tag:blogger.com,1999:blog-31841638408197693372024-02-08T01:11:27.895+00:00Estate PlanningAndrew Joneshttp://www.blogger.com/profile/08777906986904853263noreply@blogger.comBlogger34125tag:blogger.com,1999:blog-3184163840819769337.post-30516665657359659102018-09-30T10:27:00.003+01:002018-09-30T18:38:59.438+01:00Toastmasters "FATCA" ProjectThis page isn't live yet, but it is where I intend to post the video of my Toastmasters "FATCA" Project, due to be given at the Cardiff Toastmasters on 3rd October 2018.<br />
<br />
In the meantime, here are a few resources:<br />
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<a href="https://en.wikipedia.org/wiki/Foreign_Account_Tax_Compliance_Act" target="_blank">FATCA on Wikipedia</a><br />
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<a href="https://www.irs.gov/businesses/corporations/foreign-account-tax-compliance-act-fatca" target="_blank">FATCA on the US Internal Revenue Service Website</a><br />
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<a href="https://www.gov.uk/government/publications/foreign-account-tax-compliance-act-registration-guidance-fatca/automatic-exchange-of-information-reporting-guidance" target="_blank">FATCA (and other AEOI agreements) on the UK HM Revenue and Customs website</a><br />
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<a href="https://www.step.org/sites/default/files/Policy/model1-intergovernmental-agreementv3.pdf" target="_blank">FATCA guidance from STEP</a> and <a href="https://www.step.org/sites/default/files/Policy/fatca-flowchart-iga.pdf" target="_blank">flowchart</a> (both PDF)<br />
<br />
Hugh James (Solicitors) Blogs on FATCA by Andrew Jones:<br />
<a href="https://www.hughjames.com/news/comment/2014/10/foreign-account-tax-compliance-act-fatca-trustees-must-take-urgent-action/" target="_blank">FATCA: Trustees must take urgent action</a><br />
<a href="https://www.hughjames.com/news/comment/2015/01/fatca-trustees-stand-now/" target="_blank">FATCA – Where Do Trustees Stand Now?</a><br />
<a href="https://www.hughjames.com/news/comment/2014/08/american-taxpayer-dont-know/" target="_blank">Are you an American taxpayer but don’t know it?</a><br />
<a href="https://www.hughjames.com/news/comment/2015/11/what-does-fatca-mean-for-real-people/" target="_blank">What does FATCA mean for real people?</a><br />
<br />Andrew Joneshttp://www.blogger.com/profile/08777906986904853263noreply@blogger.com0tag:blogger.com,1999:blog-3184163840819769337.post-52696967886750121952013-12-11T14:23:00.000+00:002013-12-11T14:23:50.617+00:00Is a Complicated Will Better Than a Simple Will?A potential client rang me with this fascinating question recently, having been advised by someone else to have a complicated will, and wanting a second opinion. <em>Is a complicated will better than a simple will? </em><br />
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To be more specific, he and his wife had been advised to have the kind of complicated will comprising two different types of trusts which I have blogged about before: see the ending of <a href="http://andrewjonesestateplanning.blogspot.co.uk/2013/09/inheritance-tax-strategy-8-tax-planning.html" target="_blank">this posting.</a> And he wanted to know whether that was better than simple wills which basically left everything to the survivor outright, failing which everything to the children equally, failing which grandchildren.<br />
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I suppose we need to start by asking what would make one will "better" than another. Clearly neither will could be described as better if it didn't achieve the client's objectives. So probably being better has to be defined in terms of whether it saves inheritance tax or not, and if so whether the saving would justify the other costs and consequences.<br />
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I'd also start from the position, which I feel sure most of my clients would agree with, that other things being equal, simple is better. <u>Because it just is</u>.<br />
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So the question turns, for me:<br />
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Firstly, on whether the client has a tax problem at all: married couples with estates below £650,000, for example, are almost certainly better served by a simple will.<br />
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Secondly, on whether the client has, or might have, assets which would be tax free on the first death, even if left to someone other than a spouse. Business assets, agricultural assets, substantial pension schemes and tax-efficient investments (such as AIM or EIS). In the absence of those, I'd say the simpler will still has the edge.<br />
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It does also raise the question (which I will save for another post) of the non-tax advantages of trusts.<br />
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<br />Andrew Joneshttp://www.blogger.com/profile/08777906986904853263noreply@blogger.com0tag:blogger.com,1999:blog-3184163840819769337.post-64755760701490010902013-10-06T12:24:00.000+01:002013-10-06T12:24:33.342+01:00Inheritance Tax Strategy 9 - Sort Out Your Pension
<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">Most people have pensions
for reasons unconnected to Inheritance Tax ("IHT"). Indeed, the whole concept of “a pension” is
completely unrelated to the idea of you dying and passing on your wealth. Just
the opposite: pensions exist to provide you with an income in retirement, for
as long as you live, and then (traditionally) they stop.<o:p></o:p></span></span><br />
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">Over the years, that has
changed: and especially since the so-called A-Day (6<span style="font-size: small;"><sup>th</sup> April 2006,
the date on which “pensions simplification” came into effect) pensions have
become regarded as a fairly flexible form of investment.<o:p></o:p></span></span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">There are two circumstances
in which a pension fund will pay out a lump sum on the member’s death:<o:p></o:p></span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">1.<span style="mso-tab-count: 1;"> </span><u>Death in service</u>: this is often a fixed sum
(sometimes, in occupational pension schemes, related to the member’s salary)
and usually in addition includes a return of the member’s contributions plus growth.<o:p></o:p></span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">2.<span style="mso-tab-count: 1;"> </span><u>The balance of the fund after retirement</u>: unless and
until the fund is annuitised (explained below) then the balance of the fund,
less any income already “drawn-down” and less any tax payable on the death, is
paid out as a lump sum.<o:p></o:p></span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">A pension which is
annuitised in the traditional way (i.e. the fund is cashed-in to buy an annuity
which pays a monthly income to the member (and widow(er), if relevant) until
death) ceases to be of interest to us from an IHT-planning viewpoint. That is
because there will be nothing left at the death to tax-plan with. The person
who wins most from annuitising his or her pension is the member who lives for
many more years than expected and keeps drawing the income. The person who
loses most is the heir of a member who dies very shortly after annuitising: who
gets nothing.<o:p></o:p></span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">So, where does inheritance
tax come in? The answer is that these lump sums paid out of pension schemes are
IHT free, provided that the pension fund trustees pay out the fund at their
discretion, and not to the member’s estate. (So it is important to check that the
fund is set up in this way, although most are. It is also important to
“nominate” your pension – that is, to tell the scheme’s trustees who to pay the
money to, if the worst happens.)<o:p></o:p></span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">You may be asking ‘if
there’s no inheritance tax, why did you say “...less any tax payable...” in
item 2 above?’ Good question. The answer is that when a member takes a pension
draw-down (which means that he or she didn’t annuitise the pension fund, but
instead left the fund intact and drew an income from it) he or she suffers <i style="mso-bidi-font-style: normal;">income tax</i> at 55% on the balance left in
the fund at death.<o:p></o:p></span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">So far, you may be thinking,
so good. We’ve had the problem with the income tax but, that aside, everything
seems positive. Certainly there are no IHT problems – on the contrary, it’s all
IHT free. And you would be right. But any tax advantage is also a threat: the
threat that you might fail to take advantage of it. In this case, for example,
what you might have done (in fact, I bet you did!) is to nominate your spouse
as the recipient of your pension lump sums. And gifts to spouses are IHT-free
anyway. So we’re back to the problem, mentioned a before on my blog, of
having used two tax reliefs where one would have done, and of bunching
everything into the estate of the survivor: an estate where it won’t <i style="mso-bidi-font-style: normal;">be</i> a pension fund any more, just a wodge
of cash to be taxed at 40% when the second death comes. And especially if it
suffered the 55% tax before the survivor received it, paying a further 40% on
the same money again is just adding insult to injury.<o:p></o:p></span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">So what do we do?</span></span></div>
<span style="font-family: Arial, Helvetica, sans-serif;">
</span><br />
<span style="font-family: Arial;">If you are in drawdown, your widow(er) could just stay in drawdown.</span><br />
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">The best answer is that you
put the death benefits into a discretionary trust. (There are two ways of doing
this: you either “nominate” a discretionary trust in your will to be the
recipient, or you actually “settle” your pension schemes onto one or more
trusts in your lifetime. The bigger the pot, the greater the advantage of the
second method.) The reason this works is the same as for the other first-death
discretionary trusts we have mentioned. The survivor has access to the pot if
needed, because the trustees have discretion to provide funds to him or her.
But the pot doesn’t belong to the survivor (it is “not in the survivor’s tax
estate” as we lawyers put it) and therefore is not taxed on his or her death.<o:p></o:p></span></span></div>
Andrew Joneshttp://www.blogger.com/profile/08777906986904853263noreply@blogger.com0tag:blogger.com,1999:blog-3184163840819769337.post-63305584422792553572013-09-29T17:21:00.002+01:002013-09-29T17:21:25.926+01:00Inheritance Tax Strategy 8 - Tax Planning in Wills<br />
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<b style="mso-bidi-font-weight: normal;"><span style="font-family: Arial, Helvetica, sans-serif;"><span style="font-size: large;">First Death
Discretionary Trusts<o:p></o:p></span></span></b></div>
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<o:p><span style="font-family: Arial, Helvetica, sans-serif;">I have blogged on this subject before (<a href="http://andrewjonesestateplanning.blogspot.co.uk/2013/05/first-death-discretionary-trusts.html" target="_blank">here</a>), and if you are new to the subject I'd recommend starting with that posting and then coming back here. Below, I explore some of the same ideas, in a bit more detail.</span></o:p></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">If you are a couple, then
you get a problem known as “bunching”. The first of you dies, leaving
everything to the survivor. The survivor then has all the assets bunched into
his or her tax estate, and is comparatively richer, and therefore more exposed
to inheritance tax. A better approach is for whichever of the couple dies first
to give away any items which will be tax free on that first death.</span></span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;"><span style="mso-bidi-font-size: 10.0pt;">If the couple can’t afford
to give away the assets in question outright (for example to the children), a
good approach is to create a discretionary trust, in the will itself, the terms
of which are that the survivor can benefit from it if need be. </span>The trust’s job is to take assets which would
otherwise have been inherited by the survivor, and instead hold them in a kind
of “cocoon” where they do not belong to the survivor, but can be made available
to the survivor if he or she has need of them. It is important that only
non-taxable assets go into them, however, since the trust itself is a taxable
beneficiary: if you inadvertently leave a taxable asset to it, you pay 40% tax,
unnecessarily, on the first death.<span style="mso-bidi-font-size: 10.0pt;"><o:p></o:p></span></span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">Under the old (pre-2008) rules, trusts of this kind were very
popular in wills, where they were usually called “nil-band discretionary
trusts”. <span style="mso-bidi-font-size: 10.0pt;">So, if
you have one in your wills already, the big decision is whether to keep it, or
to simplify the wills by removing it (i.e. simply leaving everything to each
other on the first death). My advice to clients on this point is that you don’t
<i style="mso-bidi-font-style: normal;">need</i> to remove it. It does no harm as
it is, at least from a tax viewpoint, because when the first death comes the
trustees can decide at that time either to implement the trust, or simply to
wind it up in favour of the survivor.<o:p></o:p></span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">The points to consider are:</span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">a. First death discretionary trusts are only there for
married couples and civil partners. If you are single, widowed or divorced they
are not for you. (But this doesn’t mean, necessarily, that I wouldn’t advise
you to have a discretionary trust in your will for some other reason.)<o:p></o:p></span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">b. You no longer need one of these trusts to take advantage
of two nil-bands, so a married couple (or civil partners) with total wealth
below two nil bands (2 x £325,000 = £650,000) really no longer have an
inheritance-tax problem. Therefore if you are in that bracket, you can ignore
(c), (d) and (e) below.<o:p></o:p></span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">c. You <u>do</u> need a first death discretionary trust if
your wealth includes:<o:p></o:p></span></span></div>
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</span><br />
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;"><span style="mso-tab-count: 1;"> </span>i.<span style="mso-tab-count: 1;"> </span>APR
assets (see <a href="http://andrewjonesestateplanning.blogspot.co.uk/2013_09_01_archive.html" target="_blank">Strategy 7</a>);<o:p></o:p></span></span></div>
<span style="font-family: Arial, Helvetica, sans-serif;">
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;"><span style="mso-tab-count: 1;"> </span>ii.<span style="mso-tab-count: 1;"> </span>BPR
assets (see <a href="http://andrewjonesestateplanning.blogspot.co.uk/2012/12/inheritance-tax-strategy-6-use-your.html" target="_blank">Strategy 6</a>); or<o:p></o:p></span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;"><span style="mso-tab-count: 1;"> </span>iii.<span style="mso-tab-count: 1;"> </span>a
pension fund (which I'll discuss in a future blog).<o:p></o:p></span></span></div>
<span style="font-family: Arial, Helvetica, sans-serif;">
</span><br />
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;"><span style="mso-tab-count: 1;"> </span>As you might expect, the bigger the size of your IHT
problem, and the bigger the size of those assets, the more worthwhile a
first-death discretionary trust is.<o:p></o:p></span></span></div>
<span style="font-family: Arial, Helvetica, sans-serif;">
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;"><span style="mso-tab-count: 1;"> </span>Alternatively, you can achieve the same tax effect by
doing anything else which gets rid of the non-taxables on the first death (such
as outright legacies to children or grandchildren).<o:p></o:p></span></span></div>
<span style="font-family: Arial, Helvetica, sans-serif;">
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">d. You <u>do</u> need a first death discretionary trust,
also, if you or your spouse (or both) have been widowed in the past. In that
case, clever use of the discretionary trust can allow you to claim not just
your own two nil-bands but ALSO the nil-band(s) of your former spouse(s). <o:p></o:p></span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">e. In the case of pensions, one or more trusts created in
lifetime might be needed, depending upon the amounts involved, instead of, or
in addition to, a will trust.</span></span></div>
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<b style="mso-bidi-font-weight: normal;"><span style="font-size: 14pt;"><span style="font-family: Arial, Helvetica, sans-serif;"><span style="font-size: large;">Spouses and
Civil Partners<o:p></o:p></span></span></span></b></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">In technical language, the types of discretionary
trust we have just been discussing are “relevant property trusts”. The <u>good
thing</u> about them is that they aren’t human beings and therefore they can’t
die, so once money is in one it can never suffer that 40% “tax whammy” which
this series of blogs is all about. The <u>bad things</u> about them are:<o:p></o:p></span></div>
<span style="font-family: Arial, Helvetica, sans-serif;">
</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">i. giving
money to one in your lifetime leads to an immediate upfront inheritance tax
charge at 20%: to use the technical terminology, it is a “lifetime chargeable
transfer”, not a “potentially exempt transfer” like other gifts are;<o:p></o:p></span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">ii. it
is not a spouse or a charity, so it’s a taxable beneficiary of your will, and
in the absence of other reliefs any money left to it will be taxed at 40%; and<o:p></o:p></span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">iii. it
suffers “ten-year charges” and “exit charges” at rates up to 6% - these will be the subject of a future blog.<o:p></o:p></span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">An alternative type of trust is called an “immediate
post-death interest” - usually abbreviated to “IPDI”. This happens where some
person is entitled to <i style="mso-bidi-font-style: normal;">income</i>, from
the date of the death. The <u>good things</u> about them are, firstly, that where
the beneficiary entitled to the income is a spouse or civil partner, the gift
to the IPDI is spouse exempt, and secondly, that there are no ten-year and exit
charges. The <u>bad thing</u> about them is that they are taxed in tandem with
that beneficiary’s inheritance tax affairs: which means they are added into the
beneficiary’s tax estate – and therefore taxed at up to 40% – on the
beneficiary’s death.<o:p></o:p></span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">So, armed with all that background information, we can
conclude:<o:p></o:p></span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">1.<span style="mso-tab-count: 1;"> </span>a.<span style="mso-tab-count: 1;"> </span>that leaving anything <u>non-taxable</u>
to a <u>relevant property trust</u> on the first death is <u>a good thing</u>,
because the “bad” consequences of doing so are fairly limited, and the good
consequence is that the money is protected from forming part of the
second-death estate, and therefore avoids the 40% tax; and<o:p></o:p></span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;"><span style="mso-tab-count: 1;"> </span>b.<span style="mso-tab-count: 1;"> </span>that leaving anything that will be <u>taxable</u>
to a <u>relevant property trust</u> on the first death is <u>a bad thing</u>
because we suffer 40% tax on it straight away, unnecessarily; and<o:p></o:p></span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">2.<span style="mso-tab-count: 1;"> </span>a.<span style="mso-tab-count: 1;"> </span>putting <u>non-taxables</u> onto an <u>IPDI</u>
would be <u>a bad thing</u>, because we are wasting the spouse exemption, and aggregating
those assets with the second death estate where they will [probably] eventually
suffer 40% tax; and<o:p></o:p></span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;"><span style="mso-tab-count: 1;"> </span>b.<span style="mso-tab-count: 1;"> </span>putting <u>taxables</u> onto an <u>IPDI</u>
is <u>a good thing</u> because we can use the spouse exemption to avoid tax on
the first death.<o:p></o:p></span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">So, in a big-money estate, that’s the best way to
structure the will on the first death. Two flexible trusts in favour of the
family as a whole, the first a relevant property trust for non-taxable assets,
the second an IPDI for taxable assets.<o:p></o:p></span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">And in a really complicated estate, one where you
honestly don’t know whether there will be BPR or APR assets, or what their
values might be, or whether all of them will get 100% relief or only 50%
relief, you do something which on the face of it looks simpler, namely to have
just one trust in the will, a fully discretionary one which takes everything.
Then, when the first death actually comes and you have a perfect picture of the
assets and their tax relief, the trustees of that trust “appoint out” an IPDI –
something they are allowed to do within two years of the death – of the taxables,
leaving a relevant property trust of the non-taxables.<o:p></o:p></span></div>
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Naturally, it doesn’t end there. You could still
have a potential second-death IHT liability on the assets of the IPDI and on
any assets owned by the survivor in his or her own name. That is where all the
other strategies mentioned in my blog come in. In particular, the trustees
of the IPDI need to think, on a regular basis, about whether they can afford to
use the “large gifts” strategy in favour of lower generations of the family,
without depriving the surviving spouse of assets he or she might need.</span><br />
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<span style="font-family: Arial;"></span>Andrew Joneshttp://www.blogger.com/profile/08777906986904853263noreply@blogger.com0tag:blogger.com,1999:blog-3184163840819769337.post-5659147933922751502013-09-28T09:14:00.001+01:002013-09-28T09:14:09.559+01:00Inheritance Tax Strategy 7 - Use Your “Agricultural Property Relief”
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<span style="font-family: Arial, Helvetica, sans-serif;"><b style="mso-bidi-font-weight: normal;"><span>
</span></b><span style="mso-bidi-font-size: 10.0pt;">Agricultural Property Relief
is usually abbreviated to “APR”.<o:p></o:p></span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">Agricultural assets are
often free of inheritance tax.<span style="mso-spacerun: yes;"> </span>The rules
are quite complicated, but very broadly:<o:p></o:p></span></span></div>
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<!--[if !supportLists]--><span style="font-family: Arial, Helvetica, sans-serif;"><span style="mso-bidi-font-size: 10.0pt;"><span style="mso-list: Ignore;">A.<span style="font-family: Times New Roman;"> </span></span></span><!--[endif]--><span style="mso-bidi-font-size: 10.0pt;">Farmers get 100% APR on farmland and buildings
which they farm themselves, if they’ve owned the land for 2 years. (100% relief
means no tax to pay at all.) <o:p></o:p></span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">B. Agricultural landowners usually get 50% APR on land which is tenanted by someone else, if they’ve owned the
land for 7 years.<b style="mso-bidi-font-weight: normal;"><i style="mso-bidi-font-style: normal;"><u> <o:p></o:p></u></i></b></span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">Remember that if you’re a
farmer you’re <u>also</u> in business, so Business
Property Relief is relevant to you, as well.<o:p></o:p></span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">There are lots of things I
could say about Agricultural Property Relief, but these are the highlights:<o:p></o:p></span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">1. You only get APR on the “agricultural value” of your land.
Agricultural value is what the property <i style="mso-bidi-font-style: normal;">would
be worth</i> if it were only ever used for farming. For example, imagine you’ve
got a farm which would be worth £1million to another farmer, but you’ve
actually obtained planning permission to build some houses on it, and you
intend to sell it for £2million to a developer for that purpose. The value is
£2million, but you only get APR on £1million, and the other £1million is
taxable.<o:p></o:p></span></span></div>
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<span style="font-size: 12pt; mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">2. Just like BPR (see <a href="http://andrewjonesestateplanning.blogspot.co.uk/2012/12/inheritance-tax-strategy-6-use-your.html" target="_blank">Strategy 6</a>), it is easy to “waste” (rather than “use”)
your APR. So, my advice is the same as in the previous strategy, and here it
is again in bold type:<o:p></o:p></span></span></div>
<b style="mso-bidi-font-weight: normal;"><span style="color: red; font-family: "Arial","sans-serif"; font-size: 18pt;"></span></b><br />
<b style="mso-bidi-font-weight: normal;"><span style="color: red; font-family: "Arial","sans-serif"; font-size: 18pt;">DON’T WASTE
YOUR “APR” WHEN YOU DIE!!!</span></b><span style="color: red; font-size: 12pt; mso-bidi-font-size: 10.0pt;"><o:p></o:p></span><br />
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;"><span style="mso-tab-count: 1;"> </span>As before, you “use” APR either by passing assets
directly to a lower generation or by putting them on a first death
discretionary trust, and you “waste” APR by leaving assets outright to a
surviving spouse or civil partner.<o:p></o:p></span></span></div>
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<span><o:p><span style="font-family: Arial, Helvetica, sans-serif;"> </span></o:p></span></div>
Andrew Joneshttp://www.blogger.com/profile/08777906986904853263noreply@blogger.com0tag:blogger.com,1999:blog-3184163840819769337.post-878380473902313542013-05-27T12:44:00.000+01:002017-12-08T11:25:51.066+00:00Statutory Residency Test<div class="separator" style="clear: both; text-align: center;">
<a href="http://www.cbw.co.uk/wp-content/uploads/2013/05/Residency-test-flowchart-Mar13.pdf" target="_blank"><img border="0" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhhMCUYi4x8JtFqXM4JCNTfmnALx5H0bRYJ1yxkbGznk-EgQPPnn9seId0hp2KfnZn_HxzAiFMyc56xRmnWK0hDmcB5YJsBEeDNaD6dsYDpSCvGXo5CHUgK9EO2w9AgnVTm9McfTtzPLl0/s200/StatResTestLoResBitmap.bmp" width="140" wya="true" /></a></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Taxpayers and the Revenue have often argued, over the years, about whether someone really is "resident" in the UK for tax purposes or not. The government recently brought in a statutory rule in the hope of bringing some certainty to the question. Unfortunately, the new Statutory Residency Test is a daunting piece of legislation, and the test itself not always easy to apply. So I was delighted to come across a flowchart, which sets out the rules clearly in a graphical form.</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Some background information can be seen here:</span><br />
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<a href="http://www.cbw.co.uk/statutory-residency-test-flowchart/" title="http://www.cbw.co.uk/statutory-residency-test-flowchart/"><span style="font-family: "arial" , "helvetica" , sans-serif;">http://www.cbw.co.uk/statutory-residency-test-flowchart/</span></a><o:p></o:p></div>
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<o:p><span style="font-family: "arial" , "helvetica" , sans-serif;">And the chart itself is here:</span></o:p></div>
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<a href="http://www.cbw.co.uk/wp-content/uploads/2013/05/Residency-test-flowchart-Mar13.pdf" title="http://www.cbw.co.uk/wp-content/uploads/2013/05/Residency-test-flowchart-Mar13.pdf"><span style="font-family: "arial" , "helvetica" , sans-serif;">http://www.cbw.co.uk/wp-content/uploads/2013/05/Residency-test-flowchart-Mar13.pdf</span></a></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">UPDATE (December 2017): The
content above has moved, but the flowchart can be found at this link:</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;"><o:p></o:p></span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;"><a href="http://www.cbw.co.uk/wp-content/uploads/2017/01/Residency-Test-Flowchart-new-Jan16-1.pdf">http://www.cbw.co.uk/wp-content/uploads/2017/01/Residency-Test-Flowchart-new-Jan16-1.pdf</a><u5:p></u5:p><o:p></o:p></span></div>
<span style="font-family: Arial, Helvetica, sans-serif;"><u5:p></u5:p></span></div>
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Andrew Joneshttp://www.blogger.com/profile/08777906986904853263noreply@blogger.com0tag:blogger.com,1999:blog-3184163840819769337.post-14556308429265248032013-05-11T07:10:00.001+01:002013-05-11T07:10:35.271+01:00First Death Discretionary Trusts <span style="color: #1f497d;"><span style="font-family: Arial, Helvetica, sans-serif;"><strong>I have had to explain this concept in writing more often, and over more years, than I care to remember! But I recently nailed it for a couple of lovely clients in a new way, that I hope makes it easier to follow (bearing in mind that it's not <em>easy</em> material!). Their business, life cover, pensions and death-in-service benefits were worth £2.38m:</strong></span></span><br />
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<span style="color: #1f497d;"><span style="font-family: Arial, Helvetica, sans-serif;">For the purposes of the discussion below, I divide your estate into two types of assets, namely:<o:p></o:p></span></span></div>
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<span style="color: #1f497d;"><span style="font-family: Arial, Helvetica, sans-serif;">1. Assets which would be <b>non-taxable</b> in the estate of the first of you to die. This includes the first £325,000 of any estate (known as the “nil-band”), assets which qualify for business property relief or agricultural property relief, assets in pension schemes, or life policies written ‘in trust’. (This is wider than the strict legal definition of your ‘estate’.) <o:p></o:p></span></span></div>
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<span style="color: #1f497d;"><span style="font-family: Arial, Helvetica, sans-serif;">2. Assets which would be <b>taxable</b> in the estate of the first of you to die: i.e. everything else (especially, the house).<o:p></o:p></span></span></div>
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<u><span style="color: #1f497d;"><span style="font-family: Arial, Helvetica, sans-serif;">First Death Discretionary Trusts<o:p></o:p></span></span></u></div>
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<span style="color: #1f497d;"><span style="font-family: Arial, Helvetica, sans-serif;">The point of first-death discretionary trusts is to capture all non-taxable assets on the first death, and to cocoon those assets so that they never “belong” to the survivor of you and accordingly are not taxed on that second death, either.<o:p></o:p></span></span></div>
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<span style="color: #1f497d;"><span style="font-family: Arial, Helvetica, sans-serif;">Taxable assets, on the other hand, are left to the survivor of you, claiming the “spouse exemption” and therefore at least avoid being taxed on the first death (although any such assets unspent by the time of the second death will be taxed in the normal way). <o:p></o:p></span></span></div>
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<span style="color: #1f497d;"><span style="font-family: Arial, Helvetica, sans-serif;">In an estate where non-taxable assets are potentially a large proportion, first-death discretionary trusts can ultimately save a huge amount: 40% of the value of the non-taxable assets amounts to (40%x2,380,000=) £952,000.<o:p></o:p></span></span></div>
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<span style="color: #1f497d;"><span style="font-family: Arial, Helvetica, sans-serif;">The non-tax advantage of a discretionary trust is that although the assets do not “belong” to the survivor of you, those assets ARE available for the survivor to draw on, if needed. <o:p></o:p></span></span></div>
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<u><span style="color: #1f497d;"><span style="font-family: Arial, Helvetica, sans-serif;">Your Wills<o:p></o:p></span></span></u></div>
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<span style="color: #1f497d;"><span style="font-family: Arial, Helvetica, sans-serif;">The best way to establish a first death discretionary trust is in your will itself. This is the only way to capture the business: but other types of first death discretionary trusts are suggested below in relation to other assets.<o:p></o:p></span></span></div>
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<span style="color: #1f497d;"><span style="font-family: Arial, Helvetica, sans-serif;"><o:p></o:p></span></span></div>
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<u><span style="color: #1f497d;"><span style="font-family: Arial, Helvetica, sans-serif;">Life Cover<o:p></o:p></span></span></u></div>
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<span style="color: #1f497d;"><span style="font-family: Arial, Helvetica, sans-serif;">It is generally unwise for people with estates over the tax threshold to hold life cover unless it is ‘in trust’. This is because assets payable directly to you are taxed as part of your tax estate, whereas assets held in trust are not. So you should get your financial adviser to get all the policies ‘written in trust’. <o:p></o:p></span></span></div>
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<span style="color: #1f497d;"><span style="font-family: Arial, Helvetica, sans-serif;">In addition to this “first death” saving: there is also tax to be saved by either ‘appointing’ from these trusts so that the proceeds pass to the discretionary trust in your will; or (which may be neater, if your financial adviser can arrange it) getting them written onto discretionary trusts in the first place.<o:p></o:p></span></span></div>
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<span style="color: #1f497d;"><span style="font-family: Arial, Helvetica, sans-serif;"><o:p></o:p></span></span></div>
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<span style="color: #1f497d;"><o:p><span style="font-family: Arial, Helvetica, sans-serif;"></span></o:p></span></div>
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<span style="color: #1f497d;"><span style="font-family: Arial, Helvetica, sans-serif;">I am always happy to work with financial advisers on this.</span></span></div>
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<u><span style="color: #1f497d;"><span style="font-family: Arial, Helvetica, sans-serif;">Pensions<o:p></o:p></span></span></u></div>
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<span style="color: #1f497d;"><span style="font-family: Arial, Helvetica, sans-serif;">There is an automatic first-death inheritance tax saving attached to lump-sum pension payments on death and most death-in-service benefits. However to save second death tax one of the following should be done:<o:p></o:p></span></span></div>
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<span style="color: #1f497d;"><span style="font-family: Arial, Helvetica, sans-serif;">a. your pensions ‘nominated’ to the discretionary trust in your wills; or<o:p></o:p></span></span></div>
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<span style="color: #1f497d;"><span style="font-family: Arial, Helvetica, sans-serif;">b. your pensions settled on so-called “spousal bypass trusts” (which is just a term used in the IFA industry for a first death discretionary trust of pension benefits).<o:p></o:p></span></span></div>
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<span style="color: #1f497d;"><span style="font-family: Arial, Helvetica, sans-serif;">Again, your financial adviser can organise, and I’m happy to assist/facilitate.<o:p></o:p></span></span></div>
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<u><span style="color: #1f497d;"><span style="font-family: Arial, Helvetica, sans-serif;">Rysaffe Planning<o:p></o:p></span></span></u></div>
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<span style="color: #1f497d;"><span style="font-family: Arial, Helvetica, sans-serif;">Although first death discretionary trusts are designed to avoid the 40% “inheritance tax whammy”, they do suffer inheritance tax of their own, at rates of up to 6% on their value in excess of the nil-band, every ten years (or part thereof). There is a way of avoiding this tax, also, which is – instead of having one big discretionary trust in your will, or just a small number of them – to create a string of discretionary trusts on different days. These are funded with just £10 each, but at your later death each takes funding of about £300,000 – either from your will or from a life policy or pension scheme. The advantage is that each trust is worth less than the nil-band at the outset, so its ten-year charges should be nil, or very small.</span></span></div>
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Andrew Joneshttp://www.blogger.com/profile/08777906986904853263noreply@blogger.com0tag:blogger.com,1999:blog-3184163840819769337.post-70344794401490848332013-04-16T09:34:00.002+01:002013-04-16T09:34:30.015+01:00What Happens If You Die Without A Will<span style="font-family: Arial, Helvetica, sans-serif;">See this blog by Nina Sampson, about intestacy:</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"></span><br />
<span style="font-family: "Calibri","sans-serif"; mso-ansi-language: EN-GB; mso-bidi-font-family: "Times New Roman"; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-GB; mso-fareast-theme-font: minor-latin;"><a href="http://www.mary-waring.co.uk/2013/04/what-happens-if-you-die-without-a-will/"><span style="color: blue; font-family: Arial, Helvetica, sans-serif;">http://www.mary-waring.co.uk/2013/04/what-happens-if-you-die-without-a-will/</span></a></span><br />
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Andrew Joneshttp://www.blogger.com/profile/08777906986904853263noreply@blogger.com0tag:blogger.com,1999:blog-3184163840819769337.post-17707466919105977352013-04-07T15:11:00.000+01:002013-04-07T15:11:54.185+01:00Common Misconceptions About Inheritance Tax<div class="MsoNormal" style="line-height: normal;">
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<span><span style="font-family: Arial, Helvetica, sans-serif;">The following ideas about IHT somehow seem to have entered the public imagination.<o:p></o:p></span></span></div>
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<span><span style="font-family: Arial, Helvetica, sans-serif;">They are all wrong:<o:p></o:p></span></span></div>
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<b><span><span style="font-family: Arial, Helvetica, sans-serif;">If I put all my assets offshore then they won’t be charged to Inheritance Tax. </span></span></b></div>
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<b><span><span style="font-family: Arial, Helvetica, sans-serif;"><span style="color: red;">WRONG!<o:p></o:p></span></span></span></b></div>
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<span><span style="font-family: Arial, Helvetica, sans-serif;">This is wrong. UK domiciliaries pay IHT on all their assets worldwide.<o:p></o:p></span></span></div>
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<b><span><span style="font-family: Arial, Helvetica, sans-serif;">If I put all my assets in the name of somebody else, they won’t be charged to IHT.</span></span></b></div>
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<b><span><span style="font-family: Arial, Helvetica, sans-serif;"><span style="color: red;">WRONG!</span></span></span></b></div>
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<span><span style="font-family: Arial, Helvetica, sans-serif;">This is wrong. I know people who’ve taken the hugely risky step of putting their homes and investments into their children’s names, in the utterly mistaken belief that it will save tax. Gifts obviously do have their place in tax planning, though, and are discussed in some of my other posts.<o:p></o:p></span></span></div>
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<b><span><span style="font-family: Arial, Helvetica, sans-serif;">I can put all my assets into trusts, and carry on treating them as my own. They’ll then be tax free.</span></span></b></div>
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<b><span><span style="font-family: Arial, Helvetica, sans-serif;"><span style="color: red;">WRONG!<o:p></o:p></span></span></span></b></div>
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<span><span style="font-family: Arial, Helvetica, sans-serif;">Not so. Generally, the type of trust which is tax effective is the type which prevents you from benefiting from it. Your advisers can perform minor miracles on your behalf with trusts, though, and some of the strategies are mentioned in other posts.<o:p></o:p></span></span></div>
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<b><span><span style="font-family: Arial, Helvetica, sans-serif;">I can form a charity and run my life through it. Then everything I do will be tax free.</span></span></b></div>
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<b><span><span style="font-family: Arial, Helvetica, sans-serif;"><span style="color: red;">WRONG!<o:p></o:p></span></span></span></b></div>
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<span><span style="font-family: Arial, Helvetica, sans-serif;">Not so, either. Money put into a charity can never be withdrawn again for private purposes. By all means give money to existing charities. By all means create a charity if you have an enterprise that deserves charitable status. But don’t think of a charity as the core of a tax-plan, because that will not work.<o:p></o:p></span></span></div>
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<b><span><span style="font-family: Arial, Helvetica, sans-serif;">If I hold my assets jointly, they won’t be part of my estate, and therefore won’t be taxable.</span></span></b></div>
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<b><span><span style="font-family: Arial, Helvetica, sans-serif;"><span style="color: red;">WRONG!<o:p></o:p></span></span></span></b></div>
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<span><span style="font-family: Arial, Helvetica, sans-serif;">This is wrong. Your “tax estate” is bigger than your “estate”, and includes your share of jointly held assets. <o:p></o:p></span></span></div>
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<span><span style="font-family: Arial, Helvetica, sans-serif;">I expect this misconception arises from two things:<o:p></o:p></span></span></div>
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<span><span style="font-family: Arial, Helvetica, sans-serif;">a. firstly because a little knowledge of the law is a dangerous thing, and many people have cottoned on to the (correct) idea that joint assets are not in your “estate”; and<o:p></o:p></span></span></div>
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<span><span style="font-family: Arial, Helvetica, sans-serif;">b. because, in fact, assets held jointly by a husband and wife <i>do</i> pass to the survivor inheritance tax free – and people have seen this happen, perhaps with their parents. However, that had nothing at all to do with the joint ownership: transfers between husbands and wives always are inheritance tax free, due to the “spouse exemption”.<o:p></o:p></span></span></div>
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<b><span><span style="font-family: Arial, Helvetica, sans-serif;">The “£3,000-a-year gift”, which is mentioned so often in the financial pages of the newspapers, is one of the best things you can do to save tax.</span></span></b></div>
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<b><span><span style="font-family: Arial, Helvetica, sans-serif;"><span style="color: red;">WRONG!<o:p></o:p></span></span></span></b></div>
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<span><span style="font-family: Arial, Helvetica, sans-serif;">Not really. It is quite a painless way of saving tax, but you would have to do it for years and years before you made any serious inroads into your tax problem. The rules are explained in other blog posts. But look at other, better, strategies first. And, as explained<span><o:p><span style="font-family: Arial, Helvetica, sans-serif;"> <a href="http://andrewjonesestateplanning.blogspot.co.uk/2012/07/inheritance-tax-strategy-5-make-regular.html" target="_blank">here</a>, limiting yourself to £3,000 is not necessarily wise.</span></o:p></span></span></span></div>
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<b><span><span style="font-family: Arial, Helvetica, sans-serif;">Debts are Deductible.</span></span></b></div>
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<b><span><span style="font-family: Arial, Helvetica, sans-serif;"><span style="color: red;">WRONG! ish<o:p></o:p></span></span></span></b></div>
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<span><span style="font-family: Arial, Helvetica, sans-serif;">I always have trouble with this one. After all, debts ARE deductible from your tax estate, so my clients are always a bit nonplussed when I insist on ignoring their debts when I calculate their inheritance-tax exposure. But there is method in my madness. The trouble with debts is that so often they come with built-in safeguards for paying them off. Endowment mortgages, for example, have life-cover built into them. Repayment mortgages are usually attached to mortgage protection policies. Credit card debts, store cards and financing deals are often covered by payment protection.<o:p></o:p></span></span></div>
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<span><span style="font-family: Arial, Helvetica, sans-serif;">Also, these protections usually kick-in on the first death. So a young couple with 10% equity in a £1million home, and not much else, might think of their wealth as £100,000 and therefore outside the tax net, whereas actually the second-death estate would be £1,000,000, with a six-figure tax exposure.<o:p></o:p></span></span></div>
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<span><span style="font-family: Arial, Helvetica, sans-serif;">Besides, guess what, if we find that you do have unprotected debts, then we’ve already discovered an inheritance tax saving!<o:p></o:p></span></span></div>
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<span><span style="font-family: Arial, Helvetica, sans-serif;">Always start calculating from your gross estate.<o:p></o:p></span></span></div>
Andrew Joneshttp://www.blogger.com/profile/08777906986904853263noreply@blogger.com0tag:blogger.com,1999:blog-3184163840819769337.post-91737894926114661302013-04-07T11:36:00.000+01:002013-04-07T11:36:17.617+01:00IHT on Gifts to Minors in Wills<div class="MsoNormal" style="line-height: normal; text-align: justify;">
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<span><span style="font-family: Arial, Helvetica, sans-serif;">It makes me weep that I need to discuss this. I genuinely do not believe that the government intended to make this bit as complicated as they did. The old (pre-2006) rules for gifts to minors, called the “A&M Trust” rules, were simple, secure and tax-favourable. So, everybody followed them, leaving gifts in wills “to those of my grandchildren who survive me and attain 21” or suchlike. Very straightforward. Nobody thought of creating “bare trusts” (whatever they are) or leaving their children “intermediate income” (whatever that is), because although those options existed in theory, frankly why would you want to do them, and who needs to think about those things, anyway? Well, now you do.<o:p></o:p></span></span></div>
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<span><span style="font-family: Arial, Helvetica, sans-serif;">I think the treasury felt that some very rich people with clever lawyers were taking advantage of the A&M Trust rules, so, using a sledgehammer to crack a nut, they simply abolished them. Then, they realised that they needed at least two new statutory regimes to partially replace them. So now, you need to consider a string of options, and to trade-off simplicity -v- security -v- tax-favourableness. Instead of the one option you had before (where the only choice you really had to make was whether the beneficiaries inherited at 18 or 21 or 25, and where even <i>that</i> decision didn’t affect the tax position) you now have to choose between: <o:p></o:p></span></span></div>
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<span><span style="font-family: Arial, Helvetica, sans-serif;">a. <b>Relevant Property Trust</b>. (Example: “to those of my grandchildren who survive me and attain 21”.) <span style="border-bottom: windowtext 1pt solid; border-left: windowtext 1pt solid; border-right: windowtext 1pt solid; border-top: windowtext 1pt solid; padding-bottom: 0cm; padding-left: 0cm; padding-right: 0cm; padding-top: 0cm;">Simple, secure, tax-unfavourable.</span> This is the simple option I mentioned above, the kind that would previously have fallen squarely within the A&M Trust rules. This is still unquestionably the best option for those whose estates aren’t in the tax net anyway – indeed, if you aren’t in the IHT net this is the only option I would seriously discuss with you, if you consulted me about a will. The tax disadvantage, however, is that they are taxed as discretionary trusts, suffering ten-year charges and exit-charges. </span></span><span><span style="font-family: Arial, Helvetica, sans-serif;">The maximum rate of any charge is 6%, so what I often find is that people whose estates are taxable nevertheless work their way through the following options with me, but then decide to come back to this one: taking the view that the tax charges may be a reasonable price to pay for the simplicity and security of it.<o:p></o:p></span></span></div>
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<span><span style="font-family: Arial, Helvetica, sans-serif;">b. <b>Bereaved Minor’s Trust</b>. (Example: “to those of my children who survive me and attain 18”.) <span style="border-bottom: windowtext 1pt solid; border-left: windowtext 1pt solid; border-right: windowtext 1pt solid; border-top: windowtext 1pt solid; padding-bottom: 0cm; padding-left: 0cm; padding-right: 0cm; padding-top: 0cm;">Simple, insecure, tax-favourable.</span> This is a statutory regime, available only in the wills of the <u>parents</u> of the child concerned, and only where the minor gets their money outright, with no strings attached, at 18. And, really, that’s what I mean by “insecure” in these examples – the minors in question taking absolute control of their inheritance the moment they reach 18, whether or not they are mature enough to handle the amount of money involved. The tax advantage is that there are no ten-year charges or exit-charges.<o:p></o:p></span></span></div>
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<span><span style="font-family: Arial, Helvetica, sans-serif;">c. <b>18 to 25 Trust</b>. (Example: “to those of my children who survive me and attain 21”.) <span style="border-bottom: windowtext 1pt solid; border-left: windowtext 1pt solid; border-right: windowtext 1pt solid; border-top: windowtext 1pt solid; padding-bottom: 0cm; padding-left: 0cm; padding-right: 0cm; padding-top: 0cm;">Simple, secure, tax-middling.</span> This is another statutory regime, available only in the wills of the <u>parents</u> of the child concerned, and only where the minor gets their money outright, with no strings attached, at an age between 18 and 25. Gifts of this kind become relevant property trusts upon the minor in question reaching 18. Therefore there cannot be a ten-year charge (because there are less than ten years between someone reaching 18 and the same person reaching 25) and the maximum possible exit charge is 4.2% (because exit charges are calculated by reference to the number of years elapsed before the next ten-year charge would happen: in this case there are seven years between ages 18 and 25, and 7/10ths of the maximum 6% is 4.2%).<o:p></o:p></span></span></div>
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<span><span style="font-family: Arial, Helvetica, sans-serif;">d. <b>Bare Trust</b>. (Example: “to those of my children who survive me absolutely”.) <span style="border-bottom: windowtext 1pt solid; border-left: windowtext 1pt solid; border-right: windowtext 1pt solid; border-top: windowtext 1pt solid; padding-bottom: 0cm; padding-left: 0cm; padding-right: 0cm; padding-top: 0cm;">Simple (in theory), insecure, tax-favourable [unless the minor dies].</span> In this case, the gift to the minor is “absolute”, so he or she owns the money outright, even if he or she is only an infant. This may seem to be the ultimate in insecurity, although in practice trustees do actually have to look after the money and the child cannot demand it from them until attaining majority, at 18. The only reason to consider this is the tax consequence: the money actually belongs to the child, so the trust isn’t truly a trust at all, and isn’t taxed as one. Therefore there can be no ten-year charges and no exit charges.<o:p></o:p></span></span></div>
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<span><span style="font-family: Arial, Helvetica, sans-serif;">e. <b>IPDI</b>. (Example: “to pay the income to those of my children who survive me, from the date of my death, and to pay the capital to each of them when he or she attains 21”.) <span style="border-bottom: windowtext 1pt solid; border-left: windowtext 1pt solid; border-right: windowtext 1pt solid; border-top: windowtext 1pt solid; padding-bottom: 0cm; padding-left: 0cm; padding-right: 0cm; padding-top: 0cm;">Complicated, secure as regards capital, tax-favourable [unless the minor dies].</span> The idea of an IPDI is that if you grant someone a right to income, by a trust in a will, from the date of death, then that trust is taxed in tandem with the beneficiary’s estate (and not as a relevant property trust). The tax upside is that there are no ten-year and exit charges. But the assets are taxed in tandem with the minor’s estate, so if the fund is big enough it suffers 40% tax on the minor’s death.<o:p></o:p></span></span></div>
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<span><span style="font-family: Arial, Helvetica, sans-serif;">But just to clarify: although I have described some of these options as “tax-favourable” and “tax-unfavourable” none of them avoids the IHT on the death in question (and the old rules didn’t do that either). Leave money to a child or a grandchild (indeed, actually, to anyone except a spouse, civil partner or charity) and you pay IHT on it. The only question we are discussing in this section is whether there might be <i>yet further</i> IHT on the fund before the minors receive their share.<o:p></o:p></span></span></div>
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Andrew Joneshttp://www.blogger.com/profile/08777906986904853263noreply@blogger.com0tag:blogger.com,1999:blog-3184163840819769337.post-51280362308784985602013-03-16T18:15:00.000+00:002013-03-16T18:15:38.880+00:00International Estate Planning - Full Version<span style="font-family: Arial, Helvetica, sans-serif;">Here is the full one-hour version of this talk, in four parts:</span><br />
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<iframe allowfullscreen="" frameborder="0" height="315" src="http://www.youtube.com/embed/-ttpRv7o3Y0" width="560"></iframe><iframe allowfullscreen="" frameborder="0" height="315" src="http://www.youtube.com/embed/B2w8eFrMgbk" width="560"></iframe><iframe allowfullscreen="" frameborder="0" height="315" src="http://www.youtube.com/embed/BLME4w6QFYo" width="560"></iframe><iframe allowfullscreen="" frameborder="0" height="315" src="http://www.youtube.com/embed/7es1JN2DQOY" width="560"></iframe>Andrew Joneshttp://www.blogger.com/profile/08777906986904853263noreply@blogger.com0tag:blogger.com,1999:blog-3184163840819769337.post-32817581455802298692013-03-10T15:57:00.000+00:002013-03-16T17:47:12.143+00:00Annual Residential Property Tax (ARPT)<div class="MsoNormal">
<span style="font-family: Arial, Helvetica, sans-serif;">There are some serious changes about to come in (April 2013) for UK residential property owned through an offshore company.<o:p></o:p></span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">The political background to the change is that historically the UK has promoted itself as a tax haven for non-domiciled individuals, and has maintained a tax regime full of rules favourable to “non-doms” and “res-non-doms” when compared with the tax treatment of English residents and domiciliaries. <o:p></o:p></span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">One common example is the use of a non-resident corporation (often a BVI company) to hold English residential property. One of its main advantages is that the property’s value is outside the scope of inheritance tax. This saving arises because – from one angle – the property is owned by a corporation not by an individual, so its owner cannot die; also – from the other angle – the death of the non-domiciled individual doesn’t lead to any tax because what he owns (i.e. shares in a BVI company) are “excluded” from inheritance tax: being the non-UK-situated assets of a non-UK domiciliary.<o:p></o:p></span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">In the past, governments have seen planning of this kind as advantageous to the economy and have not challenged it. Foreign individuals can bring their wealth (and their businesses, and their expertise) into the UK with the benefit of tax-neutrality.<o:p></o:p></span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">However the current coalition government perceives things very differently. In its eyes the need to “balance the country’s books” is paramount: the economy is in poor shape, budgets are being cut, the tax-take needs to be maximised and there needs to be a perception that rich non-domiciliaries are paying their share.<o:p></o:p></span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">Against that background, we are now faced with a number of punitive taxes, the clear intention of which is not so much to <i>raise</i> tax, as to encourage the break-up of these structures.<o:p></o:p></span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">Unfortunately, the decision is NOT clear cut in a case like this. There is not one recommendation to make, and overall the decision has to be one for each individual client. There are three options, and they are:<o:p></o:p></span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">1. <u>No action. Keep the structure as it is</u>.<o:p></o:p></span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;"> ADVANTAGES<o:p></o:p></span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;"> a. no inheritance tax, for the same reason as when the structure was set up<o:p></o:p></span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;"> b. no scope for stamp duty, since nothing is changing<o:p></o:p></span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;"> c. all the non-tax advantages of the trust from a succession, flexibility, confidentiality and asset protection viewpoint which the arrangement previously had<o:p></o:p></span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;"> d. no costs, except the any advice needed to reach this conclusion, since there is nothing to implement<o:p></o:p></span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;"> a. the new Annual Residential Property Tax</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;"> b. the property will henceforth be exposed to Capital Gains Tax, re-based to April 2013</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;"> c. the law may change, penalising this option further or negating any of its advantages<o:p></o:p></span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">2. <u>Collapse the structure completely</u>.<o:p></o:p></span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;"> ADVANTAGES<o:p></o:p></span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;"> a. no new Annual Residential Property Tax<o:p></o:p></span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;"> b. most likely no Capital Gains Tax on general principles (i.e. assuming that the owner will be non-resident)<o:p></o:p></span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;"> DISADVANTAGES<o:p></o:p></span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;"> a. inheritance tax payable at death (This is a crucial point - £15,000 is an unintended and unexpected cost of the structure, but you would have to pay it for over 66 years to match the inheritance tax hit on a £2.5 million property.)<o:p></o:p></span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;"> b. various non-tax issues: for example that there would henceforth be an undervalue transaction in the title to the property.<o:p></o:p></span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;"> d. the law may change, in ways less favourable to non-domiciled property owners than the current laws (you could argue that the subject matter of this email is an example of this already occurring)<o:p></o:p></span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">3. <u>Tweak/Restructure</u>.<o:p></o:p></span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;"> This would involve retaining some elements of the existing structure but reorganising it in such a way – if possible – that the existing advantages are obtained without giving rise to the new tax charges. This is obviously the most nebulous of the three, and cannot be explained in terms of simple advantages or disadvantages. One obvious disadvantage, however, is that tax law may change further – especially if there is a sense that many non-doms are using a particular tweak – in order to negate or penalise the restructuring. Possibilities include:<o:p></o:p></span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;"> a. <u>letting the property</u>: the new rules don't apply to lettings on a commercial basis, so if it is let out to independent tenants at arm’s-length and at full rent the problems do not apply</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;"> b. <u>removing the company from the structure but keeping the trust in place</u>: superficially this appears to achieve the desired effect (no annual residential property tax, no capital gains tax, possibly no inheritance tax on client’s death), but unfortunately introduces a new complication: the trust would cease to be an “excluded property trust” and would instead fall into the regime called the “relevant property trust regime”. The inheritance tax cost of being in that regime could be somewhere close to the ARPT, so it is hard to recommend it in isolation. However there is an argument to the effect that this further tax can be mitigated by burdening the property with debt.</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif; font-size: x-small;">See also Nina Sampson's article on this topic at Business First Magazine, which is a little more up-to-date than my blog above: </span><a href="http://www.businessfirstmagazine.co.uk/heavy-new-taxes-about-to-hit-foreign-owned-properties/"><span style="font-family: Arial, Helvetica, sans-serif; font-size: x-small;">http://www.businessfirstmagazine.co.uk/heavy-new-taxes-about-to-hit-foreign-owned-properties/</span></a></div>
Andrew Joneshttp://www.blogger.com/profile/08777906986904853263noreply@blogger.com0tag:blogger.com,1999:blog-3184163840819769337.post-71328636629215488002013-03-10T15:13:00.000+00:002013-03-10T15:13:18.021+00:00International Estate Planning - TasterThis is the 3-Minute taster for my full-length International Estate Planning seminar.<br />
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Andrew Joneshttp://www.blogger.com/profile/08777906986904853263noreply@blogger.com0tag:blogger.com,1999:blog-3184163840819769337.post-91427015578628964532012-12-02T10:00:00.001+00:002012-12-02T10:00:20.492+00:00Inheritance Tax Strategy 6 - Use Your "Business Property Relief"<div class="MsoNormal" style="line-height: normal; margin: 0cm 0cm 0pt; text-align: justify;">
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">Business Property Relief is usually abbreviated to “BPR”.<o:p></o:p></span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">1.<span style="mso-tab-count: 1;"> </span>The basic principles are:<o:p></o:p></span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;"><span style="mso-tab-count: 1;"> </span>a.<span style="mso-tab-count: 1;"> </span>Sole traders get 100% BPR on their business and its assets. (100% relief means <i style="mso-bidi-font-style: normal;">no tax to pay at all</i>, whether on a lifetime gift or at death.)<o:p></o:p></span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;"><span style="mso-tab-count: 1;"> </span>b.<span style="mso-tab-count: 1;"> </span>Partners get 100% BPR on their share of the business. (Even members of Limited Liability Partnerships get this relief.)<o:p></o:p></span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;"><span style="mso-tab-count: 1;"> </span>c.<span style="mso-tab-count: 1;"> </span>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.<o:p></o:p></span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;"><span style="mso-tab-count: 1;"> </span>d.<span style="mso-tab-count: 1;"> </span>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.)<o:p></o:p></span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;"><span style="mso-tab-count: 1;"> </span>e.<span style="mso-tab-count: 1;"> </span>Controlling shareholders (only) get 50% BPR on assets owned by them personally but used by the company.<o:p></o:p></span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;"><span style="mso-tab-count: 1;"> </span>f.<span style="mso-tab-count: 1;"> </span>Controlling shareholders of PLCs get 50% BPR on their shares (although if you control a PLC you are one of a very rare breed).<o:p></o:p></span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;"><span style="mso-tab-count: 1;"> </span>g.<span style="mso-tab-count: 1;"> </span>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.<o:p></o:p></span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;"><span style="mso-tab-count: 1;"> </span>h.<span style="mso-tab-count: 1;"> </span>Everybody is denied BPR on the <i style="mso-bidi-font-style: normal;">investment element</i> 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.<o:p></o:p></span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;"><span style="mso-tab-count: 1;"> </span>i.<span style="mso-tab-count: 1;"> </span>You generally need to have had the business interest in question for over two years to get any BPR.<o:p></o:p></span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">2.<span style="mso-tab-count: 1;"> </span>These rules are very generous compared to taxes we’ve had in the past. There’s a good chance that this won’t last. <b style="mso-bidi-font-weight: normal;">Tax plan now.</b><o:p></o:p></span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">3.<span style="mso-tab-count: 1;"> </span>You need to be quite careful to ensure that what your business does really is <u>business</u>, 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. </span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;"><span style="mso-tab-count: 1;"> </span>Just to emphasise the effect of my points 3 and 1(h):<o:p></o:p></span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;"><span style="mso-tab-count: 1;"> </span>i.<span style="mso-tab-count: 1;"> </span>if the business is <i style="mso-bidi-font-style: normal;">mainly</i> investment or letting then you don’t get any BPR at all, on any of it (even the non-investment/letting part); but<o:p></o:p></span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;"><span style="mso-tab-count: 1;"> </span>ii.<span style="mso-tab-count: 1;"> </span>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.<o:p></o:p></span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">4.<span style="mso-tab-count: 1;"> </span>Gifts of your business assets are likely to have <b style="mso-bidi-font-weight: normal;">capital gains tax</b> consequences. Make sure that any tax plan takes into account the impact of both taxes.<o:p></o:p></span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">5.<span style="mso-tab-count: 1;"> </span>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.<o:p></o:p></span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">6.<span style="mso-tab-count: 1;"> </span><u>The single most important thing</u> 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%.<o:p></o:p></span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;"><span style="mso-tab-count: 1;"> </span>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:<o:p></o:p></span></span></div>
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<span style="font-size: 12pt; mso-bidi-font-size: 10.0pt;"><span style="mso-tab-count: 1;"> </span></span><b style="mso-bidi-font-weight: normal;"><span style="color: red; font-family: Arial; font-size: 18pt;">DON’T WASTE YOUR “BPR” WHEN YOU DIE!!!<o:p></o:p></span></b></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">7.<span style="mso-tab-count: 1;"> </span>This final point isn’t so much a strategy in its own right - more an important problem to be aware of.<o:p></o:p></span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;"><span style="mso-tab-count: 1;"> </span>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. </span></span></div>
Andrew Joneshttp://www.blogger.com/profile/08777906986904853263noreply@blogger.com0tag:blogger.com,1999:blog-3184163840819769337.post-77345447769995549932012-09-18T15:37:00.001+01:002013-10-07T09:57:49.041+01:00Rysaffe Planning<div class="MsoNormal" style="margin: 0cm 0cm 0pt;">
<span style="font-family: 'Times New Roman','serif';"><span style="font-family: Arial, Helvetica, sans-serif; font-size: x-small;"><strong><span style="font-family: Arial, Helvetica, sans-serif; font-size: small;">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.</span></strong> </span></span><br />
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<span style="font-family: 'Times New Roman','serif';"><span style="font-family: Arial, Helvetica, sans-serif; font-size: x-small;"><em>One of my more technical postings, dealing with a less-common piece of planning for people with larger inheritance tax problems</em></span></span></div>
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<span style="font-family: 'Times New Roman','serif';"><span style="font-family: Arial, Helvetica, sans-serif;">Discretionary trusts are a <i style="mso-bidi-font-style: normal;">good thing</i> 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:<o:p></o:p></span></span></div>
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<span style="font-family: 'Times New Roman','serif';"><span style="font-family: Arial, Helvetica, sans-serif;">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).<o:p></o:p></span></span></div>
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<span style="font-family: 'Times New Roman','serif';"><span style="font-family: Arial, Helvetica, sans-serif;">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 <u>do not</u> 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.<o:p></o:p></span></span></div>
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<span style="font-family: 'Times New Roman','serif';"><span style="font-family: Arial, Helvetica, sans-serif;">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.<o:p></o:p></span></span></div>
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<span style="font-family: 'Times New Roman','serif';"><span style="font-family: Arial, Helvetica, sans-serif;">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%.<o:p></o:p></span></span></div>
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<span style="font-family: 'Times New Roman','serif';"><span style="font-family: Arial, Helvetica, sans-serif;">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.<o:p></o:p></span></span></div>
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<span style="font-family: 'Times New Roman','serif'; mso-ansi-language: EN-GB; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;"><span style="font-family: Arial, Helvetica, sans-serif;">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.</span></span>Andrew Joneshttp://www.blogger.com/profile/08777906986904853263noreply@blogger.com0tag:blogger.com,1999:blog-3184163840819769337.post-89697793729549414212012-08-20T20:56:00.001+01:002012-08-20T20:56:08.450+01:00Is it Better to be Married?<div class="MsoNormal" style="margin: 0cm 0cm 0pt; text-align: justify;">
<span style="font-family: Arial, Helvetica, sans-serif;">I would never tell a client whether it is better to be married!</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">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:</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">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.</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">(Don’t worry about the detail of these calculations, by the way, just keep an eye on the “total tax” number!)</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">Being married does protect against some of that tax. For example, a married couple could do this:</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">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.</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">Can an unmarried couple achieve that same bottom-line figure? Yes, they can: for example by incorporating discretionary trusts in their wills:</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">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. </span></div>
Andrew Joneshttp://www.blogger.com/profile/08777906986904853263noreply@blogger.com0tag:blogger.com,1999:blog-3184163840819769337.post-57492391484352330512012-07-15T17:53:00.001+01:002012-07-15T17:53:27.682+01:00Inheritance Tax Strategy 5 - Make Regular Gifts<div class="MsoNormal" style="line-height: normal; margin: 0cm 0cm 0pt; tab-stops: 42.55pt decimal 276.45pt 389.85pt; text-align: justify;">
<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">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:</span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">1.<span style="mso-tab-count: 1;"> </span><b style="mso-bidi-font-weight: normal;">The Annual Exemption</b>.<span style="mso-spacerun: yes;"> </span>You are allowed to give £3,000 per year away, free of tax.<span style="mso-spacerun: yes;"> </span>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.</span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">2.<span style="mso-tab-count: 1;"> </span><b style="mso-bidi-font-weight: normal;">The Small Gifts Exemption</b>. This allows you to give £250 each year to any number of individuals.<span style="mso-spacerun: yes;"> </span>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. </span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;"><span style="mso-tab-count: 1;"> </span>You need to be quite careful with this exemption, because the rules are quite strict. Taking just two examples:</span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;"><span style="mso-tab-count: 1;"> </span>a.<span style="mso-tab-count: 1;"> </span>If you give someone £3250, that is <u>not</u> a £3000 annual exemption plus a £250 small gift, as you might think. The balance over £3000 is potentially taxable. </span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;"><span style="mso-tab-count: 1;"> </span>b.<span style="mso-tab-count: 1;"> </span>If (having used up your annual exemption elsewhere) you give someone £300 then that is <u>not</u> 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.</span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;"><span style="mso-tab-count: 1;"> </span>Basically, the small gifts exemption just doesn’t mix with the other exemptions.</span></span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;"><b style="mso-bidi-font-weight: normal;"><span style="mso-bidi-font-size: 10.0pt;">3.<span style="mso-tab-count: 1;"> </span>The Regular Gifts out of Income Exemption</span></b><span style="mso-bidi-font-size: 10.0pt;">.<span style="mso-spacerun: yes;"> </span>This is a very useful exemption because there is ABSOLUTELY NO LIMIT on the amount you can give away.<span style="mso-spacerun: yes;"> </span>However, what you are giving away must be SURPLUS INCOME.<span style="mso-spacerun: yes;"> </span>That is:</span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">a.<span style="mso-tab-count: 1;"> </span>it must be paid out of your <i style="mso-bidi-font-style: normal;">income</i>, not from your capital; and</span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">b.<span style="mso-tab-count: 1;"> </span>it must be <i style="mso-bidi-font-style: normal;">surplus</i>, meaning you must be left with enough income – after making the gift – to maintain your own usual standard of living.</span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;"><span style="mso-tab-count: 1;"> </span>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.</span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">4.<span style="mso-tab-count: 1;"> </span><b style="mso-bidi-font-weight: normal;">The Wedding Gifts Exemption.</b> This is a fairly minor exemption. The following people can make IHT-free gifts to the happy couple, in the following amounts:</span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">Parents: £5,000<span style="mso-tab-count: 1;"> </span></span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">Other ancestors (e.g. grandparents): £2,500<span style="mso-tab-count: 1;"> </span></span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">Anyone else: £1,000<span style="mso-tab-count: 1;"> </span></span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">A party to the marriage: £2,500</span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">Crucially, many people who set up schemes of giving assume, wrongly, that they should think of £3,000 per year as the <u>upper limit</u> 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.</span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">In <b style="mso-bidi-font-weight: normal;">scenario 1</b> he decides not to make any gifts at all.<span style="mso-spacerun: yes;"> </span>He suffers inheritance tax on £100,000 at 40%, which is <u style="text-underline: double;">£40,000</u>.</span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">In <b style="mso-bidi-font-weight: normal;">scenario 2</b> he decides to give away £3,000 each year.<span style="mso-spacerun: yes;"> </span>This saves tax on £3,000 x 10 = £30,000, so he pays tax on £70,000, which at 40% is <u style="text-underline: double;">£28,000</u>.</span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">In <b style="mso-bidi-font-weight: normal;">scenario 3</b> he decides to make gifts of £10,000 each year.<span style="mso-spacerun: yes;"> </span>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.<span style="mso-spacerun: yes;"> </span>He is therefore taxed on 7 x £7,000 = £49,000, on which tax at 40% is <u style="text-underline: double;">£19,600</u>.</span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">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.</span></span></div>Andrew Joneshttp://www.blogger.com/profile/08777906986904853263noreply@blogger.com0tag:blogger.com,1999:blog-3184163840819769337.post-7708397556402210722012-07-08T22:23:00.000+01:002012-07-09T20:19:57.924+01:00Inheritance Tax Strategy 4 - Make Large Gifts<div class="MsoNormal" style="line-height: normal; margin: 0cm 0cm 0pt; tab-stops: 42.55pt decimal 276.45pt 389.85pt; text-align: justify;">
<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">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.<span style="mso-spacerun: yes;"> </span>Much larger gifts, however, can have a considerable effect.<span style="mso-spacerun: yes;"> </span></span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">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 <i style="mso-bidi-font-style: normal;">potential</i> to become <i style="mso-bidi-font-style: normal;">exempt</i> from tax if you survive the seven years.<span style="mso-spacerun: yes;"> </span>(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.)</span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">For the very wealthy, this is the most important tax saving strategy.<span style="mso-spacerun: yes;"> </span>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.</span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">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%.<span style="mso-spacerun: yes;"> </span>If you survive four years it is 24%, five years is 16%, and six years is 8%.<span style="mso-spacerun: yes;"> </span>It is very easy to become misled by this sliding scale however.<span style="mso-spacerun: yes;"> </span>If the original gift was within your nil band then the sliding scale will never apply to it.<span style="mso-spacerun: yes;"> </span>It is only larger gifts which get this advantage.</span> </span><span style="font-family: Arial, Helvetica, sans-serif;"><span style="font-size: xx-small;">(If you’re interested, this is because it’s <u>not</u> the <i style="mso-bidi-font-style: normal;">value of the gift</i> that tapers, it’s the <i style="mso-bidi-font-style: normal;">rate of tax</i> 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.)<b style="mso-bidi-font-weight: normal;"><span style="mso-bidi-font-size: 10.0pt;"></span></b></span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">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.</span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">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.</span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">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 <b style="mso-bidi-font-weight: normal;">stays in your tax estate</b>. 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.</span></span></div>Andrew Joneshttp://www.blogger.com/profile/08777906986904853263noreply@blogger.com1tag:blogger.com,1999:blog-3184163840819769337.post-79511733935860874842012-07-02T20:46:00.002+01:002012-07-02T20:46:51.918+01:00Inheritance Tax Strategy 3 - Give It To Charity<div class="MsoNormal" style="line-height: normal; margin: 0cm 0cm 0pt; tab-stops: 42.55pt decimal 276.45pt 389.85pt; text-align: justify;">
<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">All money given to charity is completely free of tax.<span style="mso-spacerun: yes;"> </span>If you give money to charity during your lifetime then it is out of your inheritance tax estate straightaway.</span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">Every gift made to charity by your Will is deducted from your estate before the inheritance tax is calculated.</span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">People who have no dependants and are able to leave their entire estates to charity naturally pay no IHT whatsoever.</span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">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.</span></span></div>Andrew Joneshttp://www.blogger.com/profile/08777906986904853263noreply@blogger.com0tag:blogger.com,1999:blog-3184163840819769337.post-65112603756547413732012-06-24T13:10:00.000+01:002012-06-24T13:10:28.172+01:00Inheritance Tax Strategy 2 - Spend It<div class="MsoNormal" style="line-height: normal; margin: 0cm 0cm 0pt; tab-stops: 42.55pt decimal 276.45pt 389.85pt; text-align: justify;">
<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">Spending your money on yourself during your lifetime is by far the most effective IHT-saving strategy.<span style="mso-spacerun: yes;"> </span>Every pound you spend is money out of your estate straightaway, and (with inheritance tax at 40%) saves 40p in tax.<span style="mso-spacerun: yes;"> </span>The Inland Revenue cannot challenge it.<span style="mso-spacerun: yes;"> </span>There are none of the other tax complications you get with trusts.<span style="mso-spacerun: yes;"> </span>You do not need to survive seven years like you do with a gift.<span style="mso-spacerun: yes;"> </span>You do not need to fulfil any technical rules like you do to get Business Property Relief.<span style="mso-spacerun: yes;"> </span>The money is out of your estate, and that’s all there is to it.</span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">You have worked hard for your wealth and have earned it.<span style="mso-spacerun: yes;"> </span>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.<span style="mso-spacerun: yes;"> </span>Employ a companion, or a nurse. Buy depreciating assets like yachts and fast cars.<span style="mso-spacerun: yes;"> </span>Go to live in an expensive hotel for the rest of your life.</span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">Then think of all that money which you are not leaving to the taxman.</span></span></div>Andrew Joneshttp://www.blogger.com/profile/08777906986904853263noreply@blogger.com0tag:blogger.com,1999:blog-3184163840819769337.post-415813848739783992012-06-24T13:01:00.000+01:002012-06-24T13:10:46.151+01:00Anglo-Spanish Law Societies' Conference<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhkm0tLKVmBuc5WPqmBnQa59p09J1_Ei57xWUkR3-T7CPcjW5vRW_RudMm9lDp6cSLyzewIoxKx9y1lmwBqaeVG7UF8JVQMnJ7KLvZxRoh3Y2VkM2lZDha0-nfjKcj1VfbR3p7lP7SRyFY/s1600/AngloSpanishLawSocieties.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="227" rca="true" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhkm0tLKVmBuc5WPqmBnQa59p09J1_Ei57xWUkR3-T7CPcjW5vRW_RudMm9lDp6cSLyzewIoxKx9y1lmwBqaeVG7UF8JVQMnJ7KLvZxRoh3Y2VkM2lZDha0-nfjKcj1VfbR3p7lP7SRyFY/s400/AngloSpanishLawSocieties.jpg" width="400" /></a></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">Speaking at the Anglo-Spanish Law Societies' conference at the Law Society's Hall in London.</span></div>Andrew Joneshttp://www.blogger.com/profile/08777906986904853263noreply@blogger.com0tag:blogger.com,1999:blog-3184163840819769337.post-60112630882191437072012-04-22T10:43:00.001+01:002012-04-22T10:43:58.106+01:00International: Emigration<div class="MsoNormal" style="margin: 0cm 0cm 0pt; text-align: justify;">
<span style="font-family: Arial, Helvetica, sans-serif; font-size: x-small;">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.</span><br />
<span style="font-family: Arial; font-size: x-small;"></span><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">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.</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">The biggest misconception I come across regularly is the assumption by ex-pats either:</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">a.<span style="mso-tab-count: 1;"> </span>that because they are English, their assets will pass on their death under English law; or</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">b.<span style="mso-tab-count: 1;"> </span>that because their assets are in (say) France, their assets will pass on their death under French law.</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">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:</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">a.<span style="mso-tab-count: 1;"> </span>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</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">b.<span style="mso-tab-count: 1;"> </span>movable assets (any assets which are not immovable) pass under the law of the jurisdiction where the deceased is <i style="mso-bidi-font-style: normal;">domiciled</i>.</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">A further complication is that many other jurisdictions do not have the same rule. This can lead to an <i style="mso-bidi-font-style: normal;">overlap</i> (England and the other jurisdiction both claiming that their law applies) or a <i style="mso-bidi-font-style: normal;">gap</i> (England and the other jurisdiction both claiming that the other law applies).</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">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.</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">That brings us to the very important question: what does <i style="mso-bidi-font-style: normal;">domicile</i> mean? In summary:</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">a.<span style="mso-tab-count: 1;"> </span>Everybody has one, and only one, domicile at any one time.</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">b.<span style="mso-tab-count: 1;"> </span>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 <i style="mso-bidi-font-style: normal;">domicile of origin</i>.</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">c.<span style="mso-tab-count: 1;"> </span>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.</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">d.<span style="mso-tab-count: 1;"> </span>You acquire a new domicile by making a jurisdiction your <i style="mso-bidi-font-style: normal;">domicile of choice</i>. 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. </span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">Next, we come to the <i style="mso-bidi-font-style: normal;">deemed domicile rules</i>. 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:</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">a.<span style="mso-tab-count: 1;"> </span>tax resident in the UK for 17 of the last 20 tax years; or</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">b.<span style="mso-tab-count: 1;"> </span>domiciled in the UK at any time in the last three years;</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">then you will be treated as if you were a UK domiciliary for inheritance tax purposes.</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">One common problem, in my experience, is that the <i style="mso-bidi-font-style: normal;">deemed</i> domicile rules are better known than the <i style="mso-bidi-font-style: normal;">actual</i> 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 <i style="mso-bidi-font-style: normal;">are</i> 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: <i style="mso-bidi-font-style: normal;">deemed domicile</i> can only entangle you in the net, it cannot release you from it; <i style="mso-bidi-font-style: normal;">deemed domicile</i> does not apply to any of the other taxes, only inheritance tax; <i style="mso-bidi-font-style: normal;">deemed domicile</i> has no effect whatsoever on succession or family law.</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">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 <i style="mso-bidi-font-style: normal;">are</i> 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.</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">This problem – that somewhere which you or I might think of as <i style="mso-bidi-font-style: normal;">one country</i> 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 <i style="mso-bidi-font-style: normal;">particular</i> state, cannot give you a new domicile of choice.</span></div>
</div>Andrew Joneshttp://www.blogger.com/profile/08777906986904853263noreply@blogger.com0tag:blogger.com,1999:blog-3184163840819769337.post-75199590796543917812012-04-22T10:30:00.000+01:002012-07-07T11:09:50.656+01:00International: Immigration<div class="MsoNormal" style="margin: 0cm 0cm 0pt; text-align: justify;">
<span style="font-family: Arial, Helvetica, sans-serif; font-size: x-small;">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.</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">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.</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">In this case, I want to start by discussing “domicile”, which is the <em>connecting factor</em> 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.)</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">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. </span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">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 <u>actual</u> 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.)</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">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.</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">It follows that if you are a potential long-term immigrant, there are two things to deal with, before arrival:</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">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 <i style="mso-bidi-font-style: normal;">is</i> 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?<span style="mso-spacerun: yes;"> </span></span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">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. </span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">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.</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">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. </span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">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):</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">1. during the first (approx.) 7 years of residence;</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">2. where the unremitted foreign income is less than £2,000 a year; or</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">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.</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">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.</span></div>Andrew Joneshttp://www.blogger.com/profile/08777906986904853263noreply@blogger.com0tag:blogger.com,1999:blog-3184163840819769337.post-88964354208252636262012-04-15T10:04:00.000+01:002012-04-15T10:04:18.807+01:00Barmaid Syndrome - More Technical Solutions<span style="font-family: Arial, Helvetica, sans-serif;">This is my third and final post in a series on the subject of "Barmaid Syndrome" <span lang="EN-US">– 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.</span></span><br />
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<span lang="EN-US"><span style="font-family: Arial, Helvetica, sans-serif;">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.</span></span></div>
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<span lang="EN-US"><span style="font-family: Arial, Helvetica, sans-serif;">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 <i>life tenant</i>) has the benefit of the estate while he or she lives, but after his or her death it belongs to the <i>remaindermen</i>, who are usually the children.</span></span></div>
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<span lang="EN-US"><span style="font-family: Arial, Helvetica, sans-serif;">Be aware of the downside: the survivor only has an <i>income interest</i> – 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 <i>afford</i> 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.</span></span></div>
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<span lang="EN-US"><span style="font-family: Arial, Helvetica, sans-serif;">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.</span></span></div>
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<span lang="EN-US"><span style="font-family: Arial, Helvetica, sans-serif;"></span></span></div>Andrew Joneshttp://www.blogger.com/profile/08777906986904853263noreply@blogger.com0tag:blogger.com,1999:blog-3184163840819769337.post-35916021809725728252012-04-08T09:42:00.000+01:002012-04-08T09:42:00.314+01:00Inheritance Tax Strategy 1 - Don't Worry About It<div class="MsoNormal" style="line-height: normal; margin: 0cm 0cm 0pt; tab-stops: 42.55pt decimal 276.45pt 389.85pt; text-align: justify;">
<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">No, I’m serious. Don’t worry about it.</span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">If you just carry on with your life and do nothing about it, inheritance tax will not be payable until <i style="mso-bidi-font-style: normal;">after you have died</i>.</span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">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 <i style="mso-bidi-font-style: normal;">both of you have died</i>.</span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">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.</span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">Inheritance tax really is somebody else’s problem.</span></span></div>
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<span style="mso-bidi-font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">Go ahead, enjoy yourself, don’t worry about it!</span></span></div>
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<span><span style="font-family: Arial, Helvetica, sans-serif;"></span></span></div>Andrew Joneshttp://www.blogger.com/profile/08777906986904853263noreply@blogger.com0