LIFE ASSURANCE

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Inheritance Tax, Wills and Houses
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INHERITANCE TAX, WILLS AND HOUSES
Paul Causton Partner Steele Raymond
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INHERITANCE TAX RATES
As from 6th April 2001
ESTATE VALUE 0 - 242,000
nil Over
242,000 40 (Death Rate)
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TAX PAYABLE
Examples
ESTATE VALUE TAX PAYABLE

300,000
23,200 400,000
63,200 500,000
103,200 1,000,000
303,200 5,000,000
1,903,200
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TAXABLE ESTATE
Assets Liable to IHT on death include

• Houses
• Contents Cars
• Investments, including PEPs and ISAs
• Cash
• Life Assurance Benefits
• Pension Death Benefits
• Foreign Assets (unless taxpayer domiciled abroad)
• Loans Due
• Trusts in which there is an interest in
  possession (inc life interest)

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NON TAXABLE ASSETS
Assets Not Liable to IHT on death include

• Pensions (in payment)
• Annuities
• Many Businesses and Farms
• Discretionary Interests in Trusts
• Woodlands

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EXEMPTIONS

• Gifts
• Between Spouses
• To Charities
• To Political Parties
• Are generally exempt during the lifetime and on
  death to an unlimited extent

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EXEMPTIONS FOR LIFETIME GIFTS

• 3,000 pa from capital per donor
• 250 pa per donee, no limit on number involved
• Normal expenditure from income which will not
  reduce usual standard of living
• Lump sums on marriage

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BUSINESS PROPERTY RELIEF (BPR)

• 100 Relief
• Sole Traders
• Partnership Interests
• Private Trading Company (inc AIM) shares
• 50 Relief
• Controlling Quoted Company Shareholdings
• Property, Plant or Machinery used by Partnership
  or Controlled Company

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AGRICULTURAL PROPERTY RELIEF (APR)

• 100 Relief
• Vacant Possession Farmland
• Occupied Farmland which can be recovered within 2
  years
• Tenanted Farmland let on or after 1/9/95
• 50 Relief
• Tenanted farmland let before 1/9/95

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MITIGATION TECHNIQUES
Insurance
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MITIGATION TECHNIQUES
Insurance
Lifetime Giving
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MITIGATION TECHNIQUES
Insurance
Lifetime Giving
Maximising Reliefs and Exemptions
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LIFETIME GIVING - TAX CONSIDERATIONS

• Inheritance Tax
• Exempt Gifts
• Potentially Exempt Transfers (PETS)
• Chargeable Transfers
• Who to Pay Tax?
• Other Taxes
• Stamp Duty
• Capital Gains Tax,
• Income Tax

7 years
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LIFETIME GIVING - OTHER CONSIDERATIONS
Donors Position
Donees Position
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TRUSTS

• Interest in Possession Trusts
• Potentially Exempt Transfers
• When to Use?
• Discretionary (ie Non-interest in Possession)
  Trusts
• Chargeable Transfers, except Accumulation and
  Maintenance Trusts
• When to use?
• Accumulation and Maintenance Trusts

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GIFTS WITH RESERVATION OF BENEFIT (GROB)

• Gifts with No Strings Attached, Now or
  Subsequently
• Partial Gifts Carving Out
• Permitted Benefits

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MAXIMISING RELIEFS EXEMPTIONS

• Business Agricultural Property Relief
• 100 Relief
• 50 Relief
• Qualifying Conditions
• Investing in Relief Property
• Maximising Values

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TYPICAL FAMILY WILL
Joint Estate 600,000
Husband Leaves All to Wife and Dies First
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TYPICAL FAMILY WILL - Estate 0f 600,000

• IHT on Husbands Death - NIL (Spouse Exemption)

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TYPICAL FAMILY WILL - Estate 0f 600,000

• IHT on Husbands Death - NIL (Spouse Exemption)

• IHT on Wifes Death - 143,200

eg 600,000 (242,000) Nil Rate Band
358,000 x 40 143,200
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ALTERNATIVE FAMILY WILL
Joint Estate 600,000
Husband Leaves 242,000 to Children and Residue
to Wife and Dies First
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ALTERNATIVE FAMILY WILL

• IHT on Husbands Death - NIL (Spouse Exemption
  and Nil Rate Band Gift)

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ALTERNATIVE FAMILY WILL

• IHT on Husbands Death - NIL (Spouse Exemption
  and Nil Rate Band Gift)
• IHT on Wifes Death - 46,400

358,000 (242,000) Nil Rate Band
116,000 x 40
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Husbands Estate
WifesEstate
HusbandDies First
Nil Rate BandGift intoDiscretionaryWill Trust
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DISCRETIONARY WILL TRUSTS - ADVANTAGES

• Enables Testator to Use Nil Rate Band on First
  Death
• Surviving Spouse May Benefit from Income /
  Capital During Lifetime from Trust
• Trust Fund Not Part of Surviving Spouses Estate
• Surviving Spouse can be a Trustee and Exert
  Control
• Trust fund can be Distributed after Surviving
  Spouses Death

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DEEDS OF VARIATION

• Variation of a Will or Intestacy within 2 years
  of death

IHT Election
CGT Election
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Flexible Trust of Residue

• Testator (after nil rate gift) leaves residue
• To wife for life
• But with overriding power for will trustees to
  alter the provisions
• Effect
• Residue is exempt (surviving spouse)
• Termination of wifes interest starts 7 year
  period running
• GROB rules do not apply so wife can continue to
  receive benefits e.g. under discretionary trust

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Flexible Trust of Residue - Example

• Husband and wife own 1,000,000 estate in equal
  shares
• Husbands Death NIL gift -
  Residue to wife
• Wifes Death Estate 500,000

258,000 758,000 (242,000) NIL
Rate 516,000 Tax at 40 206,400
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Flexible Trust of Residue Example (ctd)

• Husbands residue give wife interest in possession
• Interest replaced by discretionary trust after
  his death
• Wife survives 7 years
• Wifes Estate 500,000

(242,000) NIL Rate 258,000 Tax at
40 103,200 Saving 103,200
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The Home and Inheritance Tax

• The Essential problem
• Making a gift
• Not reserving a benefit

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The Home and Inheritance Tax

• Solution ?
• Pay a full market rent
• Often impractical
• Income tax absurdity

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The Home and Inheritance Tax

• The lease carve out strategy
• Lady Ingram has not killed this
• Owner (aged 75) grants a long lease at no rent to
  trustees for the family
• Lease 900 years at a peppercorn
  
• Starting in 20 years time

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The Home and Inheritance Tax

• The lease carve out strategy
• Effect
• Owner continues to live in house because of
  freehold ownership
• Freehold remains in the estate
• But diminishes in value
• Leasehold value escapes tax after 7 years
• In the meantime leasehold value increases

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The Home and Inheritance Tax

• The Loan Trust Scheme
• How to do it
• Owner creates trust on self for life (nominal
  capital)
• Sells house for full price to the trust
• But receives IOU in payment
• Gives IOU away (and survives 7 years)

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The Home and Inheritance Tax

• The Loan Trust Scheme
• Effect
• Owner lives in house under terms of the trust
• The value is in the IOU which drops out of the
  estate in time
• No CGT problems

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Inheritance Tax Wills and Houses