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Inheritance tax planning

Inheritance tax planning. Helena Luckhurst Partner, Speechly Bircham LLP. . . . . . . TAX CASE STUDY. About Speechly Bircham. Speechly Bircham LLP is a leading City of London law firmServicing private clients, business clients and clients in the real estate, construction and engineering sectorThe largest private client practice in LondonRated by Chambers Global 2009 among top ten private client groups in the worldWinners of the 2009 Private Client Law Firm of the Year" award from Spear's Wealth Management Survey.

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Inheritance tax planning

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    1. Inheritance tax planning  Chair: John Porteous Head of Distribution, Macquarie Banking & Financial Services Group (UK) Helena Luckhurst Partner, Speechly Bircham LLP

    2. Inheritance tax planning  Helena Luckhurst Partner, Speechly Bircham LLP

    3. About Speechly Bircham Speechly Bircham LLP is a leading City of London law firm Servicing private clients, business clients and clients in the real estate, construction and engineering sector The largest private client practice in London Rated by Chambers Global 2009 among top ten private client groups in the world Winners of the 2009 “Private Client Law Firm of the Year” award from Spear’s Wealth Management Survey

    4. Objectives To remind you why Inheritance Tax (IHT) planning matters To enable you to spot opportunities to add value to your clients and your business To teach you tips and tricks to give you the edge To cement your status as your client’s trusted adviser

    5. Why does IHT planning matter? IHT Nil Rate Band (NRB) frozen at Ł325,000 until 5 April 2015 – Budget 2010 Increasing pressure on families to conserve family wealth for future generations Effective rate of IHT on family wealth increases as each generation passes

    6. Threats to the estate The 40% tax: IHT in one generation The unlimited tax: IHT in all generations Up to 80% IHT on domicile mismatch Up to 85% IHT and US estate tax The 50% loss: divorce The 100% loss: long-term care fees The 100% loss: disputes, incapacity, new relationships, spendthrifts, mid-management

    7. Case Study: The Richards family

    8. Mr and Mrs Richards’ assets Pension and other income = Ł90k net p.a.

    9. Mr and Mrs Richards’ concerns IHT Maximising any opportunities to save tax and pass more to all their heirs Protecting their estate against the threats of divorce and other risks from their children’s life

    10. Current wills

    11. The Richards’ TNRB Mr Richards will leaves all his assets to Mrs Richards On Mrs Richards’ death: Claim unused part of Mr Richards’ NRB Calculate the unused part M > VT E x 100 NRBMD

    12. The Richards’ TNRB: but what if…? …Mr Richards’ Will leaves his NRB to the children? …Mr Richards makes a gift of Ł100K capital to David 5 years before his death? …Mr Richards gives his half share of their buy-to-let to the children? …Mr Richards invests Ł200K of his cash into a Discounted Gift Plan and dies 3 years later? …Mr Richards is entitled to the income from his sister’s 1995 will trust?

    13. How times change! PRE OCT 2007 you may have said to the Richards: “make sure you use the first-to-die’s NRB” “make sure each of you owns assets in excess of the NRB” NOW you would say to the Richards: “DON’T use up any of the first-to-die’s NRB!” “you don’t have to equalise your assets” “do you need the income from that will trust?”

    14. TNRB and Wills: what’s best? The Richards’ Wills leave everything to each other after the first death. Is that the best Wills for the Richards? or

    15. IHT planning using Wills The best Wills for married couples: Preserve the TNRB wherever possible Save IHT on the family home Take the family wealth outside the IHT net long term Beware the second marriage IHT ‘trap’!

    16. Our Wealth Protector Wills

    17. The Instant Home Saver

    18. How does the Instant Home Saver work?

    19. The Instant Home Saver: benefits An immediate IHT saving of Ł95,000 minimum Immediate IHT saving of Ł95,000 (based on 15% devaluation of Theresa’s retained interest (worth Ł1,575k) 92% of the TNRB preserved IHT savings increase if the house increases in value No CGT if house is sold Entitlement for spouse to occupy or downsize

    20. The Leveraged Loan Plan

    21. How does the Leveraged Loan Plan work?

    22. Leveraged Loan Plan: benefits Immediate IHT saving + growth in half the house to the children free of IHT Immediate IHT saving of Ł48,000 (based on 15% devaluation of Theresa’s retained interest (worth Ł800k)) 92% of the TNRB preserved Further IHT saving of Ł368,000 on growth of deceased’s share of house in NRB Trust No CGT if house is sold Entitlement for spouse to occupy or downsize

    23. What happens on the death of Mrs Richards? Leave on a flexible discretionary trust This enables further wealth protection, tax and investment planning

    24. The discretionary trust in Mrs Richards’ Will Advantages Avoids 40% IHT on every death Protects wealth from many threats Controls succession planning Disadvantages Costs? Ten year and exit charges

    25. The Super Wealth Protector

    26. Tax planning with the family home Traps to be wary of: IHT: Gifts with reservation of benefit Income Tax: Pre owned assets tax Capital gains tax: Disposal / loss of main residence relief? Stamp duty land tax: Sales or transfers subject to mortgage

    27. Tax planning with the family home SHARED OWNERSHIP ARRANGEMENTS e.g. The Richards want to help look after the grandchildren - and be looked after in their old age. The Richards buy and renovate a large house which is big enough for the whole family to occupy. After taking advice, the Richards give 50% to their two children. or Charles divorces. Life was much easier when he lived at home so he comes back home….and stays! After taking advice, the Richards transfer 50% of their home to Charles.

    28. Shared ownership arrangements: what’s required? A gift by the donor Max 50% share? The donor and donee occupying together No requirement to occupy ‘as the family home’ No definition of ‘occupation’ for IHT purposes Can occupy more than one property Physical use required Personal possessions stored, equivalent to exclusive use Access at any time Donor receives no benefit (other than a negligible one) provided by donee as a result of the gift Best if donor continues to pay all bills on property

    29. Tax planning with the family home RENTAL STRATEGY The Richards have surplus income. Each of them decide to give a share of their home worth in total no more than Ł650K into trust for the children. They are the trustees. An open market rent for the share given to the trust is calculated, which they pay to the trust. As the Richards live in an old pile which would need modernising to let for the best rent and as they retain responsibility to insure and maintain, the rent is affordable.

    30. Tax planning with the family home Mr Richards has died. You weren’t their financial adviser until recently so they died with simple Wills! Mrs Richards phones you in a blind panic on the first anniversary of his death, to the day. The IHT bill on the house on my death is going to be huge – what can I do? I’m getting married to Mr Smith next month! What should I do?

    31. Lifetime gifts Not all gifts are equal! Gifts of capital to individuals Exemptions Potentially Exempt Transfers (7 year survival period required) Gifts of capital to most trusts Chargeable Lifetime Transfers Gifts of income only Structured carefully, these can be immediately exempt from IHT

    32. Normal expenditure out of income: IHT exemption What gifts qualify for this exemption? Gift is part of normal expenditure Made out of income Donor left with sufficient income to maintain usual standard of living Habitual pattern of giving: HMRC view - at least 3/4 years Evidence commitment to pattern of gifts at outset Do not allow income to capitalise! Keep careful records: On death, this exemption must be claimed and proof given (IHT form 403)

    33. Normal expenditure out of income: use trusts Give surplus income into trust: retain control Structure carefully: multiple trusts

    35. Thanks to our headline sponsors

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