inheritance tax planning in uncertain times dec 2010
DESCRIPTION
Inheritance Tax planning update and strategies December 2010TRANSCRIPT
Tax Planning In Uncertain TimesSwindells & Gentry
Robin Stevenson Duncan Orr
Ridgeview Wine Estate
8th December 2010
Agenda
Inheritance Tax – Background and Coalition position Calculating your Inheritance Tax liability IHT allowances (gifting) and Trust planning Objections to and risks with IHT planning Three simple IHT mitigation Strategies
o Reducing the IHT liability
o Funding the IHT liability
Bringing it all together Questions
New Partners
IHT been around for a long time
????- 1975 Estate Duty
1975-1986 Capital Transfer Tax
1986- date Inheritance Tax
Government Approach
IHT hasn’t really changed since 1986.
Prime target for a rethink?
Government Receipts
Inheritance Tax £2.4 Billion
Basic IHT ComputationTwo Occasions for IHT
First Gifts during lifetime
Note: Fall in value of estate, not value of gift!!
Gifts to individuals are Potentially Exempt Transfers – PET i.e. NO IHT if survive seven years!
Gifts to non-people (i.e. companies or trusts) are Chargeable Lifetime Transfers (CLTs) not PET’s i.e. Chargeable to IHTo 0% Nil Rate Band (£325,000)o 20% Lifetime rate (everything over £325,000)
Basic IHT ComputationTwo Occasions for IHT
Second
IHT on death
Gifts within previous seven years
Assets - What’s included? Everything!o 0% Nil Rate Band (if any left over!)o 40% Death rate
Simple IHT computationAssets at date of death
House £400,000Less Mortgage (£100,000)
£300,000Shares £100,000Other e.g. Savings £100,000
£500,000
£325,000 x 0% = 0%£175,000 x 40% = £70,000£500,000 £70,000 IHT Liability
Basic IHT comp
Transferable nil rate band Spousal exemption
What’s the difference ?
Make use of allowances Annual exemptions
o £3,000
Small gifts to same persono £250pa
Regular gifts out of incomeo Unlimited
Agricultural/ Business property relief (APR/BPR)
Marriage giftso £5,000 Parento £2,500 Grand parento £2,500 Spouseo £1,000 Anyone else
Gifts have to be outright gifts – watch out for GROB’S &
POAT!!!
See HMRC as a beneficiary
Inheritance tax can be cruel
Simple Family Trust
Settlors
Trustees
Beneficiaries
Basically two different kinds of trust
Discretionary Trusto Trustees decide when and what to distribute to the
beneficiaries, if anything at all!o Beneficiaries have no right to the income or the assets
Interest in Possession or Life Interest Trusto Trustees have to pass income to the beneficiarieso Beneficiaries have a right to the income.
Perhaps the trust might be a mix of the two!
Why a Trust? Protection of assets
o Trustees retain control, beneficiaries have limited rights.
o Divorce and bankruptcy of the beneficiary.
o Can also protects assets from settlor’s creditors.
o Gold diggers.o Immature beneficiaries.
From a tax point of viewo Forces an IHT charge. Not a
bad thing!o Rule change in 2006 –
A&M tax break stopped!o Taxed as a separate entity
from settlor and beneficiary.
o Discretionary Trust taxed at higher rate.
o Interest in Possession taxed at basic rate.
o R185 passed to beneficiary to declare on tax return.
Agenda Inheritance Tax – Background and Coalition position Calculating your Inheritance Tax liability IHT allowances (gifting) and Trust planning
Objections to and risks with IHT planningThree simple IHT mitigation Strategies
Reducing the IHT liability Funding the IHT liability
Bringing it all togetherQuestions
Barriers to IHT PlanningLoss of Capital – Are you happy to gift outright
sizeable sums?
Loss of Income – Can you afford or are you comfortable losing an income stream?
Lack of flexibility during lifetime – Advances to beneficiaries?
Complexity – Understanding?
Change of circumstances – Can you unwind?
Social Impacts of gifting
Divorce
Bankruptcy
Long Term Care
Three major Risks with IHT planningLegislative
• Change of Government• Change of Policy
Taxation • Trust Taxation• Change to BPR• 7 Year rule etc…
Investment • Orthodox Investment risk• Illiquid Assets
Three strategies to reduce your Inheritance Tax
liability
Strategy 1
Flexible Trust Planning
Why use a “Flexible” Trust
Control - Gifts (Potentially greater than £325K) where control and access (income) are required
Access – retain right and flexibility over future income stream
Tax Savings – Immediate IHT saving, Tax-free growth, further IHT after 7 years and No Income Tax on death
Simplicity – No probate req’d, cash to beneficiaries
Trust Planning (Mechanics)
Cash into Trust – Structure agreed
Immediate IHT saving e.g. Female, aged 73, 5% p.a. - £250K Trust….discount £128K…IHT saving £51K
Totally bespoke investment strategy
Regular Reviews
Yr 7 – Balance of Trust out of estate-£122KTrust ends – distribution before Probate
Investors Estate
In any year some, all or none of a reversion can be taken
Chargeable gain assessable at Settlor’s marginal rate of income Tax
No Income Tax on death
Postponement does trigger Tax events
£ £ £
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Year 2 Year 3 Year 4
Year 14Year 13
Year 6 Year 7Year 5
Year 9 Year 10 Year 11 Year 12
Year 8
Year 16Year 15
Year 1
££
£ £
Strategy 2
Investments qualifying for Business Property Relief
(BPR)
Business Property Relief (BPR)• Qualification can be complex• BPR available on “Relevant Business Property which
has been owned for 2 Years at the rate of 100%” (Inheritance Tax Act 1984 Sections 105 and 106)
Relevant Business Property includes:-
• The shares of an unquoted company which is undertaking permitted business activities.
• Permitted business activities includes trading but not investment
Why invest using BPR Strategies?
Gifting – Concerns re Bankruptcy & Divorce
Speed – Unlike gifts (7 Years) IHT free after 2 Years
Access – Liquidate and use if required
Control – No loss of asset
AIM Share Portfolio performanceNov’ 2004 – Nov’ 2010
66% drop!!!
“Lower Risk”Business Property Relief
Qualifying Investment strategy
Fund Structure:Limited Liability Partnership
• Care Hom
e• £2m
• Care Hom
e Operator
• Health
Club• £1.5
m
• Health
Club Operator
• Property Development
• £1.5m
• Property Developer
• Pub• £1m
• Pub • Oper
ator
• Two Hotel
s• £4m
• Hotel
Operator
• Subscriber 1• £50,000
• Other Subscribers
• £9,850,000
• Subscriber 2• £100,000
• XXX IHT Fund • Limited Liability Partnership
• £10m
• XXX Fund Management LP
(Manager)
• XXX Corporate Finance Limited
(Sponsor & Operator)
• Experienced operators (Business Managers)
Investment Strategy
Entrepreneur Funds
IHT LLP Funds
Safety cushion(at purchase)
Safety cushion‘Trading Uplift’
over time
Partnership agreement
Investment Example 1
Armley Developments LLP (“Armley”)
• Residential development three miles from Leeds city centre
• 12 two-bedroom flats completed January 2009
• To date 4 flats sold and 5 are tenanted on rent to buy
• Invested December 2008 to replace HBOS bank-facility
• Priority return of 9%
• IHT Funds’ exposure is now below 50% of value
Investment Example 2
Urban and Country Leisure (Warwick) LLP 19-letting bedroom poorly operated Thai themed bar restaurant in the centre of Warwick
Purchased property for £1.6m in May 2010 with a £900k (16-week) extensive redevelopment
programme which commenced in June 2010
Re-opening in October 2010 as an exclusive boutique B&B with a stylish and contemporary
steakhouse bar and grill on the ground floor
Property purchased as a joint venture with Urban and Country Leisure, who own and operate a
number of similar venues in central and southern of England
Purchase of property and all refurbishment works funded 80% by the Downing IHT Funds, 20% by
Management
Priority return of 8.4% pa and 50% of profits
Business Property Relief
Alternative “Lower Risk” Investment strategy
CAPITAL PROTECTIONEXAMPLE TRADE
90 Days
£100
180 Days£103£97
0 Days
CAPITAL PROTECTION
SUPPLIER RETAILERCREDIT INSURANCE
InvestorCompany
For illustrative purposes only
SUMMARY
Full Control - Investors retain full access and control over their money.
Quick - IHT exempt in just 2 years.
Simple - No complicated and expensive trust structures to set up and operate.
Income or Growth - Investors can choose growth or income up to 10% p.a.
Lower Risk – Aiming for capital preservation and predictable returns
FAST CONTROL
SIMPLE
INCOME
PROTECTION
Strategy 3
Use Life Assurance
Why use Life Assurance?
Simple and non-contentious
Can be used to cover all/part of any IHT liability
Can also cover gifts (7 years) e.g. (M) 72 + (F) 70 £100K - £2,000 p.a.
No loss of control of existing assets
Affordable – children assist with cost of premiums?
Instantly funds any liability
Life Assurance (Mechanics)
Policy that pays a guaranteed sum on death or 2nd death
Once underwritten/medically agreed, premiums and payout will not change
Policy placed in suitably worded bespoke Trust
Policy Proceeds paid out free of IHT and….
Proceeds paid before Grant of Probate
Example (Non – Smokers)Male – Aged 72 Female Aged 70
Annual Premium £6,700
Providing £250,000 of Life Assurance (G’teed)
Net benefit to beneficiaries£250,000
Assume £6,700 p.a. invested and returns 2% p.a. (Net)
15 Years later – Lump sum of £124,883
After 40% IHT – Net sum to beneficiaries £74,929 approx. 30%
of Life Assurance
Managing and organising your IHT
plan
Adviser value is in discussing, creating and reviewing a
comprehensive and robust overall strategy, not simply selecting a
product
Question Time
Robin Stevenson Duncan Orr [email protected] [email protected]
01825 763366 01323 894202