Inheritance Tax Strategy 6 - Use Your "Business Property Relief"

Business Property Relief is usually abbreviated to “BPR”.

1.           The basic principles are:

              a.           Sole traders get 100% BPR on their business and its assets. (100% relief means no tax to pay at all, whether on a lifetime gift or at death.)

              b.           Partners get 100% BPR on their share of the business. (Even members of Limited Liability Partnerships get this relief.)

              c.           All shareholdings in unquoted companies get 100% BPR. Shares which are traded on the Alternative Investment Market are unquoted for this purpose, so you’re still OK to claim BPR on them.

              d.           Partners get 50% BPR on assets owned by them personally but used by the partnership. (50% BPR, of course, means you pay tax on half of the value of the assets.)

              e.           Controlling shareholders (only) get 50% BPR on assets owned by them personally but used by the company.

              f.            Controlling shareholders of PLCs get 50% BPR on their shares (although if you control a PLC you are one of a very rare breed).

              g.           Generally there’s no actual need to work for the business, or be actively involved in management. The fact that you are a financial backer (such as a sleeping partner or an inactive shareholder) can be enough to get you BPR.

              h.           Everybody is denied BPR on the investment element of the business, so part of the claim will be rejected if the business holds assets such as lots of cash, stockmarket investments, or properties which are let.

              i.            You generally need to have had the business interest in question for over two years to get any BPR.

             

2.           These rules are very generous compared to taxes we’ve had in the past. There’s a good chance that this won’t last. Tax plan now.

3.           You need to be quite careful to ensure that what your business does really is business, as distinct from letting or investment. A business which is chiefly based on rental income, for example, isn’t a “business” in the “business property relief” sense of the word. 

              Just to emphasise the effect of my points 3 and 1(h):

              i.            if the business is mainly investment or letting then you don’t get any BPR at all, on any of it (even the non-investment/letting part); but

              ii.           even if you do get BPR on the business as a whole, it’s refused on the part of the business’s value that is attributable to investment/lettings.

4.           Gifts of your business assets are likely to have capital gains tax consequences. Make sure that any tax plan takes into account the impact of both taxes.

5.           In the case of a lifetime gift, there is a particular trap to watch out for, in the “clawback” rules. These kick-in if BPR is claimed, but the assets in question stop being eligible for BPR by the time the giver dies. These force you to go back and recalculate inheritance tax as if BPR had never been available in the first place, which of course could be a disaster.

6.           The single most important thing in estate tax planning for people whose assets potentially qualify for BPR, is to ensure the BPR is “used” (not “wasted”). It can be used in two ways: firstly by passing the business directly on to a lower generation (e.g. children/grandchildren) or secondly by putting the business onto a First Death Discretionary Trust. BPR gets “wasted” by leaving the business outright to the surviving spouse. The reason this is a waste is that you have used two reliefs (business property relief and the spouse exemption) against the same assets when either one would have done, in consequence of which the surviving spouse has got richer. Then, the surviving spouse can live on for many years, eventually retiring and selling-out of the business, then dying with a huge wodge of cash to be taxed at 40%.

              So if you only take one message from this posting, then it’s this one, which I will set out in big bold lettering for you:

              DON’T WASTE YOUR “BPR” WHEN YOU DIE!!!

7.           This final point isn’t so much a strategy in its own right - more an important problem to be aware of.

              When you sell a business, you are turning an asset (the business) which potentially qualifies for 100% BPR - making it tax free - into another asset (cash) which is going to be taxed in full at your death. There is action you can take to deal with this problem, so you should be sure to take advice on the point before you start negotiating any sale. 

Rysaffe Planning

NOTE: Since I posted the below (September 2012) the government have consulted on whether Rysaffe arrangements should be allowed to continue. At the time of this note (October 2013) no decision has yet been made. If you have these arrangements they could need review. Entering into them also needs to be considered more carefully. 


One of my more technical postings, dealing with a less-common piece of planning for people with larger inheritance tax problems

Discretionary trusts are a good thing once assets are inside them, for the reason that their assets are not owned by a human being and the trust cannot die, thereby never suffering the 40% “tax whammy” that inheritance tax represents. However such trusts are also a bad thing inheritance-tax-wise for several reasons:

a. There’s no exemption when you leave money to a discretionary trust (as there is, for example, when you leave money to a spouse or charity).

b. Giving money to a discretionary trust (indeed to most types of trust) in your lifetime is not a “potentially exempt transfer” like other gifts are: instead you have to pay half of the death-rate IHT right there-and-then upfront (that’s 20% of the amount you pay in, less the £325,000 “nil-band”) and you do not get this money back even if you survive for seven years. However if you do die within seven years you have to recalculate the tax and may have to stump-up some or all of the remaining 20% to make up the 40% death rate.

c. Discretionary trusts suffer “ten year charges” – inheritance tax on the value of the trust over the nil-band at rates up to 6% every ten years.

d. Discretionary trusts suffer “exit charges” – inheritance tax on the value of funds leaving the trust over the nil-band in between ten-year anniversaries, at rates up to 6%.

So, having found an acceptable way to get money into a discretionary trust, is there anything that can be done about items (c) and (d)? Yes, there is, if you plan in advance and if you consider the tax problem sufficiently serious to justify the costs. What you do is this: you establish, in your lifetime, a number of small discretionary trusts. By “small” I mean that the amount of money in them is small – usually £10 – but in all other respects they are full-blown trusts – you sign-up to trust deeds and appoint trustees who take office. The number of trusts you need is found by dividing the amount you want to settle onto discretionary trusts by the current nil band, rounding up. If you have £2million, for example, you need seven trusts. You create each of these trusts on a different day.

When you die, you make a gift of somewhere less than a nil-band to each trust, in your will. The advantage is that because each trust was established on a different day, it has its own nil-band. And, as I mentioned above, the ten year charges and exit charges are charged on assets over the nil-band. And that is likely to be nothing, or very little, if the trusts each start with less than one nil-band.

Is it Better to be Married?

I would never tell a client whether it is better to be married!

I do think, however, that it is legitimate to ask whether it is better, from an inheritance tax viewpoint, for a couple to be married. The answer seems to be “yes”, but I cannot find a very simple way of explaining it. The best I can do is to set it out arithmetically. Let’s imagine a couple who each own £2,000,000, and let’s start with the worst case scenario, which is that they are unmarried and leave everything to each other:

What has happened here is that the total inheritance tax they have paid, £1,872,000 is extremely bad news, and is actually MORE THAN 40% of their total assets, even though 40% is the tax rate. The reason is that some of this money has been taxed twice, once when he died and again when she died.

(Don’t worry about the detail of these calculations, by the way, just keep an eye on the “total tax” number!)

Being married does protect against some of that tax. For example, a married couple could do this:

The total tax has reduced to £1,340,000: which is still a lot of money, but does at least seem ‘fairer’ than the first example in the sense that the tax comes out at 40% of the taxable portions of the estates. The tax saving is over half a million pounds and, significantly, none of it was paid on the first death – it was all postponed until after both had died.

Can an unmarried couple achieve that same bottom-line figure? Yes, they can: for example by incorporating discretionary trusts in their wills:

This third example has the same bottom-line as the married couple achieved. Notice, though, that there is one significant difference. This time some of the tax, £670,000, was paid on the first death. An unmarried couple cannot shield that until the second death, as a married couple can.

Inheritance Tax Strategy 5 - Make Regular Gifts

A good way of saving inheritance tax is to give regular sums to the family, each year, using your inheritance tax exemptions. There are four exemptions within which you can give money away, and these are:

1.           The Annual Exemption.  You are allowed to give £3,000 per year away, free of tax.  If you did not use this exemption in the last year you are allowed to carry it forward, so in the first year of a scheme of giving you can give away £6,000.

2.           The Small Gifts Exemption. This allows you to give £250 each year to any number of individuals.  This is particularly suitable if you have lots of grandchildren, nieces, nephews etc. because you can give £250 Christmas presents to every single one of them and the money will be out of your inheritance tax estate straightaway.

              You need to be quite careful with this exemption, because the rules are quite strict. Taking just two examples:

              a.           If you give someone £3250, that is not a £3000 annual exemption plus a £250 small gift, as you might think. The balance over £3000 is potentially taxable.

              b.           If (having used up your annual exemption elsewhere) you give someone £300 then that is not a £50 gift plus a £250 small gift, as you might think. It is a £300 gift and will be taxed as such if you die within seven years.

             

              Basically, the small gifts exemption just doesn’t mix with the other exemptions.

3.           The Regular Gifts out of Income Exemption.  This is a very useful exemption because there is ABSOLUTELY NO LIMIT on the amount you can give away.  However, what you are giving away must be SURPLUS INCOME.  That is:

a.         it must be paid out of your income, not from your capital; and

b.         it must be surplus, meaning you must be left with enough income – after making the gift – to maintain your own usual standard of living.

              It is nevertheless a hugely useful exemption for those whose income exceeds their outgoings. It is more difficult to establish than the others, however, and it’s important to speak to your advisers to make sure you get it right.

4.           The Wedding Gifts Exemption. This is a fairly minor exemption. The following people can make IHT-free gifts to the happy couple, in the following amounts:

Parents: £5,000 

Other ancestors (e.g. grandparents): £2,500 

Anyone else: £1,000 

A party to the marriage: £2,500

Crucially, many people who set up schemes of giving assume, wrongly, that they should think of £3,000 per year as the upper limit of the gifts they make. This is wrong, and it can be demonstrated by an example. Let us suppose that a Mr. Smith has quite a large tax estate, which includes £100,000 in a deposit account. He is trying to decide whether to make regular gifts from that money. Let us also imagine that in the event he dies 10 years after making this decision.

In scenario 1 he decides not to make any gifts at all.  He suffers inheritance tax on £100,000 at 40%, which is £40,000.

In scenario 2 he decides to give away £3,000 each year.  This saves tax on £3,000 x 10 = £30,000, so he pays tax on £70,000, which at 40% is £28,000.

In scenario 3 he decides to make gifts of £10,000 each year.  The gifts from the first three years do not form part of his tax estate at all (because he survived 7 years after making them), and he is allowed to deduct £3,000 from each of the others.  He is therefore taxed on 7 x £7,000 = £49,000, on which tax at 40% is £19,600.

What you can see from the above three scenarios is that the larger the gifts you make, and the longer you live from the start of your scheme of giving, the bigger the tax saving will be.

Inheritance Tax Strategy 4 - Make Large Gifts

Technically, this strategy applies to most gifts in excess of £250, but obviously a small gift of that kind does not create much of a tax saving in your estate.  Much larger gifts, however, can have a considerable effect. 

Any large gift you make is known in technical language as ‘potentially exempt’ - meaning that it will be taxed if you die within seven years, but it has the potential to become exempt from tax if you survive the seven years.  (You’ll sometimes hear lawyers talk about a “PET”, which is an abbreviation of “Potentially Exempt Transfer”, and is usually just another way of talking about a large gift.)

For the very wealthy, this is the most important tax saving strategy.  There is no limit to the size of gift you can make (for example to your own children) and if you survive the seven years it will be tax free.

If the gift does eventually become taxable, because you die within the seven years, then it will be taxed on a sliding scale. This is called “taper relief”. If you survive three years from making the gift the rate of tax falls by a fifth, from 40% to 32%.  If you survive four years it is 24%, five years is 16%, and six years is 8%.  It is very easy to become misled by this sliding scale however.  If the original gift was within your nil band then the sliding scale will never apply to it.  It is only larger gifts which get this advantage. (If you’re interested, this is because it’s not the value of the gift that tapers, it’s the rate of tax that tapers: and the nil rate band gets its name because it’s taxed at “nil-rate” i.e. 0%. And however much you taper 0%, it is still 0%. People imagine, for example, that if they make a £100,000 gift and survive three years, they’ll be taxed as if they had made an £80,000 gift and therefore save tax on £20,000 from their death estate. But they are wrong. They have to survive 7 years for their saving: and of course if they do survive that long the gift is out of the tax estate completely.)

There is a school of thought which says that those with considerable wealth should give away to younger generations of the family as much as they can afford to give away, and as young as they are able to do it. However, this must be a matter for your personal choice, and it would obviously be wrong to make gifts which were not prudent or which left you exposed to financial difficulties later in your life.

There is no financial limit to Potentially Exempt gifts. You can gift fifty billion pounds tax free, if you have that sort of money lying around.

A WORD OF WARNING: It quite often happens that people with inheritance tax problems don’t have any assets to “tax plan” with, except those which they need for themselves. A good example of this is the widow who only has the house and a portfolio of investments, and she lives off the income which those investments produce. It is tempting to transfer the house and investments into the names of the children. The problem with this arrangement is the “gift with reservation” rule. This rule says that if you give something away, but continue to receive some benefit from it, then it stays in your tax estate. You’ve given away your financial security and have got no benefit whatsoever from it. You will be living for the rest of your life off the charity of your children, and in the event they may prove not to be as charitable as you hope. (If you need more advice about this problem, you might like to read a play called “King Lear”, which is available from most good bookshops.) That’s not to mention the horrendous consequences which would follow if one of your children died before you, or became divorced, or lost their mental capacity, or went bankrupt.

Inheritance Tax Strategy 3 - Give It To Charity

All money given to charity is completely free of tax.  If you give money to charity during your lifetime then it is out of your inheritance tax estate straightaway.

Every gift made to charity by your Will is deducted from your estate before the inheritance tax is calculated.

People who have no dependants and are able to leave their entire estates to charity naturally pay no IHT whatsoever.

Gifts to charity are particularly useful for those who would like to get rid of a very small IHT problem, or (at the other end of the scale) for those whose beneficiaries have lots of independent wealth of their own, and whose money might therefore be put to better use in the charitable sector.

Inheritance Tax Strategy 2 - Spend It

Spending your money on yourself during your lifetime is by far the most effective IHT-saving strategy.  Every pound you spend is money out of your estate straightaway, and (with inheritance tax at 40%) saves 40p in tax.  The Inland Revenue cannot challenge it.  There are none of the other tax complications you get with trusts.  You do not need to survive seven years like you do with a gift.  You do not need to fulfil any technical rules like you do to get Business Property Relief.  The money is out of your estate, and that’s all there is to it.

You have worked hard for your wealth and have earned it.  If you are in a position to enjoy it, then you should do so. Go on a cruise. Have your home adapted to suit your health needs.  Employ a companion, or a nurse. Buy depreciating assets like yachts and fast cars.  Go to live in an expensive hotel for the rest of your life.

Then think of all that money which you are not leaving to the taxman.

Anglo-Spanish Law Societies' Conference

Speaking at the Anglo-Spanish Law Societies' conference at the Law Society's Hall in London.

International: Emigration

This is the second of two postings on the international aspects of my field of law. The first, which I posted earlier today, dealt with non-England-&-Wales people who arrive, or buy a home here. This posting deals with England-&-Wales people who leave, or buy a second home abroad.

When an English person buys a home overseas, his or her affairs can become a whole lot more complicated, and need to be dealt with carefully. Misconceptions about the situation abound, and this posting attempts to separate some of the myths from the reality.

The biggest misconception I come across regularly is the assumption by ex-pats either:

a.    that because they are English, their assets will pass on their death under English law; or

b.    that because their assets are in (say) France, their assets will pass on their death under French law.

Actually both assumptions are wrong and, if you think about it, they are inconsistent with one another as well. The important thing is not to make any rash assumptions, and to take advice on the actual situation. The real rule is, I’m afraid, rather more complicated than either of the above, and it is that:

a.    immovable assets (a term which more-or-less means the same as “real estate” – land and buildings) pass under the law of the jurisdiction where the asset is situated; but

b.    movable assets (any assets which are not immovable) pass under the law of the jurisdiction where the deceased is domiciled.

A further complication is that many other jurisdictions do not have the same rule. This can lead to an overlap (England and the other jurisdiction both claiming that their law applies) or a gap (England and the other jurisdiction both claiming that the other law applies).

Domicile is important for another reason also: the UK charges the worldwide estates of its domiciliaries to inheritance tax, but it only charges the UK-situated assets of non-domiciliaries to inheritance tax. With tax at a flat 40% on all assets over £325,000, this can make a huge difference.

That brings us to the very important question: what does domicile mean? In summary:

a.    Everybody has one, and only one, domicile at any one time.

b.    When you are born, your domicile is the domicile of your father at the time of your birth (except that illegitimate children take their mother’s domicile). This is called a domicile of origin.

c.    The domicile of origin is “sticky” – if at any time you do not have another domicile then your domicile of origin prevails. This can produce odd results (since it is possible in theory for your domicile of origin to be somewhere you have never been!) but can also produce unfortunate results, from a tax viewpoint, especially for those whose domicile of origin is English.

d.    You acquire a new domicile by making a jurisdiction your domicile of choice. To do so you have to be physically residing there and have the intention of remaining there permanently. This question of intention is one of objective fact: merely declaring “my domicile is so-and-so” (e.g. in your will) is not nearly good enough, although it can certainly help. Many people have had their domicile successfully challenged by their families or by the tax authorities. There are a large number of factors, called “badges of domicile”, which judges use to establish what your true domicile is.

Next, we come to the deemed domicile rules. These are rules that keep you in the UK’s inheritance tax net for longer than would otherwise be the case, by saying that if you were:

a.    tax resident in the UK for 17 of the last 20 tax years; or

b.    domiciled in the UK at any time in the last three years;

then you will be treated as if you were a UK domiciliary for inheritance tax purposes.

One common problem, in my experience, is that the deemed domicile rules are better known than the actual domicile rules by international clients (and sometimes by their advisers) – and perhaps this is because they are easier to understand and are far less woolly. It is therefore very important to avoid the misconception that the deemed domicile rules are the rules: they are not – they are just a limited extension to the rules and they apply for one purpose only, namely to catch some people in the inheritance tax net who would otherwise escape it. Take care to avoid that misconception: deemed domicile can only entangle you in the net, it cannot release you from it; deemed domicile does not apply to any of the other taxes, only inheritance tax; deemed domicile has no effect whatsoever on succession or family law.

Throughout this article, “England” means “England and Wales”. The law of England and the law of Wales are the same in this respect: they are one jurisdiction, so moving across that border has no more effect than moving from Hertfordshire to Hampshire. However, it is not always widely realised that Scotland and Northern Ireland are different jurisdictions: so this article does apply to an English person who moves to either of them – the only real difference being that he or she will have moved to a jurisdiction which also has UK inheritance tax.

This problem – that somewhere which you or I might think of as one country is actually divided into several jurisdictions – is quite common. Each state of the USA is a separate jurisdiction, for example. So is each canton of Switzerland. Canada and Australia are divided into a number of jurisdictions. This can affect the points analysed earlier in this article quite considerably. For example, moving to the USA and intending to stay there permanently, but not settling on a particular state, cannot give you a new domicile of choice.

International: Immigration

This is the first of two postings on the international aspects of my field of law. The second, which I'll post later today, deals with England-&-Wales people who leave, or buy a second home abroad. This posting deals with non-England-&-Wales people who arrive, or buy a home here.

I like to start writing about legal problems by presenting a common misconception. So often, someone’s problem is not the one they think they have, and the solution is not the one they thought they needed.

In this case, I want to start by discussing “domicile”, which is the connecting factor for English succession law. (A “connecting factor” is the thing which connects a person to a system of rules: for example, I am not subject to any of the laws of China because I have no connecting factor. As a “resident” of England I am subject to its income tax rules. If I were a “citizen” of the United States I would suffer federal estate tax on my death. If my “nationality” was Spanish I could leave my worldwide assets under a Spanish will. In each of the preceding sentences the item in quotation marks is the connecting factor.)

One common misconception, in my experience, is that overseas clients, and often their advisers, are aware of a set of English rules called the “deemed domicile rules” – and in particular the rule which says that you are treated as domiciled in England after 17 years of tax-residence – and therefore assume that it requires a long period of residence in England to become domiciled here: that you cannot become domiciled on day one.

This thinking is wrong. The deemed domicile rules exist only to catch some people in the tax net who would otherwise escape it. It is far more important to look at the actual domicile rules first. This is especially important because domicile, as well as being the connecting factor to England’s succession law, is also the connecting factor to our inheritance tax. (Stated very briefly, a non-domiciliary who dies only pays inheritance tax on assets situated in the UK, while a domiciliary who dies pays inheritance tax on the entire worldwide estate.)

You become domiciled through (i) physical presence here, with (ii) an intention to remain permanently. As you can see, those two criteria could be fulfilled the day you get off the plane.

It follows that if you are a potential long-term immigrant, there are two things to deal with, before arrival:

The first is to establish whether you will be domiciled in England from the outset. It is usually tax-advantageous not to be domiciled. If you are to be “non-dom”, to use the common abbreviation, where is your domicile? What ties are you maintaining with that domicile? What are your plans to leave England? What evidence have you got to prove these things? 

The second is to divest yourself of non-UK situated assets before you become domiciled, or deemed domiciled, in England. This process can involve making gifts within the family, but more usually involves the creation of trusts, offshore, of a kind which will retain their UK-tax-free status even if their settlor (the person who created them) becomes UK domiciled later.

Domicile is not the connecting factor for all purposes. Sometimes mere presence or activity in England brings you within the scope of some of our laws (just as I would become subject to the criminal laws of China if I visited, even if I was only a tourist). Unlike inheritance tax, the connecting factor for income tax is “residence”. Residence is far more easily established than domicile. Living and working here for six months can be enough to make you tax-resident, for example.

It is therefore possible to be resident but not domiciled (“res-non-dom”) and traditionally that has been considered a charmed tax status: the UK tax residence probably (although not necessarily) preventing the res-non-dom from being taxed as a resident of anywhere else, but non-UK assets (often themselves, ideally, situated in offshore tax havens) only being taxed on the “remittance basis” – in effect, only on the income actually brought into the UK.

Unfortunately, as a result of some changes in recent years, the remittance basis is now only available in three circumstances, and all other res-non-doms are taxed on the “arising basis” – that is, effectively, on all their worldwide income (just like an English person):

1. during the first (approx.) 7 years of residence;

2. where the unremitted foreign income is less than £2,000 a year; or

3. where the taxpayer pays a £30,000p.a. “Remittance Basis Charge”. Paying this charge is entirely optional, so the decision whether to pay it turns on the level of unremitted foreign income. If the tax on that would be more than £30,000 then the charge is worth paying, otherwise it is not.

A final point about connecting factors is that they can lead to clashes with the laws of other nations. Let’s go back to our example of the Spanish national who can leave his worldwide estate by a Spanish will because in Spain “nationality” is the connecting factor. Suppose this man owns a house and a bank account in England. Do they pass under the Spanish will? Not necessarily. In England, “situs” (i.e. “where is the asset situated?”) is the connecting factor when it comes to land and buildings. So, Spanish and English law are already in conflict. As for the bank account, the connecting factor is “domicile”, which for all we know could be Spain or England or some third country. This generates another important “action point” for the client moving to the UK: to take advice on succession and estate planning, and to get wills (and trusts, if needed) in place in all relevant jurisdictions.

Barmaid Syndrome - More Technical Solutions

This is my third and final post in a series on the subject of "Barmaid Syndrome" – the fear a woman has that, after her death, her husband will re-marry, then die leaving everything to the new wife and nothing to the children. In my last post I considered some simpler solutions: (1) trusting the survivor and (2) paying the children upfront. Now, it's time to touch upon some more technically complex solutions.

Solution 3: Mutual Wills. Although what I'm about to say isn't strictly correct, the easiest way to understand Mutual Wills is to think of them as if they were a contract between two people, usually husband and wife, that once one of them has died, the survivor will leave his or her will intact. I don’t like mutual wills at all. Come to me asking for one and I will try to talk you out of it. They are inflexible, they don’t take account of the way things may change in the future, and they encourage court battles after you have gone. They are definitely the last choice solution. Having said that, Mutual Wills suit some families’ needs: and even if he grumbles your solicitor will be able to prepare them for you.

Solution 4: Life Interest. This is a type of trust that can go into your will, or you can set it up in your lifetime. Its terms are that the survivor (known as the life tenant) has the benefit of the estate while he or she lives, but after his or her death it belongs to the remaindermen, who are usually the children.

Be aware of the downside: the survivor only has an income interest – he or she can occupy real estate, or receive the interest/dividends from investments. He or she cannot touch the capital, or the proceeds of sale of real estate. Those are protected for the remaindermen. It follows that you have to be able to afford a life interest. If you impose one, then your spouse finds himself or herself short of money, there is a real risk that your estate will be challenged through the courts.

A final point is that if you go to a solicitor asking for a life interest trust, she will almost certainly suggest that you have something more complicated (such as a flexible discretionary trust, or a flexible IPDI, or both) instead. I won’t go into all the technicalities here, but you should check that you are achieving the same overall effect.

Inheritance Tax Strategy 1 - Don't Worry About It

No, I’m serious. Don’t worry about it.

If you just carry on with your life and do nothing about it, inheritance tax will not be payable until after you have died.

If you are a married couple, and you intend to leave everything to the survivor when the first of you dies, then no inheritance tax will be payable until both of you have died.

If your estate is large enough for inheritance tax to be payable, the people who you leave it to can still expect a substantial inheritance.

Inheritance tax really is somebody else’s problem.

Go ahead, enjoy yourself, don’t worry about it!

Ten Reasons Not To Give Your Home Away: 9 and 10 - Care Fees Problems

Perhaps more important than the two remaining problems is this thought: planning to protect your home from the burden of care fees is, in effect, planning to live in state-funded care for the rest of your life if you become ill. And the quality of that care is not necessarily very high. People of modest wealth may have no choice about this - but people of means should be thinking of ways to fund high-quality care, not planning to avoid it.

9.     The Deprivation Rule. The rules which assess how much a person must pay for their care say that the local authority have to include among your assets any assets which you have given away with the intention of avoiding the social services charge.

10.  Insolvency. Supposing you do go into social services care, and they assess you to pay more than you can actually afford to pay (i.e. because you have given your home away). Then you would in effect be bankrupt. And there is nothing to stop social services from actually bankrupting you. The advantage from their viewpoint is the ability to go back and set aside any gifts made in two years (or sometimes five years) before the bankruptcy, giving them a direct action against your children or the property itself.

A final thought is to consider what other assets you have. If your income or other capital exceed the local authority's contribution thresholds then you will have to pay for any care in full, anyway. A gift of your home in those circumstances might have exposed you to all the risks mentioned in my two previous postings, for no benefit whatsoever.

Barmaid Syndrome - Some Solutions

In a recent post, I introduced “barmaid syndrome” – the fear a woman has that, after her death, her husband will re-marry, then die leaving everything to the new wife and nothing to the children.

In this post I will examine some of the simpler solutions, and in a future post, I’ll finish off this topic by mentioning the more technical or complex solutions. (I have written this as if I’m writing to a wife, but husbands can have the same problems, with the same solutions.)

Solution 1: Trust the survivor. Reach an agreement with your husband, and have it set out in both of your wills. Then just carry on with your life, trusting and believing that your husband will stick to the agreement.

In reaching this agreement, try to respect the thought that if your husband does remarry, his new wife will have financial needs, which will have to be met, too.

Solution 2: Pay the children upfront. For the very wealthy, this solution is simplest and the best. Make gifts to your children now, while you are still alive. Or, set up your will such that the children get their inheritance on your death, even if you die before your husband. (You might want to couple these ideas with a trust if the children aren’t old enough to handle the money responsibly, yet.) Once you’ve done this, it doesn’t matter what your husband does, since you already know the children will be OK.

In my third post on this topic, I’ll deal with some more technical approaches. In the meantime, though, please think about “Solution 0”: Don’t even have the problem! For the very poor this is the best solution, and even some wealthy people like it. It works like this: tell the children that they will have to make their own way, without any expectation of money from you. Tell your husband that you trust him to do what is right, and that if he remarries you want him to make sure his new wife is provided for. Who knows: your family may be stronger for your refusal to let them be emotionally and financially dependent on you.

What is Probate?

Apparently "what is probate?" is one of the top ten "what is..." searches on Google in the UK. My assistant is writing a sensible article on the subject at the moment, explaining the problem for someone bereaved who might need to obtain probate. But I thought I'd devote a blog post to explaining the problem from a different angle. Because I think it's easier to understand what a grant of probate is, and why one is needed, if you look at things from the point of view of a bank.

Suppose that I own a bank. And that you have a million pounds deposited at my bank.

Now, suppose that one day, some guy walks into my bank and tells me that you have died, and that he is your executor, and I pay him the million pounds. Then the next day, you walk into my bank and ask where your million pounds is. I tell you that I paid it to a guy yesterday, because he told me you had died. And you point out that you self-evidently haven't died and demand that I pay out your million pounds again - which, of course, I have to do.

Or, imagine the same scenario, but this time you really have died, and the guy comes to me with your death certificate and I pay him the million pounds. Then, the next day another guy walks in with a copy of your will, pointing out that he is your executor and not the first guy, and that I must pay out the million pounds again to him.

Or, this time a guy comes into my bank with your death certificate and a will showing that he is your executor. So I pay the million pounds to him. Then the next day, another guy comes in and says he is your executor. When I protest that I've already paid the first guy, the second guy produces another will, dated later than the first will, revoking all previous wills and appointing the second guy as executor. So I have to pay out the million pounds again.

But suppose the first guy comes to me with a grant of probate. This time I can pay the first guy with confidence. Because the grant of probate is, in effect, an order of the court authorising me to pay estate money to the person named in it. And if it turns out that there is another guy out there with some kind of claim against your estate, he has to take it up with the person named on the probate. And not with me.

So that is why probates are necessary, really. It's not so much that they protect the executor or the estate. It's that they protect anyone who has to pay money to the estate: like the deceased's banker or stockbroker or the buyer of the house.

A FOOTNOTE: As you might imagine, doing what I do for a living, I could come up with an unlimited number of these one-guy then-another-guy scenarios. A lot of them would involve the first "guy" being, or claiming to be, your widow(er). And you may be thinking that if the first guy in each scenario is some kind of fraudster then my bank might be able to recover the million pounds from him. But he isn't necessarily a fraudster (in the real world, problems more often happen where there are genuine competing claims against an estate). Besides, if he really is a fraudster he might have disappeared off the face of the earth, as fraudsters often do.

AND A POSTSCRIPT: Nina Sampson's article, metioned above, appeared in London Business Matters, April 2012, Page 32.

Barmaid Syndrome - Introduction

“Barmaid Syndrome” is the fear a woman has that, after her death, her husband will drown his sorrows at the golf club, fall in love with the blousy barmaid, re-marry with her, then die leaving everything to the new wife and nothing to the kids.

The phrase “barmaid syndrome” was coined by Ralph Ray, one of the founders of STEP - the Society of Trust and Estate Practitioners. 

Where a husband has the “barmaid syndrome” problem, it used to be known as “coalman syndrome”. For the twenty-first century, I have suggested re-naming it “personal trainer syndrome”, but my idea hasn’t caught on, yet.

Any married woman with children might have a barmaid syndrome problem. However, the problem is more intense and real where yours is a second marriage. That’s because in a first marriage, your kids are his kids, too, so the risk of his deliberately leaving them in the cold is much less. (The worst risk in that circumstance is that he remarries then doesn’t bother to make a new will. In that case the new wife probably would grab the lot. I’ve said it before and I’ll say it again: whoever you are, you owe it to your family to make a will.)

With a second marriage, though, the problem is real. It’s at its most intense where the second marriage happened later in life, when both parties already had grown-up children of their own. In such cases the stepfamilies are often not friends, and do not even know each other particularly well.

Barmaid Syndrome is a tricky problem to deal with. There are emotional issues and legal issues, and they often don’t dovetail neatly. Although there are things you can do by yourself, ideally the couple should face the issue together, and reach a joint conclusion. Some possible solutions are discussed in future postings to this blog.

Ten Reasons Not To Give Your Home Away: 5 to 8 - Tax Problems

Continuing my series of reasons not to make a gift of your home, here are some tax problems.

For inheritance tax:

5.     The Gift With Reservation Rule. This rule says that if you give something away but continue to reserve a benefit in it (for example, by giving your home to your children and continuing to live in it) then you are inheritance-taxed at death as if you still owned the asset. (Of course, this is no worse than not making the gift in the first place - but it is the reason why the gift might not work.)

6.     Double Jeopardy. Remember that although the house is treated as part of your tax estate because of the gift with reservation rule, it in fact belongs to your children, and will be taxed as part of their tax estates if they die.

For capital gains tax:

7.     No PPR. Most people never pay capital gains tax on their home because of “principal private residence relief”. But if you give your home away, the owners, your children, are not the same people who reside in the property. So that relief is not available to them and they will suffer capital gains tax on an eventual sale.

8.     No uplift. If you hold onto any asset until your death, all gains made in your lifetime are wiped out. But if you gift the property in your lifetime that never happens - so your children eventually suffer capital gains tax on the whole gain in the property's value, from the date of the gift, until the date of the sale.