Inheritance Tax Rule Changes

Effective estate planning can safeguard your wealth for future generations

If you want to have control over what happens to your assets after your death, effective estate planning is essential. After a lifetime of hard work, you want to make sure you protect as much of your wealth as possible and pass it on to the right people. However, this does not happen automatically. If you do not plan for what happens to your assets when you die, more of your estate than necessary could be subject to Inheritance Tax.

The rules around Inheritance Tax changed from 6 April this year. The introduction of an additional nil-rate band is good news for married couples looking to pass the family home down to their children or grandchildren, but not every estate can claim it.

Bereaved families

This tax year, according to the Office for Budget Responsibility, more than 30,000 bereaved families will be required to pay tax on their inheritance[Note 1]. So, it pays to think about Inheritance Tax while you can and work out as soon as possible how much potentially could be taken out of your estate – before it becomes your family’s problem to deal with.

An Inheritance Tax survey conducted by Canada Life[Note 2] shows that Britons over the age of 45 are either ignoring estate planning solutions or they have forgotten about the benefits these can provide. Only 27% of those surveyed have taken financial advice on Inheritance Tax planning, despite all of them having a potential Inheritance Tax liability.

Leaving an estate

Every individual in the UK, regardless of marital status, is entitled to leave an estate worth up to £325,000 without having to pay any Inheritance Tax. This is known as the ‘nil-rate band’. Anything above that amount is taxed at an Inheritance Tax rate of 40%. If you are married or in a registered civil partnership, then you can leave your entire estate to your spouse or partner with no Inheritance Tax liability.

The estate will be exempt from Inheritance Tax and will not use up the nil-rate band. Instead, the unused nil-rate band is transferred to your spouse or registered civil partner on their death. This means that should you and your spouse pass away, the value of your combined estate has to be valued at more than £650,000 before the estate would face an Inheritance Tax liability.

Considered ‘wealthy’

You don’t have to own a very large estate or even be considered ‘wealthy’ to leave behind an Inheritance Tax bill. The nil-rate band has remained frozen at £325,000 since April 2009, but the average price of a UK property has risen 33% over the same period[Note 3].
With much of the UK population’s wealth invested in their property, a growing number of families are potentially being left with a significant Inheritance Tax bill to pay.

Residence nil-rate band

If you’re worried that rising house prices might have pushed the value of your estate into exceeding the nil-rate band, then the new ‘residence nil-rate band’ could be significant. From 6 April 2017, it can now be claimed on top of the existing nil-rate band. But claiming this new allowance is not as simple as it sounds. It can only be claimed by the estates of people on property that is, or was at some point in the past, used as their main residence and which forms part of their estate on death.

It’s only available to homeowners who plan on leaving their residence to ‘direct descendants’, such as children or grandchildren or step children. If you don’t have any direct descendants, or you wish to leave your home to someone else, the new allowance can’t be claimed.

Tapering effect

Anyone without a property worth at least £175,000 per person, or £350,000 per couple (in 2020/21), will only partially benefit. And, because the new allowance was intended to help ‘middle England’ and those who weren’t especially wealthy, the residence nil-rate band reduces for estates worth more than £2 million by £1 for every £2 above the taper threshold. Because of this tapering effect, there is a point at which claiming the allowance is ruled out completely.

Your estate may still be able to claim the residence nil-rate allowance even if you’ve already sold your home, for example, because you are in residential care or living with your children. If your home was sold after 8 July 2015 and you plan on leaving the proceeds to your direct descendants, then there are provisions in place that will allow your estate to claim the new allowance. However, this doesn’t apply to homes sold before 9 July 2015.

Planning ahead

If you plan ahead, certain gifts made during your lifetime could reduce the amount of Inheritance Tax payable on your death. In addition, the proceeds payable from any life insurance policies written in an appropriate trust will not form part of your estate and so will not further add to a potential Inheritance Tax bill.

Estate planning will enable you to maximise your wealth and minimise Inheritance Tax. Is it time for you to have a comprehensive review of all your assets and objectives and consider the tax-efficient solutions?

Source data:
[1] Office of Budget Responsibility, November 2016.
[2] Survey of 1,001 UK consumers aged 45 or over with total assets exceeding the individual Inheritance Tax threshold of £325,000 carried out in September 2016.
[3] Nationwide report: UK house prices since 1952.

Funding Future Care Costs

‘The tragedy of old age is not that one is old, but that one is young’

With the UK’s population ageing, more people will be living with long-term care needs. Oscar Wilde once said: ‘The tragedy of old age is not that one is old, but that one is young.’ But the good news of rising life expectancy also brings with it the challenge of how we fund our future care costs. The question is: who is responsible for looking after us if we need care in old age?

As we get older, it becomes more likely that we may need day-to-day help with activities such as washing and dressing, or assistance with household activities such as cleaning and cooking. This type of support, along with some types of medical care, is what is called ‘long-term care’.

A good life in old age

Demand for long-term care is expected to rise, thanks in part to our ageing population and the increasing prevalence of long-term conditions such as dementia. This makes planning ahead essential, but when it comes to funding later life it can get quite complicated, particularly since the costs depend on several unknowns, including how long we are going to live. The matter is further exacerbated because of how local authorities calculate whether a person needs financial assistance for the cost of residential care.

Level of state support

The level of state support received can be different depending on whether you live in England, Wales, Scotland or Northern Ireland.
In England and Wales, for example, currently you can receive means-tested state assistance, which depends on your savings and assets. For instance, if your savings and assets are above £23,250 in England, you will normally be expected to pay for the full cost of long-term care yourself.

Government state benefits can also provide some help, but may not be enough or may not pay for the full cost of long-term care.

Financial support assistance

Long-term care insurance can provide the financial support you need if you have to pay for care assistance for yourself or a loved one. Additionally, some long-term care insurance will cover the cost of assistance for those who need help to perform the basic activities of daily life such as getting out of bed, dressing, washing and going to the toilet.

You can receive long-term care in your own home or in residential or nursing homes.
Regardless of where you receive care, paying for care in old age is a growing issue.

Planning for long-term care

There are a number of different ways to fund long-term care. These are some of the main options available to people needing to make provision.

Immediate needs annuities

This annuity is a type of insurance policy that provides a regular income in exchange for an upfront lump sum investment. When used for long-term care, it provides a guaranteed income for life to help to pay for care costs in exchange for a one-off lump sum payment if you have care needs now. Income is tax-free if it is paid directly to the care provider.

Enhanced annuities

You can use your pension to purchase an enhanced annuity (also known as an ‘impaired life annuity’) if you have a health problem or a long-term illness, if you are overweight or if you smoke. Annuity providers use full medical underwriting to determine a more accurate individual price. People with medical conditions including Parkinson’s disease and multiple sclerosis, or those who have had a major organ transplant, are likely to be eligible for an enhanced annuity.

Equity release schemes

If you need to fund your long-term care and have already paid off (or nearly paid off) your mortgage, an equity release scheme could be one option to consider if appropriate. It is important to obtain professional financial advice before committing to an equity release scheme. Your individual circumstances need to be assessed, and this is why financial advice is a must in the process and a regulatory requirement.
These schemes give you the ability to obtain a cash lump sum as a loan secured on your home. However, it’s essential to make an informed decision and consider the options and alternatives available, plus any implications regarding state benefits, local authority support and tax obligations.

Savings and investments

These two methods enable you to plan ahead and ensure your savings and assets are in place for your future care needs.

If you are already retired, or nearing retirement, you should ensure that your financial affairs are in order – for example, arranging or updating your Will or Power of Attorney. It also makes sense to ensure your savings, investments and other assets are in order in the event that you or your partner may need long-term care in the future.

If you are of working age, you are in the best position to plan for your future care needs. Accumulating wealth through investments or savings while you are earning will help with the potential costs of long-term care in later life.

When planning for future care needs, what should you think about?
Who in your family may most need long-term care and for how long?
Do you or another family member need to make long-term care provision now?
Do you have sufficient money to pay for future long-term care fees?
How long might you need to pay for a care fees plan?
Is there the likelihood that home care or a nursing home may be required?
What activities may you require help with, for example, help with dressing, using the toilet, feeding or mobility?
Would your home require additional features such as a stair lift, an opening and closing bath, or a bath seat?

Please contact us if you wish to discuss any of the above.

Creativity in Finance

David Bowie’s estate planning could be a lesson to us all !

It’s fair to say there was no one else quite like David Bowie. He was truly one of a kind, and his music helped inspire generations of people throughout his illustrious career. However, it would now seem that he could become an inspiration when it comes to estate planning too.

Very few musicians enjoyed lasting careers as diverse, colourful and successful as Bowie. He remained fascinating and cutting edge until the very end in ways that extended far beyond making music.

Bowie passed away from liver cancer a mere two days after the release of his latest album, Blackstar. Knowing that his cancer was terminal, many people believe Bowie intended his last album – featuring lyrics about mortality – to be a farewell. In fact, the song ‘Lazarus’ begins with the line, ‘Look up here, I’m in heaven,’ and ends with, ‘Oh I’ll be free, just like that bluebird, oh I’ll be free, ain’t that just like me?’

Throughout the 1970s and ‘80s, Bowie reportedly struggled financially, even coming close to bankruptcy. He hints at his financial difficulties, again through the lyrics of ‘Lazarus’, singing, ‘By the time I got to New York, I was living like a king, then I used up all my money.’ Bowie married his second wife, Iman, in 1992 and moved to New York soon afterwards. A few years after that, he took control of his financial legacy through a move now considered to be revolutionary.

Bowie Bonds
With the help of investment banker David Pullman, Bowie sold a stake in his catalogue of music. Instead of selling the songwriting, performance and licensing rights to his many successful songs, Pullman helped Bowie create ‘Bowie Bonds’. Through these, Bowie sold – for $55 million – a 10-year investment which operated like an annuity, providing a fixed-rate of return of 7.9%. The payouts were secured by all of Bowie’s royalties and copyrights from his music.

Prudential Insurance Co. of America purchased the Bowie Bonds and was paid off in full during the ten-year time frame. This is despite the change in the music industry brought about by Napster and similar Internet-based music distribution, which dramatically reduced royalties available to songwriters and performers.

Financial creativeness
Pullman was recently interviewed about the financial creativeness that allowed Bowie to achieve security for the rest of his life. Pullman said Bowie did the arrangement not to protect himself but for the benefit of his family: his wife Iman; their daughter, Alexandria (who is now 15); and Bowie’s son from his first marriage, film director Duncan Jones. Pullman said that Bowie was interested in estate planning at a young age and wanted to make sure that his assets passed on to his family. He did the Bowie Bonds transaction both for tax savings and so that his estate would benefit from his music catalogue.
According to reports, Iman will likely receive the lion’s share of Bowie’s financial empire, which is estimated to be in the region of $200 million, before factoring in the expected spike in sales that inevitably occur when an iconic singer passes away. Bowie’s two children will also each receive substantial bequests.

Maximising the value of assets
At the time of going to press, the details of Bowie’s estate plan have not been made public. Given the reports about Bowie’s advanced planning and financial foresight, it is likely that he used one or more revocable or irrevocable trusts. If so, not only could Bowie have maximised the value of assets passing on to his heirs in the most tax-efficient manner permitted by law, but also his assets could pass privately without the public scrutiny that goes along with probate court. In other words, the public may never know the specifics of how Bowie’s assets will be distributed.

Many musicians fail to do proper estate planning, often relying only on a will, which becomes a public document once it is filed with the probate court after death. Or, even worse, many have no estate planning at all. The heirs of John Lennon, Jim Morrison and Kurt Cobain all went through messy estate battles that could have been prevented if those music legends had used the same foresight as David Bowie did.

Enter The Dragon

Views from investment company managers on China……

The Chinese New Year, also known as ‘Spring Festival’ in China, is China’s most important traditional festival. The 2016 Chinese New Year, ‘The Year of the Monkey’, commenced on Monday 8 February. Monkeys in the Chinese zodiac are ‘clever, mischievous and curious’, so we’ll have to see if this brings about a luckier year for Chinese financial markets.

Certainly, fund managers investing in China are proving sanguine. The Association of Investment Companies (AIC) has collated views from investment company managers on China, and one consistent theme is that the spectacular growth story of the past should not cloud judgement on the China that we see today.

Dale Nicholls, Manager, Fidelity China Special Situations said: ‘China continues to grow at a better pace than the developed world, and personal consumption is likely to outpace this rate of growth as the economy transitions towards a consumer-led market. I remain positive about the prospects for China. I consider it to be a market with great potential brought down by macroeconomic concerns over the short term. I would agree that the pace of reforms in China has been disappointing, and in some cases, such as currency depreciation, the timing and communication could have been better. Having said this, China’s decision to move towards a more flexible currency is a long-term positive. In my view there is potential room for positive surprises going forward, and this prevalent sentiment creates opportunities in areas such as A-shares, where I am finding some large-cap strong businesses at reasonable prices.

‘It is interesting to witness changes driven by increasing penetration of the Internet, particularly as a vehicle to reach previously untapped markets. For instance, while traditional retail networks have still to establish a rural footprint in China, e-commerce has already ensured that both goods and services are now accessible to a wider rural and middle-class audience. As people get wealthier, demand for better quality goods and services is also on the rise in areas such as health care and education. This is creating several opportunities for the fund.

‘I also think there are fewer reasons to worry about the Chinese property market considering overall affordability trends – recent interest rate cuts only help this, and the Chinese consumer balance sheet is in good shape. However, I remain concerned about corporate balance sheets in China, where debt has grown substantially. I also remain cautious towards banks, as I maintain that the full extent of their non-performing loans is not fully recognised.’

Howard Wang, Manager, JPMorgan Chinese Investment Trust said: ‘It’s important for investors to acknowledge and be comfortable with China’s slower growth. Many secular growth opportunities with strong multi-year prospects still exist across Chinese equities, especially in the “new economy” sectors of healthcare, Internet, consumption and environmental protection. We have long acknowledged the imbalances in China and the transition away from an industrial- and manufacturing-based “Old China” to a services- and consumption-driven “New China”.

‘Near-term sentiment will therefore remain volatile during this growth transition. While going through market corrections may not be a pleasant experience for investors, we do not believe the corrections are reflective of a wider deterioration in company fundamentals.’
Ian Hargreaves, Manager, Invesco Asia explains: ‘I have just returned from a research trip to China and found nothing to suggest that the economy is deteriorating at a more rapid rate than we have seen so far. Neither did I find any evidence of new factors undermining the resilience of the consumer and service sectors.

‘Concerns over renminbi (RMB) depreciation have contributed to recent market weakness. Unfortunately, the Chinese Government’s decision to change the RMB pricing regime so as to measure it against a trade-weighted basket – which we consider to be a sensible change – was poorly communicated, allowing talk of declining FX reserves and capital flight to heighten investor risk-aversion. The People’s Bank of China has now issued clearer guidance, although we should be braced for several months of large declines in reserves as Chinese companies seek to repay unhedged foreign debt. Furthermore, I expect that the RMB market will gradually stabilise, as China’s external position appears sound compared to many emerging market countries – foreign debt/GDP is low at 10%, while its trade surplus is currently 5% of GDP.

‘Of greater concern is the level of domestic debt-to-GDP in China, which is high and continues to rise. However, I believe we are still some way from reaching the banking system’s liquidity limits. This is important as it should buy some time for the Government to begin to deliver on its supply-side reform agenda, which many are sceptical about given the lack of progress in reducing overcapacity in recent years. Such scepticism may be too pessimistic, as we are starting to see some positive developments such as: moves by the Government to prepare for the social consequences of capacity closures; acceptance that some companies will have to go under; and evidence of action in the worst affected sectors like steel, coal and cement.

‘However, local governments have a leading role to play in this process, and there is still no clear way for them to be incentivised. Furthermore, progress in reform will do nothing to aid growth in the near term, although if the market believes action to be far-reaching enough then that could be positive for share price valuations. The challenge, as I have found with India in the last 18 months, will be judging what constitutes significant reform and what doesn’t.’

Mark Mobius, Executive Chairman, Templeton Emerging Markets Group and Co-Manager of Templeton Emerging Markets Investment Trust said: ‘We think the type of market volatility we have seen is likely to continue this year, and not only in China. Volatility is increasing in many markets, and it’s something investors will likely need to learn to live with. We view periods of heightened volatility with the lens of potential investment opportunities, allowing us to pick up shares we feel have been unduly punished. In the case of China, the Government’s efforts to maintain stability on the one hand and to allow a freer market on the other is a difficult balance to achieve.

‘That said, we are not terribly concerned about growth in China, nor its long-term investment prospects. We would dub current 2016 projections of about 6% in gross domestic product growth as quite strong, given that the size of the economy has grown tremendously in dollar terms from that of a few years ago when growth rates were stronger but with a smaller base. This is an aspect we think many investors may be missing when they see growth slowing. The fundamentals in China are still excellent, in our view. It is one of the fastest-growing economies in the world, even if the growth rate has decelerated.’

Ewan Markson-Brown, Manager of Pacific Horizon said: ‘China is amidst its great transition from an investment-led economy to a service-led economy, with services growth accounting for 80–90% of recent GDP growth (Sept 2015), which is being driven by the smartphone revolution that is allowing the online economy to boom. However, the cost of this technological disruption is severe and is creating permanent relative price destruction within the industrial and commodity sectors of the Chinese and the world economy. Currently, the market is focusing on the losers of this transition where the majority of the recent growth in Chinese debt has gone; we expect in time the market to turn back its attention to the long-term service-oriented winners.’

Financial Decisions

Flexibility to use your pension pot in the way that suits your needs

Working out how to make adequate financial provision for retirement is one of the most important financial decisions most of us will ever face. However, it can be a daunting topic, and the options may seem overwhelming. Over the past year, there has been a seismic change to the retirement landscape with the introduction of the Government’s ‘pension freedoms’.

These reforms – announced in the 2014 Budget and extended this year – give you the flexibility to use your pension pot in the way that suits your needs, with the aim of creating better financial outcomes for you and your family.

As long as you are over the age of 55, you have unlimited access to any Defined Contribution (DC) pension pot – to save, spend or invest as you see fit.  For many people, retirement now represents an opportunity to realise life-long ambitions, pursue new passions or help family members with their income needs.

Understanding the options
There is no easy answer or ‘one-size-fits-all’ solution, so it is important to understand the options. You do not have to choose just one option, and you may find that a ‘mix and match’ approach is the most appropriate for your situation.

Leave your pension pot untouched
You may be able to delay taking your pension until a later date. Your pot then continues to grow tax-free, potentially providing more income once you access it.

Use your pot to buy a guaranteed income for life – an annuity
You can choose to take up to a quarter (25%) of your pot as a one-off tax-free lump sum, then convert the rest into a taxable income for life called an ‘annuity’. There are different lifetime annuity options and features to choose from that affect how much income you would receive. You can also choose to provide an income for life for a dependant or other beneficiary after you die.

Use your pot to provide a flexible retirement income – flexi-access drawdown
With this option, you take up to 25% (a quarter) of your pension pot or of the amount you allocate for drawdown as a tax-free lump sum, then re-invest the rest into funds designed to provide you with a regular taxable income. You set the income you want, though this may be adjusted periodically depending on the performance of your investments. Unlike with a lifetime annuity, your income isn’t guaranteed for life – so your investments need to be managed carefully.

Take small cash sums from your pot
You can use your existing pension pot to take cash as and when you need it and leave the rest untouched where it can continue to grow tax-free. For each cash withdrawal, the first 25% (quarter) is tax-free, and the rest counts as taxable income. There may be charges each time you make a cash withdrawal and/or limits on how many withdrawals you can make each year.   With this option, your pension pot isn’t re-invested into new funds specifically chosen to pay you a regular income, and it won’t provide for a dependant after you die. There are also more tax implications to consider than with the previous two options.

Take your whole pot as cash
Cashing in your pension pot will not give you a secure retirement income.

You could close your pension pot and take the entire amount as cash in one go if you wish. The first 25% (quarter) will be tax-free, and the rest will be taxed at your highest tax rate – by adding it to the rest of your income.

There are many risks associated with cashing in your entire pot. For example, it’s highly likely that you’ll be subject to a significant tax bill, it won’t pay you or any dependant a regular income and, without very careful planning, you could run out of money and have nothing to live on in retirement.

Mixing your options
You don’t have to choose one option when deciding how to access your pension – you can mix and match as you like, and take cash and income at different times to suit your needs. If you wish, you can also keep saving into a pension and get tax relief up to age 75.

Which option or combination is right for you will depend on:

  • When you stop or reduce your work
    Your income objectives and attitude to risk
  • Your age and health
  • The size of your pension pot and other savings
  • Any pension or other savings your spouse or partner has, if relevant
  • Whether you have financial dependants
  • Whether your circumstances are likely to change in the future



One of Life’s Unpleasant Facts

Protecting your assets to give your family lasting benefits in an uncertain world

Inheritance Tax (IHT) in the UK is a subject that was once something that only affected very wealthy people. It may be one of life’s unpleasant facts but today it affects more people than ever, partly due to the rise in the property market that has not been matched by a corresponding rise in the IHT threshold.

Taxing times
The threshold is currently just £325,000 – any assets above this level are taxed at 40%. Married couples and registered civil partners have a joint estate of £650,000 before any IHT is payable. The threshold usually rises each year but has been frozen at £325,000 for tax years up to and including 2017/18. Unmarried partners, no matter how long-standing, have no automatic rights under the IHT rules.

Your estate consists of all the assets you own including your home, jewellery, savings and investments, works of art, cars, and any other properties or land – even if they are overseas.
It’s usually payable on death. But there are certain circumstances (if you put assets into certain types of trusts, for example) when IHT becomes payable earlier. Any part of your estate that is left to your spouse or registered civil partner will be exempt from IHT. The exception is if
your spouse or registered civil partner
is domiciled outside the UK.

Nil rate threshold
Every individual is entitled to a ‘Nil Rate Band’ (that is, every individual is entitled to leave an amount of their estate up to the value of the nil rate threshold to a non-exempt beneficiary without incurring IHT). If you are a widow or widower and your deceased spouse did not use the whole of his or her Nil Rate Band, the Nil Rate Band applicable at your death can be increased by the percentage of Nil Rate Band unused on the death of your deceased spouse, provided your executors make the necessary elections within two years of your death.

Gifting it away
You are allowed to make a number of small gifts each year without creating an IHT liability. Remember, each person has their own allowance, so the amount can be doubled if each spouse or partner uses their allowances. You can also make larger gifts, but these are known as ‘Potentially Exempt Transfers’ (PETs) and you could have to pay IHT on their value if you die within seven years of making them.

Any other gifts made during your lifetime which do not qualify as a PET will immediately be chargeable to IHT and these are called ‘Chargeable Lifetime Transfers’ (CLT).

Gift With Reservation
If you make a gift to someone but keep an interest in it, it becomes known as a ‘Gift With Reservation’ and will remain in your estate for IHT purposes when you die. For example, if you gave your son your house, but continued to live in it without paying a market rent, it would be considered a Gift With Reservation. But if you continued to live there and paid him a market rent each month, it would become a Potentially Exempt Transfer and move out of the IHT net, provided you survived for seven years. However, your son would be liable to pay income tax on the rent he received.

Where the total amount of non-exempt gifts made within seven years of death plus the value of the element of your estate left to non-exempt beneficiaries exceeds the nil rate threshold, IHT is payable at 40% on the amount exceeding the threshold.

This reduces to 36% if the estate qualifies for a reduced rate as a result of a charity bequest. In some circumstances, IHT can also become payable on the lifetime gifts themselves – although gifts made between three and seven years before death could qualify for taper relief, which reduces the amount of IHT payable.

Exempt gifts
Some gifts you make during your lifetime are exempt from IHT. If you make a transfer to your spouse, this will always be exempt as long as they have a permanent UK home.
Your executors or legal personal representatives typically have six months from the end of the month of death to pay any IHT due. The estate can’t pay out to the beneficiaries until this is done. The exception is any property, land or certain types of shares, where the IHT can be paid in instalments. Then your beneficiaries have up to 10 years to pay the tax owing, plus interest.

Taper relief
Taper relief applies where tax, or additional tax, becomes payable on your death in respect of gifts made during your lifetime. The relief works on a sliding scale. The relief is given against the amount of tax you’d have to pay rather than the value of the gift itself. The value of the gift is set when it’s given, not at the time of death.

Write a Will
This is the first step in making effective plans. Whilst making a Will on its own does not reduce IHT, a Will makes sure your assets go to the people you choose quickly and with minimum effort. It also helps you to identify areas where you could take other action. If you die without a Will, your estate is divided out according to a pre-set formula, and you have no say over who gets what and how much tax is payable.

You need to keep your Will up-to-date. Getting married, divorced or having children are all key times to review your Will. If the changes are minor, you could add what’s called a ‘codicil’ to the original Will. This is a document which can have the effect of making small amendments to your original Will.

Many people would like to make gifts to reduce IHT but are concerned about losing control of the money. This is where trusts can help. The rules changed in 2006 making some of them less tax effective, as a small minority will require you to pay IHT even before you have died, but if appropriate they should still be considered.

Life cover
If you don’t want to give away your assets while you’re still alive, another option is to take out life cover, which can pay out an amount equal to your estimated IHT liability on death. Make sure you write the policy in an appropriate trust, so that it pays out outside your estate.
Policies written on a joint life second death basis – paying out when both of the couple are dead – can be the most cost-efficient way of mitigating an IHT liability.

On your death
When you die, your estate has to be distributed one way or another. If you have a Will, your executors have to gain a Grant of Probate in England and Wales or Northern Ireland (a Grant of Confirmation in Scotland). If there’s no valid Will, or the named executors in the Will are unwilling or unable to carry out their duties, a Grant of Letters of Administration is needed. This is known as ‘dying intestate’.

What could happen if you don’t write a will?
The government lays down strict guidelines on how money is to be paid out if you die without making a Will. These could mean that a long-term unmarried partner ends up receiving nothing and the Crown gets all your estate.


Pension Freedom

The most radical reforms this century

In Budget 2014, Chancellor George Osborne promised greater pension freedom from April next year. People will be able to access as much or as little of their defined contribution pension as they want and pass on their hard-earned pensions to their families tax-free.

For some people, an annuity may still be the right option, whereas others might want to take their whole tax-free lump sum and convert
the rest to drawdown.

Extended choices
‘We’ve extended the choices even further by offering people the option of taking a number of smaller lump sums, instead of one single big lump sum,’
Mr Osborne said.

From 6 April 2015, people will be allowed full freedom to access their pension savings at retirement. Pension Freedom Day, as it has been named, is the day that savers can access their pension savings when they want. Each time they do, 25% of what they take out will be tax-free.

Free to choose
Mr Osborne said, ‘People who have worked hard and saved all their lives should be free to choose what they do with their money, and that freedom is central to our long-term economic plan.’

From 6 April 2015, people aged 55 and over can access all or some of their pension without any of the tax restrictions that currently apply. The pension company can choose to offer this freedom to access money, but it does not have to do so.

Accessing money
It will be important to obtain professional advice to ensure that you access your money safely, without unnecessary costs and a potential tax bill.

Generally, most companies will allow you to take the full amount out in one go. You can access the first 25% of your pension fund tax-free. The remainder is added to your income for the year, to be taxed at your marginal income tax rate.

This means a non–tax payer could pay 20% or even 40% tax on some of their withdrawal, and basic rate taxpayers might easily slip into a higher rate tax band. For those earning closer to £100,000, they could lose their personal allowance and be subject to a 60% marginal tax charge.

Potential tax bill
If appropriate, it may be more tax-efficient to withdraw the money over a number of years to minimise a potential tax bill. If your pension provider is uncooperative because the contract does not permit this facility, you may want to consider moving pension providers.

You need to prepare and start early to assess your own financial situation. Some providers may take months to process pension transfers, so you’ll need time to do your research.

Questions to ask
It’s important to ask yourself some pertinent questions. Are there any penalties for taking the money early? Are these worth paying for or can they be avoided by waiting? Are there any special benefits such as a higher tax-free cash entitlement or guaranteed annuity rates that would be worth keeping?

If you decide, after receiving professional advice, that moving providers is the right thing to do, then we can help you search the market for a provider who will allow flexible access.

Importantly, it’s not all about the process. You also need to think about the end results.

Withdrawing money
What do you want to do with the money once you’ve withdrawn it? You may have earmarked some to spend on a treat, but most people want to keep the money saved for their retirement. Paying off debt is usually a good idea.

If you plan just to put the money in the bank, you must remember you will be taxed on the interest. With returns on cash at paltry levels, you might be better keeping it in a pension until you need to spend it. Furthermore, this may also save on inheritance tax.
Finally, expect queues in April 2015. There’s likely to be a backlog of people who’ve put off doing anything with their pension monies since last year. Those who get through the process quickly and efficiently will be the ones who’ve done the groundwork.

Care Fees Burden

It’s a fact THAT more of us will require specialist care in our later years

Today, the cost of care is a major concern for many people, with the average level of pension savings unlikely to be enough to cover any long-term care requirements in addition to providing a retirement income.

Catching people off guard
So why is care fee planning catching so many people off guard? Well, besides the fact that few of us like to think of ourselves going into long-term care in our old age, there are a number of other reasons. As we can now expect to live for 20 or 30 years beyond our selected retirement age, it becomes more likely that we will need specialist care in our later years.
Moreover, research compiled by the Institute and Faculty of Actuaries shows that while life expectancy has been increasing, healthy or disability-free life expectancy for both men and women has not nearly kept pace, leaving more people needing long-term care.

The need for care fee planning
Estimates are that one in three women and one in four men aged 65 today are likely to need care.

Even more relevant for long-term care is the number of over-85s, which is expected to more than double in the next 20 years[1].

Meanwhile, incidences of dementia are rising. It is forecast that the number of people in England and Wales aged 65 and over with dementia will increase by over 80% between 2010 and 2030, to 1.96 million[2].

These individuals will all need specialist care. As it stands, the average cost of dementia care per person is more than the average UK salary. In 2008, dementia cost the UK economy £23 billion – more than the costs of cancer and heart disease combined[3].

Introducing a cap on care costs
Under the Government’s new Care Bill, a cap on care costs will be introduced to prevent people paying more than £72,000 towards their own care. But while the care cap offers a safety net that will prevent some individuals from facing significant care costs, it will not replace savings as the key means of paying for care.
The cap only applies to local authority-set care costs – it does not take account of daily living costs or top-up care costs. With or without government support, it makes sense to plan for the unforeseen cost of care, not least because there is no specific savings product for care home fees. If you are not yet retired, start by drawing up a financial plan which includes the potential cost of care.

Allowing you much greater freedom
The good news is that this year’s Budget changes allow you much greater freedom as to how you utilise your pension savings, enabling the money to be used for other purposes. Even if you end up not needing the money, saving something extra into your pension for the possibility of long-term care will mean the added bonus of a bigger pension pot.

You could also choose to use your annual New Individual Savings Account (NISA) allowance for this purpose. You will have instant access to your savings when you need it, which you can draw tax-efficiently.
These can help ensure you have a regular income that can help with the burden of care fees while not eating into your original capital.

[1] Office for National Statistics, 2013.
[2] Lords Select Committee on Public
Service and Demographic Change, 2013.
[3] Carers UK, 2012.

New Intestacy Rules aim to make things Simpler and Clearer

Why the consequences could be far-reaching for you and your loved ones

Significant changes to existing intestacy rules came into force on 1 October 2014 in England and Wales, with the aim of making things simpler and clearer. The consequences could be far-reaching for you and your loved ones, and while there are increasing entitlements for surviving spouses and registered civil partners, the changes highlight the importance of making a Will to ensure your wishes are carried out.

Radical rule changes
From 1 October 2014, the Inheritance and Trustees Powers Act 2014 radically alters the way in which the assets of people who die intestate are shared among their relatives. The biggest change will affect married couples or registered civil partnerships where there are no children. In the past, the spouse received the first £450,000 from the estate, with the rest getting split between the deceased’s blood relatives. Under the new law, the surviving spouse will receive everything, with wider family members not receiving anything.

Life interest concept abolished
Couples who have children will also be affected by the changes. Previously, the spouse of the deceased received the first £250,000 and a ‘life interest’ in half of the remainder, with the children sharing the other half. Under the new rules, the life interest concept has been abolished, with the surviving married partner receiving the first £250,000 and also half of any remainder. The children will receive half of anything above £250,000 and will have to wait until they are 18 to access any funds.

No protection for couples
These changes go some way to improving the position for married couples and registered civil partners. However, they still leave couples who are not married or in a registered civil partnership with no protection. Where an individual in an unmarried couple dies without a Will, their partner is not entitled to receive any money from their estate.

Distributing assets tax-efficiently

The changes therefore highlight again how important it is to make a Will to ensure that your wishes are followed and that assets are distributed tax-efficiently. Wills are also often used to express a preference for who should act as guardians for minor children in the event that parents die.

If a person dies without leaving a Will, the chances are that the estate will be distributed in a way that the deceased would not have wanted. This can have very real and distressing consequences, as well as unanticipated inheritance tax costs.



Safeguarding your Family’s Lifestyle

The numbers show a significant protection gap exists for families in the UK

W e all want to safeguard our family’s lifestyle in case the worst should happen. But only a quarter (24%) of adults in the UK with children under 16 have any form of financial protection, a significant drop from 31% in 2013, according to the latest research from the Scottish Widows Protection Report. With over half (54%) of this group admitting that their savings would last just a couple of months if they were unable to work, a significant protection gap exists for families in the UK.

Real challenges for households
Almost half of households (46%) with children under 16 are now also reliant on two incomes, and a further 14% of this group state that parents or grandparents are dependent on their income. There would be real challenges for these households if one income were lost.

Childcare costs are another area that can be impacted by the loss of one parent’s income, equally so if grandparents could not continue to provide support. With more parents working and with increasing childcare costs, up 27% since 2009[1], 40% of those with children under 16 rely on their parents to help with free childcare.

Following the death of a parent
While some government support is available in times of need, the current state bereavement benefits and support system is based on marriage or registered civil partnerships and doesn’t yet replicate the modern family we see today. Unmarried couples and long-term partners are left in a welfare grey area – particularly when it comes to looking after their dependent children following the death of a parent.

People are realistic about the support available, with only 1% of those with children under 16 believing the state would look after their family if something were to happen to them. 45% of this group also believe that individuals should take personal responsibility for protecting their income through insuring against the unexpected happening to themselves or a loved one.

[1] Family and Childcare Trust – Childcare Costs Survey, 2014.