The Bible talks of the meek inheriting the earth, which inevitably led to the graffiti post script if it’s alright with you. A small and sensible consequence of the Conservative/Liberal pact means the meek and maybe not so meek will have to earn their own money and pay more Inheritance Tax on what passes down. The Tory proposal to increase the threshold to £1 million has been dropped which means hopefully tax rises will not have to be quite so high elsewhere. Lovely to inherit something from our parents and families, but if it is a choice between taxing people working to create wealth/jobs/businesses and letting people get hefty six-figure sums tax free, taxing the wealth creators seems barmy. Labour’s introduction of transferable nil-rate bands was puzzling at best and cynical at worst.
Inheritance Tax in the UK is a donor-based tax where the people giving the money away in a will for example, are liable. Other countries have a donee-based inheritance tax where the beneficiaries have to pay an inheritance tax. In the UK, everyone has their own allowance where the first £325,000 is taxed at 0% (hence the name nil-rate band) and any excess taxed at 40%. For any parents reading this, it is essentially your children’s problem, as it only arises when parents have passed away. Parents’ attitudes to Inheritance Tax fall into two distinct camps. A minority feel that they have paid their share of tax in their working lives and don’t want their beneficiaries to pay more tax on what they inherit, so may start giving assets away. This is generally effective after 7 years and has the charming label of PET or Potential Exempt Transfer.
Others say that the beneficiaries can sort this out themselves as they do not want to pay the insurance premiums. Sensible children might take out a policy for the Inheritance Tax amount where they pay the premiums and the parents are the lives insured. This ensures that a cash amount is available to pay any Inheritance Tax and can avoid selling assets which they might prefer to keep. Inheritance Tax has to be paid before probate.
An essential detail here is the place the policy concerned in trust, so that it is not counted as part of the parents’ estate. If this is not done, then the policy proceeds are added to the value of the estate and result in an increased Inheritance Tax bill. Have actually heard of cases where the adviser forgot to do this and it was only picked up later in a review by a better qualified one.
Another way of keeping money in the family is to set up a trust. The trustees are the legal owners while the children or grandchildren maybe, are the beneficiaries. Income from the trust for example, could be used to pay for private education. If the trust assets are rental properties then the rent may well have paid off the mortgage in say, 15 years. This is only likely to work if the mortgage is not more than 60 per cent of the property value and there no long voids or empty periods. Gifts of more than the nil-rate band currently £325,000, will result in an immediate tax penalty so a way to stretch any gifts to say, a family trust is to get a mortgage on the property concerned. If the property is worth £300,000 and you put a mortgage of say, £150,000 on it, the net gift is only £150,000 meaning you still have £175,000 of unused nil-rate band.
Problem here is that few lenders understand what a trust is with private banks being the main exception. When handling previous mortgage enquiries from people who had trusts, the most common reaction when phoning a lender was a stunned silence followed by “What’s that?” or “What do you mean by trust?” Even the lenders that do lend to trusts are pedantic and in a recent case, the sticking point after 2 months of dithering proved to be the age of the trustees, who were in the 60s and still working. This affected the loan term and margin over Bank Rate which might be offered.
The deal was already approved by an underwriter, but some bright sparks on the credit committee wanted a trust administrator too. They had previously asked for a legal opinion on whether the trust had powers to borrow which the client had to pay for. Had they bothered to open the trust document, they could have read this themselves on page 3. Asking now for a trust administrator was pure vanity, as the trustees concerned ran everything very easily and with an annual cost of several hundred pounds, was money which would have been better spent servicing or paying off the mortgage. What about making one of the children a trustee? Oh yes, what a good idea! Fingers crossed for the mortgage offer.
More cheerfully, feedback is always welcome and thank you Rob Worth http://www.worthsolutions.com/ for pointing that the epithet The Art of the Possible is from Bismarck http://en.wikiquote.org/wiki/OttovonBismarck who also gave us our Retirement Age of 65 http://www.georgeemsden.co.uk/2006/05/a-little-more-reality-returns-to-pensions/