Wills and tax planning and avoidance Flashcards
Exemptions and relief?
- A failed PET can give rise to an IHT in its own right
- Even if value of PET/LCT is not high enough to trigger its own IHT charge. The chargeable value will use up the NRB available for the death estate. Steps which reduce the chargeable value of lifetime transfers leave a larger NRB and so help reduce the IHT liability on death estate.
Annual exemption s19 IHTA
3000, tax free each year, can bring it forwards from only last previous year.
Family maintenance s11
- Relief is often overlooked, but with increased education and nursing are costs – it can be very useful where applicable.
- No upper limit to amount that can be given away.
- May be reasonable in the circumstances
Small gifts
- CANNOT BE USED WITH AE
- Small gifts of up to 250 per recipient
Marriage –
£5,000, £2,500 or £1,000 may be given tax free as a wedding gift
* The amount of the relief depends on the relationship with the donnée
* Can be used with the AE
This exemption is not useful to all clients.
Normal expenditure out of income s21
- Regular payments of spare income which do not affect donor’s standard of living are exempt
- No upper limit to exemption
Spouse exemption
- All transfer is fully exempt
- Where donor is UK domiciled there is no limit to amount that can be claimed
Charity exemption
Business and agricultural property relief
- Transfers of qualifying business/agricultural assets are exempt up to either 100% or 50% provided the transferor has owned the assets for the minimum qualifying period
- BPR and APR are useful if the client already has property that qualifies. Advice should be given to
- ensure that nothing is done to compromise this. Care should be taken with regards farmhouses
- where surrounding land is only partly used for agriculture.
- Clients could choose to invest in assets that qualify for BPR / APR e.g., if there is potential for
- investment in a farming partnership, or, clients could purchase Alternative Investment Market
- shares, which are ‘unquoted’ for the purposes of BPR. By ‘investing’ clients are not giving
- anything away but are turning non-exempt cash into exempt assets.
Tax avoidance?
Tax avoidance – the efficient and lawful arrangement of client’s affairs in a manner that minimises liability to tax.
Aggressive tax avoidance -involves taxpayer entering into complex or artificial arrangements which reduce tax liability but often do not reflect intention behind legislation.
Tax evasion – where a taxpayer withholds information about assets or income or otherwise takes steps to avoid paying the tax there liable for.
Transfers of value?
- if a client gives away a valuable asset the donors estate after transfer is smaller and less IHT on death is paid.
- PET – no charge at time, so if lives longer than 7 years become fully tax exempt
- Could mitigate the risk but taking out a fixed term life assurance specifically to cover cost of any IHT on the PET.
- If IHT is charges following death it will be on chargeable value of the PET at the time it was made, not the death value. Therefore, should consider giving away items likely to increase in value.
- A PET is usually a disposal for CGT purposes and normal rules will apply unless hold-over relief is available. As cash is exempt from CGT, this is the ideal.
- If an individual wants to make a gift of shares, advise on doing it in different tax years, allows them to use two CGT annual exemptions.
Tax planning in wills? Exempt beneficaries?
Exempt beneficiaries
Spouse – relief is 100%
Charity
- Offers a tax savings
- The relief is 100%only offering a tax savings if IHT would otherwise be payable following the distribution of a client’s assets on their death.
- Need to ensure it is drafted properly to make sure gift is effective.
- A gift to a charity by will is fully exempt from IHT. In addition, the chargeable part of the estate may qualify for a reduced rate of IHT. In simple terms: * If a testator leaves 10% or more of their net estate to charity * the chargeable part of the estate is taxed at 36% (rather than 40%)
Qualifying business assets?
Business property
- Qualifying assets must have been owned by the deceased for a minimum of 2 years prior to death #if BPR the relief is either 100 or 50% of value of assets
Agricultural property
- A qualifying asset must have been owned by deceased for minimum period of time prior to death.
- Usually either 100 or 50%
Tax planning points?
Qualifying assets and exempt beneficiaries
Specific gifts
- APR and BPR will be wasted is a specific gift are made to an exempt beneficiary. By s39 IHTA the relief attached to the assets and not the estate generally.
- So generally advised not to do this – unless no other option available.
- Possible solution is to leave the qualifying gift to a discretionary trust – and claim BPR or APR to a non-exempt beneficiary. Provided the testators spouse is named as one of the discretionary trust beneficiaries they will be able to benefit from these assets despite not inheriting them directly.
Gifts of residue
- If qualifying assets are not specifically given away and therefore fall into residuary estate – APR and BPR do not attach to assets. – instead, the benefit of the relief is apportioned between taxable and non-taxable beneficiaries.
Allocation of exemptions
- Statutory rules apply to ensure an exempt beneficiary is not taxed on their gift
No particular issue was
- No IHT is payable because estate is below NRB
- IHT is payable and all the gifts in the will are made to chargeable beneficiaries
Trusts? Types?
A testator may make a gift into trust by their will
A trust does not have separate legal personality – therefore a gift into trust takes effect as a transfer to the trustees. Therefore, a gift into a trust is a transfer to trustees, who is the legal owners of the assets. The equitable and beneficial interest lie with the beneficiaries.
Fairly common for a completely new trust to be created.
A will that contains the following type of clause creates a new trust. The clauses in the will which
follow should contain the detailed provisions.
“I give the sum of £325,000 to my Trustees to hold on trust in accordance with the following terms…”
A will that contains the following type of clause is adding to an existing trust. The will does not
need to contain further detailed clauses.
“I give my Residuary Estate to the trustees of the ABC Family Settlement to hold in accordance with its terms”
A trust created on death by a testator’s wills referred to as a will trust.
Where the testator creates a trust by will the:
Will is the trust deed
Testator is the settlor
Trust comes into existence on date of death
Discretionary trusts?
Discretionary trust: - a trust for benefit of a group of beneficiaries, none of whom have any FIXED right to trust assets. The trustees have absolute discretion over capital and income.
Life interest trust – for benefit of life tenant, entitled to income during their lifetime and remainderman entitled to capital when the life interest ends. Trustees do NOT have complete discretion.
Discretionary will trusts
- No immediate tax saving for testator
- No spousal exemption applies even if spouse is beneficiary
- The beneficiary can benefit from trust assets without an accumulation of wealth into their hands individually. As such their taxable estate does not include the trust assets at that time.
When its drafted – it will either be
Discretionary trust of residue: - the whole or part of residuary estate passes to a discretionary trust and exact amount cannot be determined until the administration is complete.
Legacy to a discretionary trust – a fixed amount passes to trust.
The RNRB does NOT apply if the deceased’s residential interest passes to a discretionary trust even if testators’ children is among the beneficiaries. This is because children are not inheriting it directly.
Non tax reasons for discretionary trusts?
Non tax reasons for discretionary will trusts –
Flexibility – changing needs of beneficiaries can be accommodated. A letter of wishes is commonly drafted by testator and given to trustees; however, trustees are not legally bound.
Protection – the assets in a discretionary trust are not controlled or owned by a single beneficiary.
Trust taxation?
- It’s charged to the trust not individual beneficiary.
- Only last 2 years following testators’ death. Reference to s144 IHTA.
- One year after the testator’s death the trustees pay ½ of the trust fund to the testator’s spouse, ¼
- to charity and ¼ to the testator’s children. These payments are treated under s 144 IHTA for IHT
- purposes as having been made by the testator ‘s will not the trustees:
- therefore, spouse and charity exemption can be claimed
- after they have been applied the value of the estate is less than the NRB (which could also now
- include the RNRB if a residential property had been distributed to the children)
- a refund of all of the IHT paid following death can be claimed.
- The trust has not retained any assets and comes to an end.
Life interests will trust
- Spouse exemption can be claimed on amount passing to trust provided testators spouse is in life tenant. There is no spouse relief if the testator’s spouse is a remainder beneficiary.
Anti avoidance?
Challenged by HMRC by taking a purposive interpretation of legislation – similar to mischief rule of statutory interpretation where courts look at purpose behind the legislation, this is the Ramsay Principle.
Ramsay Principle is still valid but supplemented by a series of legislative reforms
Restriction on deduction of loans for IHT
- When calculating the chargeable value of the deceased’s estate it is necessary to deduct the deceased’s debts.
- Rules those strict deductions in following circumstances
- Loans made to acquire or enhance assets that qualify for BPR
* The costs of the loan must first be set against the value of the qualifying assets. This reduced the value of assets which attract relief.
- THIS MEANS IF YOU HAVE A 25,000 LOAN TO BUY BUSINESS ASSETS THIS WILL REDUCE THE VALUE OF THE BRP YOU RECIEVE SO YOU WILL PAY MORE TAX.
ALSO APPLY TO
- Loans which are not repaid from estate
- Loans are only deducted from the value of the estate at death if they are repaid from the estate.
Most loans will be commercial, arm’s length arrangements which HMRC expects will be repaid and
does not investigate. Debts owed to the deceased’s family, related trusts or companies, and those
made as part of tax avoidance arrangements should only be deducted if they are actually repaid.
HMRC will look at these more closely.
GROB?
- When do they apply – set out s102 FA 1986:
- When the donee does not assume bona fide possession of property
- At any time during relevant period the property is not enjoyed to the entire exclusion or virtually to the entire exclusion of the donor and of any benefit to him
- Relevant period Is the 7 years before donors’ death.
- GROB – bona fide possession
- For done to be treated as having bona fide possession they must
- Have a vested beneficial interest in property
- Have actual enjoyment of the property
- Assume possession and enjoyment at start of relevant period.
- GROB – at exclusion of donor
- Donor must be entirely or virtually excluded from benefiting from the property. HMRC consider it to mean all intents and purposes.
- Settlor interests trusts
- Where the gift is into a trust, GROB will arise if the settlor is a potential beneficiary whether or not they actually obtain the benefit.
GROB - the EFFECT of reserving the benefit?
- Depends on how long the benefit is reserved
- If the GRIB subsists at date of donor’s death – it will be created as if it were part of donor’s estate for IHT
- If donor no longer retains benefit at date of their death they are treated as having made a pet on date the reservation ceases. This deemed PET is charged in the same way as other PETS but does NOT benefit from AE.
- CGT consequences
- It becomes property of done for purposes of CGT
- CGT may be payable by donor on increase in value of property since they acquired it. If done later sells it CGT will be calculated based on increase in value of property between date of gift and date of transfer.
Pre-owned assets charge?
- Annual income tax charge imposed on individuals who give way certain types of property during lifetime but subsequently obtain a benefit from that property.
- Applies to
- Land
- Chattels
- Intangible property – includes cash, credits in bank account and shares.
POAC: Land
Two conditions must be satisfied - An individual occupies land
- Either the disposal condition of contribution condition is met.
- If POAC applies the benefit that individual receives through occupation is treats as income, so pay income tax on equivalent of market rent they would have to pay to occupy the land.
- Chattels
General anti-abuse rule
Disclosure of tax avoidance schemes
Avoiding one tax can lead to another. POAC is an income tax charge which penalises IHT avoidance.
