Home is where the Heart is?
Review meetings with clients are always interesting and a recent one raised the issue of mixed marriages or rather mixed domicile marriages which give Financial Planners, Solicitors and other professionals an interesting area of research. Where both spouses are British or both are non-British the rules are relatively simple. The so-called inter-spouse exemption in the UK whereby spouses can pass assets to each other with little concern, being a very useful tax planning tool. But where one is foreign, the situation is far less generous and more complicated. Here the upper limit on gifts between spouses is £55,000 which does not cover very much where property is concerned, and the rate for Inheritance Tax is 40 per cent.
Domicile is a question of fact. It can mean where you consider your permanent home or maybe where you intend to return when you retire – as the above heading says, where the heart is. Domicile for Inheritance Tax purposes is usually acquired when a foreigner has been resident in the UK for 17 out of 20 years.
British clients with overseas property e.g. a holiday home in Spain, will need to have their will notarised for it to be valid under Spanish Law or else do two wills, a UK one and a Spanish one. And trusts for example which orginate from the time of the Crusades, can be a very useful means of keeping wealth in the family for the benefit of future generations, have not been recognised in continental Europe since the time of Napoleon.
Thinking of the long term but in a different context, one lady farmer has managed to banish plastic bags from her town and has a vision of a world without oil http://www.dailymail.co.uk/news/article-1145431/Now-farm-help-teach-world-live-oil-says-woman-banished-plastic-bags-town.html giving the fascinating thought of the oil-producing states being reduced to penury as no wants their stuff. In another twist, her father actually encourages foxes which like grey squirrels are technically vermin, as part of his conservation work. While I have never seen one in the countryside, foxes are now a regular sight at night in town. Still keeping with nature, the final winter talk at my gliding club at Lasham www.lasham.org.uk on Saturday 28th March 2009 is on the subject of Owls with a demonstration.
An indication if one were needed, of how the mortgage market has changed comes in an e-mail from Scottish Widows Bank announcing its new lending criteria in their top of the range Flexible/Professional mortgage where the maximum loan-to-value is now 60 per cent compared with 110 per cent a couple of years ago. For those who can perhaps no longer afford their mortgage, there is now The Little Book of Redundancy http://www.cm-murray.com/Pages/LittleBookOfRedundancy.pdf
Another client meeting is helping a lady take her small pension in the best way to suit her circumstances. Her fund is far too small to provide her with any sort of decent income but the tax-free cash (Pension Commencement Lump-sum) will come in useful as her husband is about to have a major operation. The fund is just over the £16,500 Triviality Limit where you can take the whole fund in cash but get stung for Emergency Rate Income Tax. Fortunately, she has assets overeas which will provide enough income and she will have the support of her family there too. But looking at the annuity offered, the 3 per cent escalating one will take 17 years to catch with the level annuity, so in spite of my warnings about inflation she takes the level option.
Research for the above reminds of another client who got all his pension funds in cash and tax-free but the price was very heavy – he was terminally ill. A local solicitor had introduced him as a divorce case where he needed advice on how to pay off his ex. He could either sell his home and give his ex an agreed portion of the proceeds, or keep his property and take out a mortgage, giving her the mortgage amount. After deciding on the latter option, there was no response to phone calls or letters until about a year later. Trying one more phone call for luck, we finally spoke and about 20 seconds into our conversation he blurted out that he had terminal brain cancer. We better meet, I suggested and he came to my office the next day. Looking visibly paler and with a large horseshoe-shaped scar on the side of his head, he brought me up to date.
At our previous meetings, we had discussed critical illness cover. As my best quote was 3 times the cost of the same benefit obtainable through his employer, I suggested that he get the maximum cover via that scheme. This turned out to be £250,000, and it must have paid out shortly after the cover started.
His divorce was now settled but he had nearly £200,000 in two private pensions. He seemed quite relaxed, was obviously compos mentis but there was one question I needed to ask. Telling him that he did not have to answer if he did not want to….my question was, How long have you got? Without pausing, he replied that there was only a 50 per cent chance of his surviving the next 12 -18 months explaining that the problem with brain cancer is that if surgery is the treatment, it is very difficult to remove all the cancerous tissue and the doctors expected his brain tumour to grow back.
Taking benefits from a pension usually involves taking the tax-free cash and an annuity. Ordinary annuities are based largely on standard life expectancy so smokers for example, can get higher rates and people with serious illness enhanced rates. In this case, taking any annuity would have been grossly unfair to the client and HMRC allow the payment of the whole fund in cash without any tax penalty in exceptional circumstances, such as terminal illness or where life expectancy is around say, 12 months. Agreeing a fee for my time, and after weeks of unnecessary delay with me eventually having to take the file back from my colleague, his two pension funds were finally paid out. He died in a hospice a few months later.