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Estate Preservation

A Guide to Estate and Inheritance Tax Planning

 

Our Approach

Our Approach

At Absolute Finance we appreciate that every client is unique and complex, which has led us to develop a highly innovative approach to their provisions for estate/IHT planning.

 

Not knowing when you will die, it is essential that you start putting our financial affairs in order ASAP (as soon as possible). May of us prolong making this decision, until it is too late, and the decision as to who gets what, and how much is decided by state law. We all want to ensure that those who have helped us most in life, benefit the most; upon our death. However, inadequate planning means that not only do wrong people inherit from our hard work throughout our life, we pay tax to the HMRC; that we could have avoided. Effective planning ensures more is left for the people (or charities) we love.

 

With so many different types of schemes and products available, it's hard to know where to start. Deciding how to and to who to pass on your estate is one of the most important financial decisions you'll ever have to make, so it's important to get it right. Absolute Finance will assist you in creating a tailored solution that meets your specific needs, and will enable you to plan for your financial future; ensuring that your loved ones will benefit; as you wished them to.

 

Below are two guides focusing on how the above can be achieved. The first guide is a quick look at inheritance tax, and how wealth can be passed down through the generations. The second guide goes into greater depth of estate preservation; allowing you to explore the many ways you can reduce the tax paid, whilst ensuring that your assets are passed onto the right people.

 

At Absolute Finance we work with our clients to create tailored estate preservation and inheritance tax planning strategies, that meet their financial goals and needs; and we're committed to ensuring that our clients enjoy the best financial planning service available.

 

As part of our service we also take the time to understand our client's unique needs and circumstances, so that we can provide them with the most suitable estate preservation and inheritance tax planning solutions in the most cost-effective, and flexible manner. If you would like to discuss the range of ways we can help then please contact us for further information.

 

This following information is packed full of practical hints and tips on how to pass on your estate to the right people whilst minimising the tax paid upon death. It is not designed to provide specific advice. If you are unsure of your financial position, or about which type of financial product is right for you, please contact us for further information.

 

Receiving reliable and professional financial advice is essential – please contact us to discuss your particular situation.

A Guide to Inheritance Tax

A Guide to Inheritance Tax

Helping to ensure that your wealth can be passed down through the generations

 

Estate preservation doesn't only affect the very wealthy. Rising property prices have meant it's now an issue for an increasing number of people. In order to protect family and loved ones, it is essential to have provisions in place after you're gone.

 

Unnecessary tax payments
The easiest way to prevent unnecessary tax payments such as Inheritance Tax (IHT) is to organise your tax affairs by obtaining professional advice and having a valid will in place to ensure that your legacy does not involve just leaving a large IHT bill for your loved ones. IHT is often called a voluntary tax because, with careful planning, the amount your estate has to pay could be reduced or removed completely. From writing a will, to understanding the exemptions and making lifetime gifts, there are several options to help mitigate IHT.

 

Could you save your beneficiaries thousands of pounds?
Effective IHT planning could save your beneficiaries thousands of pounds, maybe even hundreds of thousands depending on the size of your estate. At its simplest, IHT is the tax payable on your estate when you die if the value of your estate exceeds a certain amount. It's also sometimes payable on assets you may have given away during your lifetime, including property, possessions, money and investments.

 

IHT is currently paid on amounts above the £325,000 (£650,000 for married couples and registered civil partnerships) threshold for the current tax year & frozen until 2017/18 tax year, at a rate of 40 per cent. If the value of your estate, including your home and certain gifts made in the previous seven years, exceeds the threshold, IHT will be due on the balance at 40 per cent.

 

A substantial tax liability
Without proper planning, many people could end up leaving a substantial IHT liability on their death, considerably reducing the value of the estate passing to their chosen beneficiaries.

 

Your estate includes everything owned in your name, the share of anything owned jointly, gifts from which you keep back some benefit (such as a home given to a son or daughter but in which you still live) and assets held in some trusts from which you receive an income.

 

Useful for tax planning
Against this total value is set everything that you owed, such as any outstanding mortgages or loans, unpaid bills and costs incurred during your lifetime for which bills have not been received, as well as funeral expenses. Any amount of money given away outright to an individual is not counted for tax if the person making the gift survives for seven years. These gifts are called 'potentially exempt transfers' and are useful for tax planning.

 

A matter of trust
Money put into a 'bare' trust (a trust where the beneficiary is entitled to the trust fund at age 18) counts as a potentially exempt transfer, so it is possible to put money into a trust to prevent grandchildren, for example, from having access to it until they are 18.

 

However, gifts to most other types of trust will be treated as chargeable lifetime transfers. Chargeable lifetime transfers up to the threshold are not subject to tax but amounts over this are taxed at 20 per cent, with a further 20 per cent payable if the person making the gift dies within seven years.

 

Maintaining your standard of living
Some cash gifts are exempt from tax regardless of the seven-year rule. Regular gifts from after-tax income, such as a monthly payment to a family member, are also exempt as long as you still have sufficient income to maintain your standard of living.

 

Any gifts between husbands and wives, or registered civil partners, are exempt from IHT whether they were made while both partners were still alive or left to the survivor on the death of the first. Tax will be due eventually when the surviving spouse or civil partner dies if the value of their estate is more than the combined tax threshold, currently £650,000.

 

How much tax should be paid?
In most cases, IHT must be paid within six months from the end of the month in which the death occurs. If not, interest is charged on the unpaid amount. Tax on some assets, including land and buildings, can be deferred and paid in installments over ten years. However, if the asset is sold before all the installments have been paid, the outstanding amount must be paid. The IHT threshold in force at the time of death is used to calculate how much tax should be paid.

 

IHT can be a complicated area and without proper tax planning, many people could end up leaving an IHT liability on their death, considerably reducing the value of the estate passing to chosen beneficiaries. To ensure that your family benefits rather than the taxman, it pays to plan ahead.

 

Planning for IHT
There are a number of things you could do to reduce your family's potential IHT bill:

 

Make a will – an effective will could help to reduce your IHT bill.

 

Look into exemptions – there are a number of exemptions you could use to reduce the value of your estate. For example, moving assets between spouses or registered civil partners does not create an IHT liability.

 

Consider gifts – if you can afford to give away some of the assets that you own, it may be possible to reduce the size of your estate.

 

Think about life assurance – a life assurance plan won't actually lessen the IHT bill, but the proceeds could be used to help pay the bill on death if written in an appropriate trust.

 

Consider trusts – if structured carefully, trusts can help to reduce or even eliminate your IHT liability.

 

Receiving reliable and professional financial advice is essential – please contact us to discuss your particular situation.

 

The content of the above guide is for your general information and use only and is not intended to address your particular requirements. The content should not be relied upon in its entirety and shall not be deemed to be, or constitute, advice. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of the content. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts. Levels and bases of reliefs from taxation are subject to change and their value depends on an individuals personal circumstances.

A Guide to Estate Preservation

A Guide to Estate Preservation

Tax-efficient strategies to ensure your assets are distributed according to your wishes
Welcome to A Guide to Estate Preservation. Estate preservation is about helping you to look after and maintain your wealth in the most efficient way. Once the domain of the super-rich, wide scale home ownership and rising property values have meant that more and more people are being subjected to Inheritance Tax every year.

 

For UK domiciled clients, Inheritance Tax is currently charged at 40 per cent and is payable on your estate once your net assets exceed £325,000. For some married couples and registered civil partners, any unused percentage of the available allowance from the estate of the first to pass away may be claimed when the second spouse dies.

 

We know that building up wealth is never easy, which is why we can help you understand exactly how Inheritance Tax could affect you and discuss solutions that to help you protect your wealth for future generations.

 

We provide the expertise you need in order to protect your assets. By gaining a real understanding of your requirements, we can offer you effective solutions based on our wealth of knowledge and experience. To discuss the options available to you, please contact us for further information.

 

The content of this guide is for your general information and use only and is not intended to address your particular requirements. The content should not be relied upon in its entirety and shall not be deemed to be, or constitute, advice. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of the content. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts. Levels and bases of reliefs from taxation are subject to change and their value depends on an individuals personal circumstances.


To discuss your Estate Preservation requirements, please contact us for further information.

Protecting your wealth

Protecting your wealth

Passing on assets without having to pay Inheritance Tax
Inheritance Tax is the tax that is paid on your estate, chargeable at a current rate of 40 per cent. Broadly speaking, this is a tax on everything you own at the time of your death, less what you owe. It's also sometimes payable on assets you may have given away during your lifetime. Assets include property, possessions, money and investments. One thing is certain, careful planning is required to protect your wealth from a potential Inheritance Tax liability.

 

Not everyone pays Inheritance Tax on their death. It only applies if the taxable value of your estate (including your share of any jointly owned assets and assets held in some types of trusts) when you die is above the current £325,000 (frozen until April 2014) threshold or nil rate band. It is only payable on the excess above this amount.

 

Inheritance Tax exemptions and reliefs
Sometimes, even if your estate is over the threshold, you can pass on assets without having to pay Inheritance Tax. Examples include:

 

Spouse or registered civil partner exemption:
Your estate usually doesn't owe Inheritance Tax on anything you leave to a spouse or registered civil partner who has their permanent home in the UK - nor on gifts you make to them in your lifetime - even if the amount is over the threshold.

 

Charity exemption:
Any gifts you make to a qualifying charity - during your lifetime or in your will - will be exempt from Inheritance Tax.

 

Potentially exempt transfers:
If you survive for seven years after making a gift to someone, the gift is generally exempt from Inheritance Tax, no matter what the value.

 

Annual exemption:
You can give up to £3,000 away each year, either as a single gift or as several gifts adding up to that amount - you can also use your unused allowance from the previous year but you use the current year's allowance first.

 

Small gift exemption:
You can make small gifts of up to £250 to as many individuals as you like tax-free.

 

Wedding and registered civil partnership gifts:
Gifts to someone getting married or registering a civil partnership are exempt up to a certain amount.

 

Business, Woodland, Heritage and Farm Relief:
If the deceased owned a business, farm, woodland or National Heritage property, some relief from Inheritance Tax may be available.

 

Transfers of assets into most trusts and companies will become subject to an immediate Inheritance Tax charge if they exceed the Inheritance Tax threshold (taking into account the previous seven years' chargeable gifts and transfers).

 

In addition, transfers of money or property into most trusts are also subject to an immediate Inheritance Tax charge on values that exceed the Inheritance Tax threshold. Tax is also payable ten-yearly on the value of trust assets above the threshold; however certain trusts are exempt from these rules.

 

Gifts and transfers made in the previous seven years
In order to work out whether the current Inheritance Tax threshold of £325,000 has been exceeded on a transfer, you need to take into account all chargeable (non-exempt, including potentially exempt) gifts and transfers made in the previous seven years. If a transfer takes you over the nil rate band, Inheritance Tax is payable at 20 per cent on the excess.

Doubling the Inheritance Tax threshold

Doubling the Inheritance Tax threshold

Transferring assets can seriously improve your wealth
Current rules mean that the survivor of a marriage or registered civil partnership can benefit from up to double the Inheritance Tax threshold - 650,000 in the current tax year, in addition to the entitlement to the full spouse relief.

 

Inheritance Tax is only paid if the taxable value of your estate when you die is over £325,000. The first £325,000 of a person's estate is known as the Inheritance Tax threshold or nil rate band because the rate of Inheritance Tax charged on this amount is currently set at zero per cent, so it is free of tax.

 

Transferring exempt assets
Where assets are transferred between spouses or registered civil partners, they are exempt from Inheritance Tax. This can mean that if, on the death of the first spouse or registered civil partner, they leave all their assets to the survivor, the benefit of the nil rate band to pass on assets to other members of the family, normally the children, tax-free is not used.

 

Where one party to a marriage or registered civil partnership dies and does not use their nil rate band to make tax-free bequests to other members of the family, the unused amount can be transferred and used by the survivor's estate on their death. This only applies where the survivor died on or after 9 October 2007.

 

In effect, spouses and registered civil partners now have a nil rate band that is worth up to double the amount of the nil rate band that applies on the survivor's death.

 

Since October 2007, you can transfer any of the unused Inheritance Tax threshold from a late spouse or registered civil partner to the second spouse or registered civil partner when they die. This can currently increase the Inheritance Tax threshold of the second partner from £325,000 to as much as £650,000, depending on the circumstances.

 

Spouse or registered civil partner exemption
Everyone's estate is exempt from Inheritance Tax up to the current £325,000 threshold (frozen until April 2018).

 

Married couples and registered civil partners are also allowed to pass assets from one spouse or registered civil partner to the other during their lifetime or when they die without having to pay Inheritance Tax, no matter how much they pass on, as long as the person receiving the assets has their permanent home in the UK. This is known as spouse or registered civil partner exemption.

 

If someone leaves everything they own to their surviving spouse or registered civil partner in this way, it's not only exempt from Inheritance Tax but it also means they haven't used any of their own Inheritance Tax threshold or nil rate band. It is therefore available to increase the Inheritance Tax nil rate band of the second spouse or registered civil partner when they die, even if the second spouse has re-married. Their estate can be worth up to £650,000 in the current tax year before they owe Inheritance Tax.

 

To transfer the unused threshold, the executors or personal representatives of the second spouse or civil partner to die need to send certain forms and supporting documents to HM Revenue & Customs (HMRC). HMRC calls this transferring the nil rate band from one partner to another.

 

Transferring the threshold
The threshold can only be transferred on the second death, which must have occurred on or after 9 October 2007 when the rules changed. It doesn't matter when the first spouse or registered civil partner died, although if it was before 1975 the full nil rate band may not be available to transfer, as the amount of spouse exemption was limited then. There are some situations when the threshold can't be transferred but these are quite rare.

 

When the second spouse or registered civil partner dies, the executors or personal representatives of the estate should take the following steps.

 

Calculating the threshold you can transfer
The size of the first estate doesn't matter. If it was all left to the surviving spouse or registered civil partner, 100 per cent of the nil rate band was unused and you can transfer the full percentage when the second spouse or registered civil partner dies even if they die at the same time.

 

It isn't the unused amount of the first spouse or registered civil partner's nil rate band that determines what you can transfer to the second spouse or registered civil partner. It's the unused percentage of the nil rate band that you transfer.

 

If the deceased made gifts to people in their lifetime that were not exempt, the value of these gifts must first be deducted from the threshold before you can calculate the percentage available to transfer. You may also need to establish whether any of the assets that the first spouse left could have qualified for Business or Property Relief.


Inheritance Tax is only paid if the taxable value of your estate when you die is over £325,000. The first £325,000 of a person's estate is known as the Inheritance Tax threshold or nil rate band because the rate of Inheritance Tax charged on this amount is currently set at zero per cent, so it is free of tax.

 

Supporting a claim
You will need all of the following documents from the first death to support a claim:
copy of the first will, if there was one
copy of the grant of probate (or confirmation in Scotland), or the death certificate if no grant was taken out
copy of any deed of variation if one was used to vary (or change) the will
If you need help finding these documents from the first death, get in touch with the relevant court service or general register office for the country you live in. The court service may be able to provide copies of wills or grants; the general register offices may be able to provide copies of death certificates

 

The relevant forms
You'll need to complete form IHT402 to claim the unused threshold and return this together with form IHT400 and the forms you need for probate (or confirmation in Scotland).

 

You must make the claim within 24 months from the end of the month in which the second spouse or registered civil partner dies.

Valuing a deceased person's estate

Valuing a deceased person's estate

Responsibility for paying Inheritance Tax
To arrive at the amount payable when valuing a deceased person's estate, you need to include assets (property, possessions and money) they owned at their death and certain assets they gave away during the seven years before they died. The valuation must accurately reflect what those assets would reasonably receive in the open market at the date of death.

 

Inheritance Tax is payable by different people in different circumstances. Typically, the executor or personal representative pays it using funds from the deceased's estate. The trustees are usually responsible for paying Inheritance Tax on assets in, or transferred into, a trust. Sometimes people who have received gifts, or who inherit from the deceased, have to pay Inheritance Tax – but this is not common.

 

Valuing the deceased person's estate is one of the first things you need to do as the personal representative. You won't normally be able to take over management of their estate (called applying for probate or sometimes, applying for a grant of representation/ confirmation) until all or some of any Inheritance Tax that is due has been paid.

 

The valuation process
This initially involves taking the value of all the assets owned by the deceased person, together with the value of:

their share of any assets that they own jointly with someone else
any assets that are held in a trust, from which they had the right to benefit
any assets which they had given away, but in which they kept an interest – for instance, if they gave a house to their children but still lived in it rent-free
certain assets that they gave away within the last seven years

 

Next, from the total value above, deduct everything that the deceased person owed, for example:
any outstanding mortgages or other loans
unpaid bills
funeral expenses

 

(If the debts exceed the value of the assets owned by the person who has died, the difference cannot be set against the value of trust property included in the estate.)

 

The value of all the assets, less the deductible debts, gives you the estate value. The threshold above which the value of estates is taxed at 40 per cent is currently £325,000 (frozen until April 2018).

 

When the executor pays Inheritance Tax
Usually, the executor, personal representative or administrator (for estates where there's no will) pays Inheritance Tax on any assets in the deceased's estate that are not held in trust.

 

The money generally comes from the deceased person's estate. However, because the tax must be paid within six months of the death and before the grant of probate can be issued (or grant of confirmation in Scotland), sometimes the executor has to borrow the money or pay it from their own funds. This can happen if it hasn't been possible to get the money from the estate in time because it's tied up in assets that have to be sold.

 

In these cases, the executor or the people who have advanced the money can be reimbursed from the estate before it's distributed among the beneficiaries.

 

When a trustee pays Inheritance Tax
Inheritance Tax on transfers into trust is only necessary if the total transfer amount is above the Inheritance Tax threshold. It's usually payable by the person making the transfer(s) - known as the settlor - not the trustees.

 

The trustees must pay any Inheritance Tax due on land or assets already held in trust. The occasions for this include:
a transfer out of trust (known as the exit charge)
every ten years after the original transfer into trust (known as the ten-year anniversary charge)
when the beneficiary of the trust (known as the life tenant) dies -interest in possession trusts only

 

When a beneficiary or a donee has to pay Inheritance Tax
If the executor or the trustees can't pay the Inheritance Tax, the beneficiaries or donees (recipients of gifts made during a person's lifetime) may have to pay it.

 

A beneficiary or donee only has to pay Inheritance Tax in this case if:
they receive a share of an estate after a death
they receive a gift from someone who dies within seven years of making the gift
they benefit from assets in a trust at the time of death or receive income from those assets
they are the joint owner - other than a spouse or a registered civil partner - of a property

Inheriting a property

Inheriting a property

Could you be liable to pay Inheritance Tax?
If you owned property jointly as joint tenants with the deceased and you weren't their spouse or registered civil partner, you'll have to pay any Inheritance Tax due on the property when you inherit it.

 

If you owned property jointly as tenants in common with the deceased and weren't their spouse or registered civil partner, but inherited their share under the will, the deceased's executor or personal representative must pay any Inheritance Tax or debts before distributing the estate among the beneficiaries.

 

They'll usually try to do this by using funds from other parts of the estate. However, if there's a shortfall, you as the remaining owner are responsible for that shortfall and HM Revenue & Customs (HMRC) and other creditors have the right to approach you.

 

If there isn't enough money in the rest of the estate to pay the outstanding tax or other debts, you may need to sell the property.

Combining predictability with clever planning

Combining predictability with clever planning

Make sure everything you own goes where you want it to tax-efficiently
Planning your finances in advance should help you ensure that when you die everything you own goes where you want it to. Making a will is the first step in ensuring that your estate is shared out exactly as you want it to be.

 

If you don't make a will, there are rules for sharing out your estate called the Law of Intestacy, which could mean your money going to family members who may not need it, or your unmarried partner or a partner with whom you are not in a registered civil partnership receiving nothing at all.

 

If you leave everything to your spouse or registered civil partner there'll be no Inheritance Tax to pay because they are classed as an exempt beneficiary. Or you may decide to use your tax-free allowance to give some of your estate to someone else or to a family trust.

 

Good reasons to make a will
A will sets out who is to benefit from your property and possessions (your estate) after your death. There are many good reasons to make a will:

you can decide how your assets are shared – if you don't have a will, the law says who gets what
if you're an unmarried couple (whether or not it's a same-sex relationship), you can make sure your partner is provided for
if you're divorced, you can decide whether to leave anything to your former partner
you can make sure you don't pay more Inheritance Tax than necessary

 

Before you write your will, it's a good idea to think about what you want included in it. You should consider:
how much money and what property and possessions you have
who you want to benefit from your will
who should look after any children under 18 years of age
who is going to sort out your estate and carry out your wishes after your death, your executor

 

Passing on your estate
An executor is the person responsible for passing on your estate. You can appoint an executor by naming them in your will. The courts can also appoint other people to be responsible for doing this job.

 

Once you've made your will, it is important to keep it in a safe place and tell your executor, close friend or relative where it is.

 

It is advisable to review your will every five years and after any major change in your life, such as getting separated, married or divorced, having a child or moving house. Any change must be by codicil (an addition, amendment or supplement to a will) or by making a new will.

 

Scottish law on inheritance differs from English law.

Financial prudence

Financial prudence

It'll take longer to sort out your affairs if you don't have a will
It's easy to put off making a will. But if you die without one, your assets may be distributed according to the law rather than your wishes. This could mean that your spouse receives less, or that the money goes to family members who may not need it.

 

If you and your spouse or registered civil partner owns your home as joint tenants, then the surviving spouse or registered civil partner automatically inherits all of the property.

 

If you are tenants in common you each own a proportion (normally half) of the property and can pass that half on as you want.

 

Planning to give your home away to your children while you're still alive

 

You also need to bear in mind, if you are planning to give your home away to your children while you're still alive, that:
gifts to your children, unlike gifts to your spouse or registered civil partner, aren't exempt from Inheritance Tax unless you live for seven years after making them
if you keep living in your home without paying a full market rent (which your children pay tax on) it's not an outright gift but a gift with reservation, so it's still treated as part of your estate, and so liable for Inheritance Tax
following a change of rules on 6 April 2005, you may be liable to pay an Income Tax charge on the benefit you receive from having free or low cost use of property you formerly owned (or provided the funds to purchase)
once you have given your home away, your children own it and it becomes part of their assets. So if they are bankrupted or divorced, your home may have to be sold to pay creditors or to fund part of a divorce settlement
if your children sell your home, and it is not their main home, they will have to pay Capital Gains Tax on any increase in its value

 

If you don't have a will there are rules for deciding who inherits your assets, depending on your personal circumstances.

Dealing with the probate process

Dealing with the probate process

Getting started, what you need to know
Probate (or confirmation in Scotland) is the system you go through if you're handling the estate of someone who's died. It gives you the legal right to distribute the estate according to the deceased's wishes. Inheritance Tax forms are part of the process even if the estate doesn't owe Inheritance Tax.

 

If the deceased left a will, it usually names one or more executors who can apply for the grant of probate. If the named executor doesn't want to act, someone else named in the will can apply (depending on a strict order of priority). This person is called the administrator and they apply for a grant of letters of administration with will.

 

If the deceased died without leaving a will, a blood relative can apply for a grant of letters of administration. This is based on a strict next-of-kin order of priority defined in the rules of intestacy. The person who applies is also called the administrator.

 

The catch-all term for a grant of probate, letters of administration with will or letters of administration is a grant of representation. The catch-all term for an executor or administrator is personal representative.

 

Different terms in Scotland and northern Ireland
Scotland and Northern Ireland have different legal systems, processes and terms. The terminology is generally the same in Northern Ireland. However, in Scotland the process is called confirmation and the personal representative applies for a grant of confirmation. Different forms are required in Scotland and Northern Ireland too.

Take it step by step

Take it step by step

How to avoid the probate pitfalls

A look at the steps to take in England and Wales (the process differs in Scotland and Northern Ireland).

 

Step 1 - Value the estate to see if you need a grant of representation
When you might not need a grant of representation.

A grant may not be needed if the estate:
is a low-value estate - generally worth less than £5,000 (though this figure can vary) - and doesn't include land, property or shares
passes to the surviving spouse/civil partner because it was held in joint names

When you contact the deceased's bank or other financial institutions, they will either release the funds or tell you to get a grant of representation (or confirmation) first.

Some banks and financial institutions may insist on a grant before giving you access to even a small amount of money.

 

When a grant of representation is usually needed

You will almost certainly need a grant if the estate includes:
assets generally worth more than £5,000 in total (though again this figure varies)
land or property in the sole name of the deceased, or held as tenants in common with someone else
stocks or shares
some insurance policies

 

Step 2 - Applying for a grant of representation
You'll have to fill in an Inheritance Tax form in addition to the PA1 Probate Application form, even if the estate doesn't owe Inheritance Tax. The estate will only owe Inheritance Tax if it's over the threshold currently £325,000 (frozen until April 2018).

 

The Inheritance Tax forms you need depend on the following:
where the deceased lived – England and Wales, Scotland, Northern Ireland or abroad
the size of the estate
whether it is an excepted estate (i.e. you don't need to fill in a full Inheritance Tax account - form IHT400)

 

Usually, if an estate has no Inheritance Tax to pay, it will be an excepted estate. However, this is not always the case. Some estates that don't owe Inheritance Tax still require a full Inheritance Tax account.

 

If you're not sure whether the estate is an excepted estate, you'll need to start filling in a Return of Estate Information form (form IHT205 in England and Wales). Depending on your answers to certain questions, the form will make clear when you should stop filling in that form and switch to form IHT400 (a full Inheritance Tax account) instead.

 

Step 3 - send the forms to the relevant government bodies
Send completed IHT205 forms and the PA1 Probate Application form to your nearest Probate Registry.

 

You'll also have to include the original will (if there is one), the death certificate, and the probate fee. If you've filled in form IHT400, follow the instructions on page 55 of the IHT400 guidance notes.

 

The process is different in Scotland and Northern Ireland.

 

Step 4 - Pay any Inheritance Tax due
If the estate owes Inheritance Tax, you won't receive the grant of representation (or confirmation) unless you pay some or all of the Inheritance Tax first. The due date is six months after the date of death.

 

Steps 5 to 7 – What happens next?
Once you've paid any Inheritance Tax and sent off the forms to the Probate Registry, the process takes about eight weeks if there are no problems. There are three stages:
examination of forms and documents - Probate Registry staff check the forms and documents and prepare the papers for your interview
swear the oath - all the personal representatives who have applied for a grant of representation will need to swear an oath, either at the Probate Registry or local probate office
probate is granted - the grant of representation is sent to you by post from the Probate Registry

After you get the grant of representation (or confirmation) and have paid any Inheritance Tax due, you can collect in the money from the estate. You can then pay any debts owed by the estate and distribute the estate according to the will or the rules of intestacy.

Who gets what?

Who gets what?

Don't leave your heirs embroiled in years of legal feuding
If you leave everything to your spouse or registered civil partner, in this instance there usually won't be any Inheritance Tax to pay because a spouse or registered civil partner counts as an exempt beneficiary. But bear in mind that their estate will be worth more when they die, so more Inheritance Tax may have to be paid then.

 

Other beneficiaries
You can currently leave up to £325,000 tax-free to anyone in your will (frozen until April 2018), not just your spouse or civil partner. So you could, for example, give some of your estate to someone else or a family trust. Inheritance Tax is then payable at 40 per cent on any amount you leave above this.

 

UK Charities
Inheritance Tax isn't payable on any money or assets you leave to a registered UK charity – these transfers are exempt.

 

In Budget 2011 the rate of Inheritance Tax was cut from 40 per cent to 36 per cent from April 2012 for those who leave at least 10 per cent of their estates to a good cause.

 

Wills, trusts and financial planning
As well as making a will, you can use a family trust to pass on your assets in the way you want to. You can provide in your will for specific assets to pass into a trust or for a trust to start once the estate is finalised. You can also use a trust to look after assets you want to pass on to beneficiaries who can't immediately manage their own affairs (either because of their age or a disability).

 

You can use different types of family trust depending on what you want to do and the circumstances. If you are planning to set up a trust you should receive specialist advice. If you expect the trust to be liable to tax on income or gains you need to inform HM Revenue & Customs Trusts as soon as the trust is set up. For most types of trust, there will be an immediate Inheritance Tax charge if the transfer takes you above the Inheritance Tax threshold. There will also be Inheritance Tax charges when assets leave the trust.

Transferring assets

Transferring assets

Using a trust to pass assets to beneficiaries
Trusts may incur an Inheritance Tax charge when assets are transferred into or out of them or when they reach a ten-year anniversary. The person who puts assets into a trust is known as a settlor. A transfer of assets into a trust can include property, land or cash in the form of:
A gift made during a person's lifetime
A transfer or transaction that reduces the value of the settlor's estate (for example an asset is sold to trustees at less than its market value) - the loss to the person's estate is considered a gift or transfer
A 'potentially exempt transfer' whereby no further Inheritance Tax is due if the person making the transfer survives at least seven years. For transfers after 22 March 2006 this will only apply when the trust is a disabled trust
A gift with reservation where the transferee still benefits from the gift

 

If you die within seven years of making a transfer into a trust extra Inheritance Tax will be due at the full amount of 40 per cent (rather than the reduced amount of 20 per cent for lifetime transfers).

 

In this case your personal representative, who manages your estate when you die, will have to pay a further 20 per cent out of your estate on the value of the original transfer. If no Inheritance Tax was due when you made the transfer, the value of the transfer is added to your estate when working out whether any Inheritance Tax is due.

 

Settled property
The act of putting an asset into a trust is often known as making a settlement or settling property. For Inheritance Tax purposes, each item of settled property has its own separate identity.

 

This means, for example, that one item of settled property within a trust may be for the trustees to use at their discretion and therefore treated like a discretionary trust. Another item within the same trust may be set aside for a disabled person and treated like a trust for a disabled person. In this case, there will be different Inheritance Tax rules for each item of settled property.

 

Even though different items of settled property may receive different tax treatment, it is always the total value of all the settled property in a trust that is used to work out whether a trust exceeds the Inheritance Tax threshold and whether Inheritance Tax is due.

 

If you make a gift to any type of trust but continue to benefit from the gift you will pay 20 per cent on the transfer and the gift will still count as part of your estate. These are known as gifts with reservation of benefit.

 

Avoiding double taxation
To avoid double taxation, only the higher of these charges is applied and you won't ever pay more than 40 per cent Inheritance Tax. However, if the person who retains the benefit gives this up more than seven years before dying, the gift is treated as a potentially exempt transfer and there is no further liability if the transferor survives for a further seven years.

 

From a trusts perspective, there are four main occasions when Inheritance Tax may apply to trusts:
when assets are transferred - or settled - into a trust
when a trust reaches a ten-year anniversary
when settled property is transferred out of a trust or the trust comes to an end
when someone dies and a trust is involved when sorting out their estate

 

Relevant property
You have to pay Inheritance Tax on relevant property. Relevant property covers all settled property in most kinds of trust and includes money, shares, houses, land or any other assets. Most property held in trusts counts as relevant property. But property in the following types of trust doesn't count as relevant property:

interest in possession trusts with assets that were put in before 22 March 2006
an immediate post-death interest trust
a transitional serial interest trust
a disabled person's interest trust
a trust for a bereaved minor
an age 18 to 25 trust

 

Excluded property
Inheritance Tax is not paid on excluded property (although the value of the excluded property may be brought in to calculate the rate of tax on certain exit charges and ten-year anniversary charges). Types of excluded property can include:

property situated outside the UK that is owned by trustees and was settled by someone who was permanently living outside the UK at the time of making the settlement
government securities, known as FOTRA (free of tax to residents abroad)

 

Inheritance Tax is charged up to a maximum of 6 per cent on assets or property that is transferred out of a trust. The exit charge, which is sometimes called the proportionate charge, applies to all transfers of relevant property.

 

A transfer out of trust can occur when:
the trust comes to an end
some of the assets within the trust are distributed to beneficiaries
a beneficiary becomes absolutely entitled to enjoy an asset
an asset becomes part of a 'special trust' (for example a charitable trust or trust for a disabled person) and therefore ceases to be relevant property
the trustees enter into a non-commercial transaction that reduces the value of the trust fund

 

There are some occasions when there is no Inheritance Tax exit charge. These apply even where the trust is a relevant property trust, for instance, it isn't charged:
on payments by trustees of costs or expenses incurred on assets held as relevant property
on some payments of capital to the beneficiary where Income Tax will be due
when the asset is transferred out of the trust within three months of setting up a trust, or within three months following a ten-year anniversary
when the assets are excluded property foreign assets have this status if the settlor was domiciled abroad

 

Passing assets to beneficiaries
You may decide to use a trust to pass assets to beneficiaries, particularly those who aren't immediately able to look after their own affairs. If you do use a trust to give something away, this removes it from your estate provided you don't use it or get any benefit from it. But bear in mind that gifts into trust may be liable to Inheritance Tax.

 

Trusts offer a means of holding and managing money or property for people who may not be ready or able to manage it for themselves. Used in conjunction with a will, they can also help ensure that your assets are passed on in accordance with your wishes after you die.

 

Writing a will
When writing a will, there are several kinds of trust that can be used to help minimise an Inheritance Tax liability. From an Inheritance Tax perspective, an 'interest in possession' trust is one where a beneficiary has the right to use the property within the trust or receive any income from it. Assets put into an interest in possession trust before 22 March 2006 are not considered to be relevant property, so there is no ten-yearly charge.

 

During the life of the trust there are no exit charges as long as the asset stays in the trust and remains the 'interest' of the beneficiary.

 

If the trust also contains assets put in on or after 22 March 2006, these assets are treated as relevant property and are potentially liable to the ten-yearly charges.

 

If you make a gift to any type of trust but continue to benefit from the gift you will pay 20 per cent on the transfer and the gift will still count as part of your estate. These are known as gifts with reservation of benefit.

Trust in your future

Trust in your future

Helping you control and protect family assets
The structures into which you can transfer your assets can have lasting consequences for you and your family and it is crucial that you choose the right ones. The right structures can protect assets and give your family lasting benefits.

 

A trust is a legal arrangement where one or more trustees are made legally responsible for assets. The assets - such as land, money, buildings, shares or even antiques – are placed in trust for the benefit of one or more beneficiaries.

 

The trustees are responsible for managing the trust and carrying out the wishes of the person who has put the assets into trust (the settlor). The settlor's wishes for the trust are usually written in their will or given in a legal document called the trust deed.

 

The purpose of a trust
Trusts may be set up for a number of reasons, for example:

to control and protect family assets
when someone is too young to handle their affairs
when someone can't handle their affairs because they are incapacitated
to pass on money or property while you are still alive
to pass on money or assets when you die under the terms of your will - known as a will trust
under the rules of inheritance that apply when someone dies without leaving a valid will (England and Wales only)

 

There are several types of UK family trusts and each type of trust may be taxed differently. There are other types of non-family trusts. These are set up for many reasons - for example to operate as a charity, or to provide a means for employers to create a pension scheme for their staff.

 

What is trust property?
A trust property is a phrase often used for the assets held in a trust. It can include:
money
investments
land or buildings
other assets, such as paintings, furniture or jewellery – sometimes referred to as chattels

 

The cash and investments held in a trust are also called the trust capital or fund. This capital or fund may produce income, such as interest on savings or dividends on shares. The land and buildings may produce rental income. Assets may also be sold producing gains for the trust. The way income is taxed depends on the type of income and the type of trust.

 

What is a settlor?
A settlor is a person who has put assets into the trust. This is known as settling property. Assets are normally put into the trust when it's created, but they can also be added at a later date. The settlor decides how the assets in the trust and any income received from it should be used. This is usually set out in the trust deed.

 

In some trusts, the settlor can also benefit from the assets they've put in. These types of trust are known as settlor-interested trusts and they have their own tax rules.

 

The role of the trustees
Trustees are the legal owners of the assets held in a trust. Their role is to:
deal with trust assets in line with the trust deed
manage the trust on a day-to-day basis and pay any tax due on the income or chargeable gains of the trust
decide how to invest the trust's assets and/or how the assets in the trust are to be used - although this must always be in line with the trust deed

 

The trust can continue even though the trustees might change. However, there must be at least one trustee. Often there will be a minimum of two trustees; one trustee may be a professional familiar with trusts - a lawyer, for example - while the other may be a family member or relative.

 

What is a beneficiary?
A beneficiary is anyone who benefits from the assets held in the trust. There can be one or more beneficiary, such as a whole family or a defined group of people, and each may benefit from the trust in a different way.

 

For example, a beneficiary may benefit from:
the income only - for example, they might get income from letting a house or flat held in a trust
the capital only - for example, they might get shares held on trust when they reach a certain age
both the income and capital of the trust – for example they might be entitled to the trust income and have a discretionary interest in trust capital

 

If you're a beneficiary you may have extra tax to pay or be entitled to claim some back depending on your overall income.

 

Trust law in scotland
The treatment of trusts for tax purposes is the same throughout the United Kingdom. However, Scottish law on trusts and the terms used in relation to trusts in Scotland are different from the laws of England and Wales and Northern Ireland.

 

When you might have to pay Inheritance Tax on your trust
There are four main situations when Inheritance Tax may be due on trusts:
when assets are transferred - or settled - into a trust
when a trust reaches a ten-year anniversary of when it was set up
when assets are transferred out of a trust or the trust comes to an end
when someone dies and a trust is involved when sorting out their estate

The right type of trust

The right type of trust

Ensure you don't pay more tax than is necessary
There are now three main types of trusts.

 

Bare (Absolute) trusts
With a bare trust you name the beneficiaries at outset and these can't be changed. The assets, both income and capital, are immediately owned and can be taken by the beneficiary at age 18 (16 in Scotland).

 

Interest in possession trusts
With this type of trust, the beneficiaries have a right to all the income from the trust, but not necessarily the capital. Sometimes, a different beneficiary will get the capital – say on the death of the income beneficiary. They're often set up under the terms of a will to allow a spouse to benefit from the income during their lifetime but with the capital being owned by their children. The capital is distributed on the remaining parent's death.

 

Discretionary trusts
Here the trustees decide what happens to the income and capital throughout the lifetime of the trust and how it is paid out. There is usually a wide range of beneficiaries, but no specific beneficiary has the right to income from the trust.

 

Some trusts will now have to pay an Inheritance Tax charge when they are set up, at 10 yearly intervals and even when assets are distributed. The right type of trust in conjunction with your overall financial planning could help minimise the amount of Inheritance Tax payable. This is a highly complex area and you should obtain professional advice to ensure the right type of trust is set up for your particular circumstances.

Giving away wealth

Giving away wealth

Tax-efficiently passing on parts of your estate
There are some important exemptions that allow you to legally pass your estate on to others, both before and after your death, without it being subject to Inheritance Tax.

 

Exempt beneficiaries
You can give things away to certain people and organisations without having to pay any Inheritance Tax. These gifts, which are exempt whether you make them during your lifetime or in your will, include gifts to:

your husband, wife or civil partner, even if you're legally separated (but not if you've divorced or the registered civil partnership has dissolved), as long as you both have a permanent home in the UK
UK charities
some national institutions, including national museums, universities and the National Trust
UK political parties

 

But, bear in mind that gifts to your unmarried partner or a partner with whom you've not formed a registered civil partnership aren't exempt.

 

Exempt gifts
Some gifts are exempt from Inheritance Tax because of the type of gift or the reason for making it. These include:

 

Wedding gifts/civil partnership ceremony gifts
Wedding or registered civil partnership ceremony gifts (to either of the couple) are exempt from Inheritance Tax up to certain amounts:
parents can each give £5,000
grandparents and other relatives can each give £2,500
anyone else can give £1,000

 

You have to make the gift on or shortly before the date of the wedding or civil partnership ceremony. If it is called off and you still make the gift, this exemption won't apply.

 

Small gifts
You can make small gifts, up to the value of £250, to as many people as you like in any one tax year (6 April to the following 5 April) without them being liable for Inheritance Tax.

 

But you can't give a larger sum – £500, for example – and claim exemption for the first £250. And you can't use this exemption with any other exemption when giving to the same person. In other words, you can't combine a 'small gifts exemption' with a 'wedding/ registered civil partnership ceremony gift exemption' and give one of your children £5,250 when they get married or form a registered civil partnership.

 

Annual exemption
You can give away £3,000 in each tax year without paying Inheritance Tax. You can carry forward all or any part of the £3,000 exemption you don't use to the next year but no further. This means you could give away up to £6,000 in any one year if you hadn't used any of your exemption from the year before.

 

You can't use your annual exemption and your small gifts exemption together to give someone £3,250. But you can use your annual exemption with any other exemption, such as the wedding/ registered civil partnership ceremony gift exemption. So, if one of your children marries or forms a civil partnership you can give them £5,000 under the wedding/ registered civil partnership gift exemption and £3,000 under the annual exemption, a total of £8,000.

 

Gifts that are part of your normal expenditure
Any gifts you make out of your after-tax income (but not your capital) are exempt from Inheritance Tax if they're part of your regular expenditure. This includes:

monthly or other regular payments to someone, including gifts for Christmas, birthdays or wedding/civil partnership anniversaries
regular premiums on a life insurance policy (for you or someone else)

 

It's a good idea to keep a record of your after-tax income and your normal expenditure, including gifts you make regularly. This will show that the gifts are regular and that you have enough income to cover them and your usual day-to-day expenditure without having to draw on your capital.

 

Maintenance gifts
You can also make Inheritance Tax-free maintenance payments to:
your husband or wife
your ex-spouse or former registered civil partner
relatives who are dependent on you because of old age or infirmity
your children (including adopted children and step-children) who are under 18 or in full-time education

 

Potentially exempt transfers
If you, as an individual, make a gift and it isn't covered by an exemption, it is known as a potentially exempt transfer (PET). A PET is only free of Inheritance Tax if you live for seven years after you make the gift.

 

Gifts that count as a PET are gifts that you, as an individual, make to:
another individual
a trust for someone who is disabled
a bereaved minor's trust where, as the beneficiary of an Interest In Possession (IIP) trust (with an immediate entitlement following the death of the person who set up the trust), you decide to give up the right to receive anything from that trust or that right comes to an end for any other reason during your lifetime

 

Only outright gifts count as PETs
If you make a gift with strings attached (technically known as a gift with reservation of benefit), it will still count as part of your estate, no matter how long you live after making it. For example, if you give your house to your children and carry on living there without paying them a full commercial rent, the value of your house will still be liable for Inheritance Tax.

 

In some circumstances a gift with strings attached might give rise to an Income Tax charge on the donor based on the value of the benefit they retain. In this case the donor can choose whether to pay the Income Tax or have the gift treated as a gift with reservation.

A gift with reservation

A gift with reservation

Getting the full benefit of a gift to the total exclusion of the donor
A gift with reservation is a gift that is not fully given away. Where gifts with reservation were made on or after 18 March 1986, you can include the assets as part of your estate but there is no seven year limit as there is for outright gifts. A gift may begin as a gift with reservation but some time later the reservation may cease.

 

In order for a gift to be effective for exemption from Inheritance Tax, the person receiving the gift must get the full benefit of the gift to the total exclusion of the donor. Otherwise, the gift is not a gift for Inheritance Tax purposes.

 

An outright gift
For example, if you give your house to your child but continue to live there rent free, that would be a gift with reservation. If, after two years, you start to pay a market rent for living in the house, the reservation ceases when you first pay the rent. The gift then becomes an outright gift at that point and the seven year period runs from the date the reservation ceased. Or a gift may start as an outright gift and then become a gift with reservation.

 

Alternatively, if you give your house to your child and continue to live there but pay full market rent, there is no reservation. If over time you stop paying rent or the rent does not increase, so it is no longer market rent, a reservation will occur at the time the rent stops or ceases to be market rent.

 

The value of a gift for Inheritance Tax is the amount of the loss to your estate. If you make a cash gift, the loss is the same value as the gift. But this is not the case with all gifts.

Wealth preservation

Wealth preservation

Making the most of different solutions

Decreasing term assurance
Decreasing term assurance can be arranged to cover a potential Inheritance Tax liability and used as a Gift Inter Vivos policy (a gift given during the life of the grantor who no longer has any rights to the property and can not get it back without the permission of the party it was gifted to). This is a type of decreasing term plan that actually reduces at the same rate as the chargeable Inheritance Tax on an estate as a result of a Potentially Exempt Transfer (PET).

 

For example, if you gift part of your estate away before death, then that part is classed as a PET, meaning that for a period of seven years there could be tax due on the transfer. This amount of tax reduces by a set amount each year for seven years.

 

The Gift Inter Vivos plan is designed to follow that reduction to ensure sufficient money is available to meet the bill if the person who gifted the estate dies before the end of the seven-year period. Such policies should be written in an appropriate trust, so that the proceeds fall outside your estate.

 

Business and agricultural property
Business and agricultural property are exempt from Inheritance Tax.

 

Business Property relief: To qualify, the property must be relevant business property and must have been owned by the transferor for the period of two years immediately preceding death. Where death occurred after 10 March 1992, relief is given by reducing the value of the asset by 100 per cent. Prior to 10 March 1992, the relief was 50 per cent.

 

Agricultural Property relief: Agricultural property is defined as agricultural land or pasture and includes woodland and any buildings used in connection with the intensive rearing of livestock or fish if the woodland or building is occupied with agricultural land or pasture and the occupation is ancillary to that of the agricultural land or pasture; and also includes such cottages, farm buildings and farmhouses, together with the land occupied with them as are of a character appropriate to the property'. Where death occurred after 10 March 1992, relief is given by reducing the value of the property by 100 per cent (certain conditions apply). Prior to that date the relief was 50 per cent.

 

Woodlands relief
There is a specific relief for transfers of woodland on death. However, this has become less important since the introduction of 100 per cent relief for businesses that qualify as relevant business property. Where an estate includes woodlands forming part of a business, business relief may be available if the ordinary conditions for that relief are satisfied.

 

When a woodland in the United Kingdom is transferred on death, the person who would be liable for the tax can elect to have the value of the timber – that is, the trees and underwood (but not the underlying land) – excluded from the deceased's estate.

 

If the timber is later disposed of, its value at the time will be subject to Inheritance Tax. Relief is available if:
an election is made within two years of the death, though the Board of HM Revenue & Customs have discretion to accept late elections, and
the deceased was the beneficial owner of the woodlands for at least five years immediately before death or became beneficially entitled to it by gift or inheritance

 

The Pre-Owned Assets Tax
Pre-Owned Assets Tax (POAT), which came into effect on 6 April 2005, clamped down on arrangements whereby parents gifted property to children or other family members while continuing to live in the property without paying a full market rent.

 

POAT is charged at up to 40 per cent on the benefit to an individual continuing to live in a property that they have gifted but are not paying a full rent, and where the arrangement is not caught by the gift with reservation rules.

 

So anyone who has implemented such a scheme since March 1986 could fall within the POAT net and be liable to an income tax charge of up to 40 per cent of the annual market rental value of the property.

 

Alternatively, you can elect by 31 January following the end of the tax year in which the benefit first arises that the property remains in your estate.

 

An independent valuer must carry out rental valuations of the property every five years.

 

Disclaimer

Disclaimer

The content of this guide is for your general information and use only and is not intended to address your particular requirements. The content should not be relied upon in its entirety and shall not be deemed to be, or constitute, advice. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of the content. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts. Levels and bases of reliefs from taxation are subject to change and their value depends on an individuals personal circumstances.


To discuss your Estate Preservation requirements, please contact us for further information.

 

 

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