors of their new wills.

Answer 6

 Administer deceased’s affairs
 Obtain full details of assets / liabilities and settle debts
 Complete IHT return and pay IHT
 Apply for and obtain probate
 Distribute estate in line with will
 Complete any income tax or CGT return
 Prepare estate accounts

Question 7

Explain to Dan and Tara how the following trusts work and how they could
benefit from them:
- Immediate post-death interest trust

Answer 7

IPDI
 IPDI trust is an interest in possession trust written into a will
 It places some or all of the assets of the 1st to die into an IiP with the
surviving partner as the life tenant and any children as remainderman
 It enables the surviving partner to take an income from / use the assets
(e.g. live in a house) during their lifetime
 Although they are included in their estate on their death
 But, IPDI are not classed as relevant property trusts
 Meaning there are no periodic or exit charges
 If the couple changed their main residence to TIC
 They could leave a share to twins on first death under an IPDI
 Surviving partner could continue to live there
 And the RNRB of first to die could be used
 Which would otherwise be wasted

Question 8

Explain to Dan and Tara how the following trusts work and how they could benefit from them:
- Nil rate band discretionary trust

Answer 8

NRB Discretionary trust
 In will leaves assets of up to NRB in discretionary trust
 Partner and children as potential beneficiaries
 Enabling partner to access assets during their lifetime
 As a discretionary trust, the assets are not included in the estate of 2nd to die meaning IHT is not paid on the assets at all
 It is a relevant property trust, but no exit or periodic charge providing trust assets stay under NRB / £325,000
 However, RNRB cannot be used with this type of trust

Question 9

Explain how Dan and Tara could use life policies to mitigate their IHT issue.

Answer 9

 Both should take out a single life, whole of life policy
 Sum assureds of the IHT liability on their respective estates on first death
 Written under trust for the executors of their estates (assuming they make a will)
 After 1st death, the survivor’s IHT position should be reviewed to establish whether the sum assured needs to increase

Question 10

In relation to Lasting Powers of Attorney (LPA).

i) State why Dan and Tara should have an LPA each.
ii) State the limitations of such a power in relation to their gifting and IHT planning.
iii) Explain to the couple how an LPA is set up.
iv) Identify 4 common financial transactions an attorney could make on behalf of Dan and Tara with a property and financial affairs LPA

Answer 10

i)  Peace of mind
 To allow their finances to be managed / decisions about personal welfare be made (decisions agreed in advance) on their behalf if incapacitated.
 Property and financial affairs LPA to control financial affairs
 Can be used while they still have capacity
 Health and welfare to deal with health matters
 If they lose mental capacity
 Less complex than relying on court of protection (COP)
 Quicker than COP
 Cheaper than COP

ii) Attorney has limited powers to make gifts other than to charities or for customary occasions therefore cannot do much in the way of IHT planning
without consent of Court of Protection.

iii)  Complete prescribed form which must be signed by
 The donor
 The attorney
 Replacement attorneys
 The Certificate provider, who confirms donor understands effect of creating LPA and are doing so of own free will / there’s been no fraud
 Witnessed by independent person
 Process takes 4 – 10 weeks
 Can be done at any time after LPA is created, even if the donor still has mental capacity.
 3 week period during which people can object to LPA, e.g. if they suspect pressure of some kind

iv)  Pay bills
 Claim benefits / pensions
 Operate bank accounts
 Buy and sell investments / property

Question 11

Outline to Dan and Tara the generic steps that take place when IHT planning

Answer 11

 Make a valid will
 Ensuring it is kept up to date
 Establish valid Lasting Power of Attorney (LPA) to allow finances to be managed / decisions about personal welfare be made (decisions
agreed in advance) on their behalf if incapacitated. Ideally spouse/partner should not be sole attorney (replacement attorneys should be nominated).
 Use exemptions and reliefs, giving away assets if they can afford to do so and using trusts where they cannot or where they are not sure who
they want to benefit from the assets at the present time.
 Bequeath assets that qualify for tax reliefs to beneficiaries who would otherwise be charged tax.
 Bequeath chargeable assets to exempt beneficiaries.

Question 12

Explain to Dan and Tara the benefits that would be payable to the other from their pension arrangements in the event of their deaths prior to crystallisation.

Answer 12

 The money be taken as a lump sum return of the fund;
 Or can be taken as an income in the form of nominee’s flexi-access drawdown;
 Or by purchasing an annuity or scheme pension;
 These will be tax-free in the event of death prior to the age of 75;
 Assuming that the benefits are designated within two years or the scheme administrator becoming aware of the death;
 Or, if earlier, the date the administrator ought reasonably to have become aware;
 However, they will be tested against the lifetime allowance;
 Based on their current situation, this is not likely to present an issue;
 If they are over the age of 75, or if the benefits are not designated in the relevant time frame, the payments will become taxable;
 This will be as normal income;
 However there will be no lifetime allowance test;
 The benefits will not normally be subject to IHT

Question 13

Explain to Dan and Tara how business relief works and whether they can benefit from it.

Answer 13

 Business relief is available for transfers of business property that has been owned for at least two years prior to transfer.
 While it only applies to certain types of business (not those who deal mainly in shares, land or property generally) their company does not appear to be excluded.
 Not applicable if business property subject to a binding contract for sale at the time of the transfer.
 100% BR for unincorporated businesses (sole traders/partnerships) or shareholdings in unquoted/AIM companies.
 50% BR for controlling shareholdings in fully listed companies, or land, buildings, plant or machinery used in a business controlled by the person doing the transfer.
 Not available on property subject to a binding contract for sale (buy and sell agreement), assets not used in business for last 2 years, cash
(unless it is being held for a specific business purpose).
 They have not yet owned the business for more than 2 years
 But it does appear to be unquoted
 There is no buy and sell agreement in place that we are aware of
 The business does not appear to be excluded
 From June 2022, their estates can therefore benefit from business relief
 Although their shares of the business will be included in their estates
 The 100% relief is deducted from it meaning no tax is due on it
 Because the couple are co-habiting, if either inherit the other’s share the BR clock starts ticking again (i.e. they will need to survive 2 years before it can be left again)