Straight from the HMRCs Mouth

1
Straight from the HMRCs Mouth

• Lunchtime Lecture
• 8th November 2006
• Tom Ryan
• Compliance Training Manager
• IFG Financial Services Ltd

2
INHERITANCE TAX BUDGET 2006

• Nil Rate Band 285,000
• Big changes on IHT and Trusts
• Concessions on Pension death benefits given
  statutory force

3
BUDGET 2006

• Fundamental change to IHT on trusts
• What trusts it applies to
• What trusts it doesnt apply to
• Action on existing trusts
• Action with new trusts

4
BUDGET 2006 - BACKGROUND

• Consultation on the income tax/CGT treatment of
  trusts
• Ongoing since 2002
• Nothing on IHT

5
BUDGET 2006 - BACKGROUND
PRE-BUDGET

• Pet Regime
• Bare Trust
• IIP Trust
• AM Trust
• Pet Regime
• Bare Trust

• Discretionary Trust Regime
• Discretionary Trust
• Discretionary Trust regime
• IIP Trust
• AM Trust
• Discretionary Trust

POST-BUDGET
6
NEW TRUSTS NOT AFFECTED BY NEW RULES

• Created on death/during lifetime for a disabled
  person
• Life interest trust created on death
• Child entitled at age 18 (to 25) under deceased
  parents will/intestacy

7
LIFE ASSURANCE (FLEXIBLE) TRUSTS
PRE-BUDGET Premiums PETs Change of IIP
beneficiary PET Payment of proceeds No IHT if
paid to Trustees/IIP beneficiary
8
LIFE ASSURANCE (FLEXIBLE) TRUSTS
POST-BUDGET Premiums chargeable lifetime
transfers Change of beneficiary No IHT Payment
of proceeds to trustees No IHT Possible 10
year periodic charge Payment of proceeds to
beneficiary possible exit charge
9
GIFTS AND CLTs
20 on excess over NRB 7 year cumulative
total PETs excluded 5/99 5/06 But in
future virtually all gifts to trusts will be CLTs
10
CHARGEABLE LIFETIME TRANSFERS
Gifts to trusts and grossing up Settlor Settlor
300,000 303,750 HMRC 3,750 Trustees T
rustees IHT 3,000 HMRC 300,000
11
PERIODIC CHARGE

• Value of trust at 10 year anniversary
• Take account of settlors cumulative total before
  creating trust
• Take account of added property/related
  settlements
• Capital distributions on which tax imposed
• Maximum rate 6
• Use NRB at 10 year anniversary

12
EXIT CHARGE

• Property taken out of trust
• Tax on value of property removed from trust
• Tax rate to use
• in first 10 years, assumed recalculated
  hypothetical transfer at outset
• after 10 years, rate paid at last 10 year
  anniversary
• Rate increases for each quarter since the last
  periodic charge (1/40 39/40)

13
DISCLOSURE

• CLT if
• more than 10,000 in total in tax year
• causes 40,000 cumulative total to be exceeded on
  10 year basis
• Periodic charge
• Exit charge

14
INHERITANCE TAX

• Possible tax charges when -
• Money goes IN
• Money goes OUT
• 10th Anniversary

15
INHERITANCE TAX PLANNING THE PROCESS

• 1. Clarify the facts
• 2. Set out the position as things stand
• 3. Ascertain willingness/feasibility of estate
  reduction
• Lifetime based on assets available
• Wills
• 4. Equalise estates
• 5. Establish revised (post planning) liability
• 6. Arrange provision

16
ESTATE REDUCTION

• Lifetime or death
• In practice, the extent to which this can be
  carried out depends on assets and the taxpayers
  income needs.

17
IHT LIFETIME PLANNING

• CGT
• Control (via trusts)
• Access (GWR/POAT)

18
DEATH BENEFITS UNDER PENSION PLANS

• If Mr dies before retirement, the death benefits
  under the plan will probably go to Mrs.
  Potential increase in IHT liability on spouses
  death
• 40 x 400,000 160,000

19
Retirement Annuity Plans TRUST PLANNING

• Declare discretionary trusts
• 2 year survival rule
• Now in legislation

20
SPOUSAL BY-PASS PLAN
PPP BENS
IHT FREE

PERSONAL PENSION FUND
Loan/ Debt
WIDOW/ER
Widow/er
By pass trust - widow/er a potential
beneficiary
21
IHT AND TRUSTS THE NEW REGIME
22
ACTION

• Possible gifts outright or into trust (control)
• plans (compromise)
• Loan plan
• Retained interest
• DGTs

23
LOAN TRUST
Outside settlors estate
Growth above
over and o/s loan
B O N D
Loan (owed)
Settlor
5
Repayments funded by withdrawals - spend as
income and reduce estate
Outstanding loan at any time included in
settlors estate
24
LOAN TRUST BENEFITS

• Long-term IHT planning
• Full access to outstanding loan
• Tax free income
• Control
• Growth outside the taxable estate

25
DISCOUNTED GIFT TRUSTS
Cash into trust Bond
Settlors cash entitlement
Discretionary trust settlor excluded
No Gift with Reservation or Pre owned Asset Tax
26
PRIVATE RESIDENCE

• Difficult unacceptable(usually) for lifetime
  planning because of
• GWR
• POAT
• ACTION
• None! (in most cases) but in some cases

27
POSSIBLE IHT LIFETIME PLANNING WITH PRIVATE
RESIDENCE

• VERY LIMITED BUT
• Full market rent post gift
• Joint occupation
• Possible Will planning

28
WILLS

• Nil band being wasted
• Even if lifetime gifts made, Will trust to use
  nil band - spousal by pass revisited
• ACTION
• Use appropriate Will trust up to nil band
• EFFECT
• Tax saving up to 114,000
• Access for spouse can be maintained

29
THE SPOUSAL BY PASS WILL TRUST
Nil band 285,000
Deceased
SPOUSE
Loan/ Debt
WIDOW/ER
Widow/er
Trust (spouse a potential beneficiary)
30
PRIVATE RESIDENCE WITHIN WILL

• Half share to be given?
• Possibly use other assets first
• Care future CGT
• Care IIP
• BUT BUDGET 2006

31
MAKING PROVISION

• ACTION
• Last survivor (Joint Life) for appropriate SA
• Premiums transfers but
• Exempt (normal expenditure/annual exemption
  3,000)
• CLTs (to extent settled property increases in
  value).

32

• Sum assured tax free
• 10 year charges/exit charge? Not usually a
  problem
• Donees need to pay premiums? Fund from capital
  gifts?
• EFFECT
• Peace of mind!!!
• Flexibility with other assets

33
NOW IS AN EXCELLENT TIME TO REVIEW A CLIENTS
ESTATE PLANNING NEEDS
34
PENSIONS

• Scheme Pensions
• Alternatively Secured Pensions (ASP)

35
SCHEME PENSIONS

• Section 165 (4) and (6) Finance Act 2004
• Provides for Scheme Pension
• The scheme rules have to allow it
• The scheme must have the assets
• (This is SECURED INCOME)
• ? Run out of money ?

36
SCHEME PENSIONS

• Paid from Scheme, no annuity
• Like NHS, Teachers, Civil Service
• Boots, ICI, BT
• On death, spouse pension
• Then monies are kept in the fund to provide a
  mortality gain to all the other members

37
SCHEME PENSION

• Owned by trustees, not the individual
• No IHT
• HMRC have said that scheme pensions are intended
  to pay pension income, and NOT to provide tax
  favoured inheritances. They will decide on a
  case by case basis.

38
SCHEME PENSION

• 1.5M in fund at crystallisation
• 375K pension commencement lump sum
• 1.125M left to provide scheme pension
• On death 600 K in fund
• Distributed to other members in fund as usual

39
SCHEME PENSION

• HMRC could argue
• 525K paid out up to death as scheme pension
• Amount actually crystallised was NOT the whole
  fund
• Paid too much out as lump sum, 200K too much
• 40 tax charge, unauthorised payment charge 15,
  scheme sanction charge 15

40
SCHEME PENSION

• The remaining fund of 600K
• Deemed uncrystallised
• What if he is over 75??
• Another set of charges may arise.

41
ALTERNATIVELY SECURED PENSION(ASP)

• This is effectively drawdown for the over 75s
• Maximum income however is restricted to 70 of
  the normal drawdown rate, minimum is zero
• On death, what happens?
• Spouses pension, then when second spouse dies
  there will be a charge to IHT

42
ALTERNATIVELY SECURED PENSION(ASP)

• Example
• Will 350K
• ASP fund 100K
• Total 450K
• Nil rate band 285K
• 165,000 at 40 is 66,000
• Apportioned, from estate 51,333 and from ASP
  fund 14,667

43
ALTERNATIVELY SECURED PENSION(ASP)

• Whose estate does it belong to for IHT purposes
• Who took the fund into ASP gives you the answer.

44
ALTERNATIVELY SECURED PENSION(ASP)

• We have been told to expect something on ASP in
  the pre budget statement from Ed Balls at the
  Treasury
• He thinks ASP is being abused
• Only intended for those people who objected to
  annuitisation on religious grounds, the
  organisation is the Plymouth Brethren

45
ALTERNATIVELY SECURED PENSION(ASP)

• FSA said we had to ask clients their religion
• Then back tracked very quickly
• Evidence that it is being abused?? I have not
  seen any, doubt if Ed Balls has either
• Removing ASP? not an option in my view
• Only for certain religious groups? Also not an
  option
• The real problem is going into ASP and NOT taking
  an income

46
ALTERNATIVELY SECURED PENSION(ASP)

• If no income is taken, the fund is being
  preserved and that is what is not liked.
• There are even some people in the Treasury who
  still think annuities should be bought at age 75
  !!!
• Watch this space !!!

47
Straight from the HMRCs Mouth

• Any Questions ?