robertschontax

Writing a will – leave your affairs tidily

About 50% of my practice is helping clients with their estate planning. This invariably concludes with their writing a will. In addition, it may involve lifetime gifts (perhaps into trust) and writing a finance and/or health lasting power and perhaps a living will. Sometimes it requires liaising with lawyers offshore if the client has a foreign citizenship and/or if s/he owns assets outside the UK.

Putting these pieces of paper in place in a way that works for the client and his/her heirs is something s/he cannot delegate. It is for this reason I describe the exercise as a communication of love. I want in this note to explain this sentiment and give some examples.

Writing a will is like playing a what if game. Let us assume the client is married/in a civil partnership and has children. A typical scenario is on the client’s death their will provides:

All to my surviving spouse/civil partner;
If s/he has died – all to my children in equal shares at [18];
If a child predeceases their surviving parent and has children who survive the 2nd parent to die (‘X’); the dead child’s share goes equally to his/her children on their attaining [18];
If no children/grandchildren survive X, their estate passes to … ; and
If no named beneficiary is alive to inherit X’s estate, it passes to one or more named charities.

Prior to anyone inheriting the deceased’s assets, their financial affairs need to be brought to a conclusion. This is the job of the executor(s). If the deceased was an owner manager of a business it may be different executors need to be appointed to ‘manage’ the business for the estate to those executors appointed to manage the other assets of the deceased. This is particularly true if the deceased was an owner of a regulated business such as a solicitor.

Should the client have children below the age of 18 additional matters need to be addressed. These include:

who the client appoints as guardian(s) for his/her children should both parents die prematurely; and
thinking how in these circumstances the guardian(s) can be compensated for the inevitable disruption in their life.

The assets of the deceased can be used for the education, maintenance and welfare of the deceased’s children. They cannot (unless other steps are taken) be used e.g. to pay for a loft conversion at the home of the guardian(s) to accommodate the deceased’s children.

A question I ask clients is if they care if their surviving spouse/civil partner re-marries and potentially leaves assets inherited from the deceased to persons other than their children. In my experience the older the client the less relaxed they are.

The Inheritance Tax Act 1984 (‘IHT’) covers this scenario by saying that the IHT spouse exemption is available where assets are left on trust to a surviving spouse for life and on their death whatever remains by way of capital is to pass e.g. to the children of the first spouse/civil partner to die.

This structure has advantages when it comes to assessing the capital of the surviving spouse available to meet care costs as the assets in the will trust are presently left out of account in calculating the available assets of the surviving spouse/civil partner.

I wrote a will for a client (‘C’) who had children from a prior marriage. C chose to put in place such a life interest trust for the surviving spouse (‘S’.) After C’s death, S found it undignified that the trustees included one or more of C’s children. The issue being if S wanted any capital from the trust (in addition to its income) the trustees needed to agree. Today – especially in a second marriage scenario – if clients want such a will trust structure I explore with them their leaving their surviving spouse/civil partner some capital outright so their need to access the trust for capital is reduced.

The difference between a will and a lasting power of attorney (‘LPA’) finance

The contrast is that a will has no affect during the lifetime of the person who wrote it and a finance LPA has no affect after death.

A finance LPA allows the donor to

nominate who s/he wants to manage their financial affairs if the donor ceases to have capacity; and is
much cheaper and easier to put in place than the family needing to apply to the court for a deputy to be appointed to perform the same function if no finance LPA exists and x has ceased to have capacity.

A health LPA allows you to appoint who you want to liaise with ‘authority’ on issues concerning your care; medical wellbeing and receipt or not of life sustaining treatment.

I sincerely believe that doing the required thinking to put in place the pieces of paper I describe above, so they truly work when the time comes for you and your family/nearest and dearest, is only a job you can do. I do my best to make it an exercise you enjoy and complete feeling ‘it fits-it works’.

If you think I can be of help-please get in touch.

Robert Schon

Guidance for grandparents when writing their will

Inspired by an item by Helena Luckhurst of the London law firm Fladgate LLP.

This note offers guidance to anyone who wants to leave assets to minor grandchildren in their Will. Its focus is making provision for minor grandchildren and the tax consequences of the different options. I will shortly write on the options for making provision in a will for minor children. This note is not exhaustive; for example, it doesn’t mention the special types of trust that may be available for minors who are disabled. Its purpose is to raise awareness of the different options available to grandparents when thinking about writing a will.

Where the client has children, most wills say:

All to my spouse/civil partner if s/he survives me;
If I am the second to die; all to my children in equal shares; and
If a child has predeceased me leaving a child or children, that child or children are to take the share of their deceased parent in equal shares.

Clients are frequently content for minors to inherit modest amounts outright. My experience is clients do not want a minor to inherit substantial sums at 18 or younger. It may be the last option described below is the most flexible choice. Grandparents must make their own decision from the alternatives described.

A bare trust for a minor – this is the only option available to a grandparent for a minor to inherit at an age younger than 18

If at the time of the grandparent’s death the grandchild is a minor, the only issue preventing the minor from taking their inheritance is the grandchild’s minority. Assets passing to the grandchild are, therefore, assented to a bare trustee(s) who will hold and manage the assets for the grandchild pending their attaining 18.

At 18 the grandchild is able to call for their inheritance. From the date of the grandparent’s death the inheritance belongs in law to the grandchild. For example, if the grandchild died whilst a minor their assets would be within their estate for Inheritance Tax (‘IHT’) purposes and would, as a general rule, pass under English intestacy rules.

Whilst the grandchild is less than 18 income or capital from their inheritance can be applied for their benefit. The grandchild will annually to 5th April be subject to income tax and capital gains tax (‘CGT’) on income or gains arising in excess of any available personal allowance or annual CGT exemption. The minor may need to file a tax return.

On the grandchild attaining 18 there is no IHT on the assets being transferred into their name from that of the bare trustee(s).

A key issue when drafting the will is who the grandparent appoints as bare trustee(s) pending their grandchild attaining 18. It is the job of the bare trustee to manage the grandchild’s inheritance pending the grandchild attaining 18.

Where the grandparent does not want to set an age for the minor grandchildren to inherit

Grandparents have 2 choices. Their will can either create an immediate post death interest trust (‘IPDI’) or a discretionary trust. Each has its own tax regime. Grandparents need to have these in mind in making their decision as to how they structure via their will how any grandchild inherits.

A discretionary trust

A grandparent preferring to keep their options completely open can provide in their will after their death for a minor’s inheritance to pass into a discretionary trust. The trust can last for up to 125 years and the class of beneficiaries can be very widely drawn to include for example all the heirs and their spouses/civil partners of the client’s parents. This breadth means inheritances can be reallocated between family members as the needs of the different family members become clear. It also allows inter-generational IHT planning because it allows family wealth to pass down the family tree (or between siblings) without the 40% IHT charge that can apply when a family member passes their wealth them self on their death to a family member.

The discretionary will trust trustees will usually be guided by written advice (a letter of wishes) written and signed in the lifetime of the grandparent to the trustees setting out the thinking of the grandparent(s) on when income and capital distributions should be made from the trust to a beneficiary e.g. for each grandchild to receive their share of capital at age 25.

Whilst assets remain within the discretionary trust, trust income or capital can be applied by the trustees to or for a beneficiary’s benefit both pre and post minority.

Discretionary trusts are subject to the IHT periodic charge regime throughout the lifetime of the will trust. In essence the trust fund is subject to a maximum 6% rate of IHT every 10 years from its creation and after the first 10 years it is subject to an IHT exit charge when assets leave the will trust. The rate of the exit charge depends on how long the assets have been in trust after the last 10 year anniversary and their exit from the trust. For example, a capital distribution after 15 years would trigger an IHT exit charge (at current rates) of 3%.

Gains realised on capital distributions from a discretionary trust to a beneficiary (e.g. when the trustees transfer shares or real estate absolutely into the name of a grandchild) can be deferred until the beneficiary disposes of the asset i.e. the gain can be ‘rolled over’ thereby deferring any CGT charge.

An IPDI

An IPDI is the vehicle for a grandparent who does not want their grandchild to inherit outright on their death and who does not want to have any IHT 10 year charge or exit charge applying to the minor’s inheritance while it is in trust-see above.

An IPDI must by law give the grandchild the right to the income of their inheritance as it arises-no matter what the age of the grandchild. The income is taxed as the grandchild’s.

The terms of the IPDI can provide for the trustees to be given the power to distribute the inheritance to the child at any age. The timing of capital distributions remains at the discretion of the trustees. The grandparent can however give guidance to the trustees via a letter of wishes as to the age they consider a transfer of capital to the grandchild appropriate. As with all trusts, the choice of who the client appoints as the IPDI trustees is crucial.

The flexibility an IPDI trust offers can be very helpful in protecting the minor as s/he gains financial maturity.

The price for avoiding the IHT 10 year charge and exit charge described above for discretionary trusts is that the IPDI assets form part of the IHT estate of the minor and will be subject to IHT whenever s/he dies and at whatever age. This risk can be covered by insurance.

The transfer of capital assets out of the IPDI trust to a beneficiary e.g. the minor on attaining 25 is a disposal for CGT purposes for which the gain usually cannot be deferred. CGT will be payable at the trustees’ rate of CGT being presently 20% unless the asset being disposed of is e.g. a buy to let residential property when the rate is 28%.

The grandparent keeping their options open

A discretionary trust can be included in the grandparent’s will with a power to appoint capital onto different trusts. The IHT and CGT law allows the trustees of the discretionary will trust to have up to 2 years after the grandparent’s death to turn the trust into any of the options described above. For IHT and CGT purposes the consequences will be the same as if the grandparent’s will had included that option in the first place. The key is for the grandparent to trust their choice of will trustees to make the right decision when the time comes. The grandparent can write them a letter of wishes to set out their thinking but the decision will be that of the will trustees.

Concluding thoughts

I am embarrassed at the complexity of this topic. It may be the grandparent(s) should consult each of their children and agree together for each child the approach they think best serves that child’s family.

I enjoy helping a client write their will. I describe a will as being the last communication of love one leaves. As such (in my opinion) it should seek to minimise family division and be as useful as possible. Only the person writing their will can look at their family and their loved ones and decide in the light of the choices available what they think is likely to work best for their heirs. If you think I might be able to assist you, please get in touch.

Robert Schon

A Lasting Power of Attorney-financial decisions

One of my definitions of real love is leaving your affairs tidy. As we age this is something we alone can do. It isn’t something we can delegate.

I am surprised but quite a number of people seem not to know the difference between a will and a financial decisions lasting power of attorney.

A will speaks from death and is the document detailing

(i) who is to bring your financial affairs to a tidy end; and
(ii) who is to inherit whatever remains. A will has no application in your lifetime. In contrast a financial decisions lasting power of attorney only applies in lifetime and has no relevance on death.

So long as you have mental capacity, writing a financial decisions lasting power is the ‘easy’ mechanism to appoint named others to administer your financial affairs should you cease to have capacity.

Should you lose capacity and not have a financial decisions lasting power in place, before anyone can access your funds or manage your assets they need to apply to the Court of Protection to be appointed your Deputy. In every single way I can imagine this is a process best avoided. No one will thank you for not having written a financial decisions lasting power.

Within the lasting power document you can specify if you have financial ‘preferences’ for your attorney(s) to follow (e.g. ‘I prefer to invest in ethical funds’) or if you have ‘instructions’ they must follow. In its guidance the Office of the Public Guardian says ‘The only circumstance in which you must write an instruction is in a finance lasting power if (i) you have investments managed by a bank and want that to continue; [and] (ii) you want to allow your attorneys to let a bank manage your investments.’

Many of us have funds managed on our behalf by a discretionary manager. Should we lose capacity, if we want our funds to remain managed by that manager, our financial decisions lasting power has to authorise it as an instruction e.g. ‘My attorney(s) may transfer my investments into a discretionary management scheme. Or, if I already had investments in a discretionary management scheme before I lost capacity to make financial decisions, I want the scheme to continue. I understand in both cases that managers of the scheme will make investment decisions and my investments will be held in their names or the names of their nominees.’

Attorneys must be careful when making gifts pursuant to the lasting power. There are strict limits on the kinds of gifts that attorneys can give on behalf of the person who has lost capacity (‘the donor’). They can only give presents on ‘customary occasions’ which are defined to include weddings, birthdays and religious holidays. Gifts should be reasonable in size and take into account how much money the donor has. The Office of the Public Guardian guidance says ‘Your attorneys must apply to the Court of Protection if they want to make gifts … on your behalf like the payment of school fees for grandchildren or the making of interest free loans to family’. This is the case even if such payments or loans were a regular occurrence when the donor had capacity.

In a 2018 case, the Court of Protection considered the issues it would take into account when considering if to authorise a gift by the donor to minimise Inheritance Tax (‘IHT’) on her death. The donor was 72, a widow, her assets were circa £17m and her attorneys wanted to give away £7m in the hope she would survive 7 years (or at least 3 years) and thereby save IHT of up to £2.8m. There was no question that £10m was more than amply sufficient to meet her needs.

In reaching its decision the court had reference to the donor’s attitude and generosity in lifetime to making gifts and her known views on tax mitigation.

The conclusion I take from the case is that if the donor might want their financial decisions attorney(s) to make gifts on their behalf, they should leave evidence with their finance lasting power as to their attitude and approach to lifetime giving and tax mitigation so the Court of Protection knows their views when it is asked to consider the matter.

There is a second lasting power dealing with the donor’s health and care should the donor cease to have capacity. Should, for example, the donor have a preference to die at home in their bed; their place to say this is in the preferences section of their health and care lasting power. In this situation there is a read across to their financial decisions lasting power in that they might want to say in the preferences section of that document if needs be their attorneys should fund their elder care by equity release. In essence in a semi coded way saying to children who are appointed to act as their attorney(s) ‘please be generous to me with my money.’

You can write lasting powers without seeking help from a knowledgeable specialist. Frequently there are complexities that I think warrant involving an expert. If I might be able to help, please get in touch.

Likely Changes to Inheritance Tax

This week the Office of Tax Simplification (‘OTS’) issued the first of 2 reports looking at Inheritance Tax (‘IHT.’) The 2^nd is due in the spring and will explore key technical and design issues with the tax.

The OTS says the review has attracted an unprecedented level of public engagement and contribution. In a long article on 24th November trailing the report the Financial Times quotes it as saying ‘the IHT regime is too complex and confusing’ and needs a dramatic overhaul.

I think this will occur in the foreseeable future and it is likely IHT will be replaced by a gift tax. If you want to make lifetime gifts and access our present ‘7 year rule’ time is, I think, of the essence.

I set out below some points from the OTS paper:

a common criticism of IHT is that wealthy individuals can give away many of their assets before they die and pay less IHT than others who need to keep a greater proportion to support their living costs;
fewer than 3% of estates have a value above £1m;
Whilst IHT is set at 40%, research for the report shows the rate actually paid by the average estate is much lower. They say it peaks at just over 20% ‘for estates valued at £6 to £7m, after which it falls to 10% for estates with a value of £10m or more…The reason…. is that a greater proportion of their assets are likely to be covered by a relief. On average 70% of the value of an estate worth more than £10m is relieved in this way’;
The above statistics don’t take into account gifts made more than 7 years before a person’s death. Such gifts are not subject to IHT and HMRC does not collect data about them. It has recently commissioned external research on lifetime giving to obtain better data. It is expected that the results will be published in 2019.

As a tax and estate planning practitioner

I am surprised by the OTS’s research that for many estates the effective rate of IHT is circa 20%. This is not my experience especially where clients have sizable property assets;
I think HMRC is likely to bring in legislation better to track lifetime gifts;
I don’t expect a major overhaul of our IHT business property and agricultural property regimes;
I think our present IHT regime for lifetime gifts generous. There is no limit on the size of gift an individual can make in their lifetime free of IHT. If they are rich enough they can give away £1bn free of IHT if they survive 7 years and retain no benefit in the asset gifted. This compares to the US where the circa $11m threshold is (I understand) a lifetime allowance.

I say wills are the last communication of love you leave. Estate planning is part of that process. My recommendation is that people make use of the present IHT regime for making lifetime gifts before it is altered or even taken away.

If you think I can help you in thinking through/understanding the tax implications of different estate planning ideas please get in touch.

Robert Schon

29th November 2018.

2nd homes and inheritance tax planning

In writing this note my call to action is to ask readers who may want to embark on UK Inheritance Tax planning on their second home – in or outside the UK – to come and see me

As a solicitor specialising in UK tax law I am recurrently surprised that people who live here (UK tax residents) are unaware that the default position is that they are liable annually to UK tax on their worldwide income and gains.

As HMRC says in guidance issued in November 2017 on correcting [UK] tax due on offshore assets ‘anyone who owns or has an interest in assets held offshore or has had a source of income that is offshore, or has moved income or the proceeds of capital gains offshore is potentially affected’ by a liability to UK tax/an obligation to correct an incorrectly submitted prior UK tax return.

I want in this note to tell a story that comes up not infrequently relevant to individuals who own a second home outside the UK. I conclude by saying there is a wholly legitimate way to embark on inheritance tax planning for second homes that is within the Inheritance Tax legislation and ‘does the job.’

The story

Mr X who owns a home in Spain personally and wants to mitigate Inheritance Tax on this asset by transferring it to his 3 adult daughters. The Spanish property is important to Mr X and all his family and all intend to use it after the gift.

Mr X is told in Spain that if he makes the intended gift he can enjoy a usufruct (a right to use) for his lifetime and for Spanish purposes won’t have to pay any rent or worry about who pays the utility bills etc after the gift. He is also told for Spanish Capital Gains Tax purposes there is one value for the property which is accepted in Spain in the case of ‘donations’ and this is divorced from anything to do with market value.

The UK advice Mr X receives is that

the UK regards the creation of a usufruct as a transfer into trust on which IHT is due if the chargeable transfer by Mr X exceeds £325,000;
for Capital Gains Tax purposes the UK will deem Mr X to have realised market value when he transfers the Spanish property to the usufruct. He will be liable to pay UK Capital Gains Tax on his gain even though he has received no cash; and
for Inheritance Tax purposes, assuming he enjoys the usufruct within 7 years of his death, he will be treated as having reserved a benefit in the Spanish property and its value will be in his estate on death.

The approved Inheritance Tax route

The Inheritance Tax legislation has an exemption from the gift with reservation anti avoidance rules called the co-ownership exemption.

The co-ownership exemption applies when the donor and the recipient(s) occupy the land; and the donor does not receive any benefit other than a negligible one, which is provided by or at the expense of the recipient(s) for some reason connected with the gift. Occupation, but not necessarily as a family home, is required

Example

Tony and Cheri own a seaside property in Deal which they acquired many years ago for £70,000. It is now worth £300,000 and does not benefit from Capital Gains Tax main residence relief (Tony and Cheri elected for their London property.) They wish to give a share of the Deal house to their 2 adult children who use it during the summer months. The objective is to have the property owned as to 25% each by Cheri and Tony and their 2 children. Each co-owner comes and goes as they please; leaves possessions in the house; has their own bedroom and a set of keys. For each child it is a second home

The co-ownership exemption from Inheritance Tax will apply provided that all co-owners occupy the Deal property. On the facts above this should be the case.

The gift by each of Cheri and Tony is an Inheritance Tax potentially exempt transfer which will be outside each of their estates if each survives the gift by 7 years.

As regards expenses at a minimum Tony and Cheri and their 2 children should split the running costs of the Deal property 25% each. If Cheri and Tony can afford it there is no Inheritance Tax reason why they cannot continue to meet all the running costs. The 50% they meet for their children will be within the scope of Inheritance Tax but may be exempt from charge either under the Inheritance Tax annual exemption or as a gift out of income.

The gift by Cheri and Tony will be a disposal for Capital Gains Tax purposes and these implications will need to be considered and understood. It may be the charge to Capital Gains Tax can be deferred/’rolled – over.’

The above Inheritance Tax planning has issues if for example a child of Tony and Cheri’s dies before their parents and/or if Tony and/or Cheri cease to occupy the Deal home because they go into a nursing home. With planning, should these facts present, the Inheritance Tax issues that arise can be overcome.

If you would like to discuss anything raised in this note, please get in touch.

Robert Schon

November 2017

Planned changes to our tax regime for non domiciled individuals

On 19th August HMRC announced plans to change the way it taxes non domiciled individuals (‘non-doms’) who live in the UK. These changes will be effective from 6th April 2017. The planned changes are most pressing for those non doms who have lived in the UK for close to 15 of the last 20 years and own assets outside the UK such as land; cash or shares. They are also however relevant to long-term UK resident non doms who will become deemed-domiciled in April 2017 (see below) because they have been resident in the UK for 15 of the past 20 years.

What makes you a non dom?

You will be a non dom if you come from a jurisdiction outside the UK and have not displayed an intention to leave that other jurisdiction permanently.

UK case law has held that a Canadian who came here in 1932 and married an English woman and lived here with his wife into the 1970s had not acquired a UK domicile because he had always said if his wife predeceased him he would return to Canada. He remained a non-dom for UK tax purposes because, in effect, he had not fixed voluntarily his sole or chief residence in the UK with an intention to live in the UK for an unlimited time. This case is still good law.

Background to the planned tax changes effective from 6th April 2017

An individual’s domicile is relevant for 3 UK taxes being inheritance tax (‘IHT’) Capital Gains Tax (‘CGT’) and income tax.

For IHT, for many decades the law has had a deeming rule that makes an individual deemed UK domiciled once that individual has been UK tax resident for 17 out of 20 years. The consequence is once X is IHT deemed domiciled s/he is within the scope of IHT on their worldwide estate whereas before IHT was only relevant to that individual’s UK estate.

The planned changes effective 6th April 2017 include

– extending the deeming rule to make an individual deemed UK domiciled for income tax; CGT and IHT purposes once that individual has been resident in the UK for 15 out of 20 years i.e. it will apply from the start of year 16. Affected individuals will be taxable on worldwide income and gains as they arise and will be within the scope of IHT on their worldwide assets.

– a special window for 1 year from 6th April 2017 for all UK resident non doms to ‘clean up’ their offshore mixed bank accounts/funds comprising cash. This will allow the offshore fund to be reconstituted into its constituent parts being e.g. capital gains; original capital (including gifts e.g. from parents) and income. Once the cash fund has been reconstituted it will facilitate bringing cash into the UK in a way that means the individual can bring clean capital before realised gains and realised gains before taxable income. This will reduce the individual’s exposure to UK taxes when cash from the prior mixed fund is brought here; and

– allowing an individual who becomes deemed UK domiciled on 6th April 2017 to rebase their non UK capital assets to their value on that date. CGT rebasing will not be available to individuals who become deemed domiciled after 6th April 2017.

An IHT planning opportunity for those close to becoming deemed IHT domiciled because they are approaching being UK tax resident for 15 out of 20 years

For IHT purposes non UK assets, called ‘excluded property’, can be kept outside the scope of IHT if the non dom owner settles these assets on trust before s/he has been UK tax resident for 15 out of 20 years. This statutory rule applies regardless of the form of the settlement and even if the settlor is amomg the beneficiaries. In other words s/he can keep non UK assets outside the scope of IHT and still benefit from them. The planning is effective regardless of whether the settlor’s domicile subsequently changes to that of the UK.

This is what I call a ‘blessed route’ meaning it is totally approved tax planning having its foundations in long established thought through tax policy.

About Robert Schon

In 2017 I will I have worked in the area of UK tax law for 40 years. Throughout I have had an interest in non dom planning. I worked in the City for 30 years before setting up this business in 2005 to offer advice on those areas of tax law that mean the most to me. These include tax and estate planning for my local community.