Estate planning for £1m to £5m estates: maximising the benefits of the Residence Nil Rate Band Brooks Macdonald Adviser Academies – April / May 2018 John D. Bunker Head of Private Client Knowledge Management, Tax Trusts and Estates, IM Private Wealth Page 1
Estate planning for £1m to £5m estates: maximising the benefits of the Residence Nil Rate Band Brooks Macdonald Adviser Academies: Technical Presentation • 1.1-1.4 RNRB & PDB: major tax changes, Estate planning & working together pro-actively; role of FPs & IMPW • 2.1-2.10 RNRB: key basics incl traps for wills Estate planning for £1m- £5m estates: • 3.1-3.4 Rethinking use of Pensions and other assets • 4.1-4.6 Spouses: planning wills & trusts to avoid loss of RNRB • 5.1-5.4 Lifetime gifts to reduce estate below £2m threshold Page 2
Irwin Mitchell nationally Page 3
Irwin Mitchell Private Wealth • Irwin Mitchell Private Wealth comprises 4 national teams : – Tax Trust & Estates – Wills Trust and Estates Disputes – Family and – Residential Property • Tax Trust & Estates team includes :- – Will drafting, Inheritance Tax & Estate Planning; – Planning with APR & BPR for farm and business owners; – Trusts: advice and drafting to create, vary, re-arrange and wind up trusts; – Tax & trust compliance: all the advice, accounting, tax and admin; – Estate administration (Probate); – International Tax planning, wealth structuring & estate planning for HNWIs; – Elderly & Vulnerable Clients: a wide range of services including LPAs & COP. Page 4
1.1 Estate Planning for £1m to £5m estates for RNRB • Residence Nil Rate Band (RNRB) introduced April 2017 – Major opportunity to save IHT – But lots of traps & hurdles – many unsuspecting clients will not qualify • Key focus: £2m taper threshold will deny many RNRB – So how can to maximise RNRB? • Pension Death Benefit (PDB) tax changes in 2015/17 – ties in with RNRB planning • So a need to re-think solutions for clients – Any estate planning pre 2015 needs review Page 5
1.2 Estate Planning: Legal, tax and financial planning • Estate planning brings together 3 disciplines: – Legal – especially wills & trusts, – tax planning – IHT, CGT, Income Tax, SDLT etc. & – financial planning • Good for lawyers/tax advisers to work with FPs/IFAs – For long term benefit of clients and mutual benefit – Work together- where clients recognise value paying, for better results • Combining legal, tax planning and financial planning solutions Page 6
1.3 Role of Financial Advisers in major tax changes • FPs /IFAs have key role in pro-active advice to clients – Hope to show key points to flag up for attention – with 12 top tips • Tax reforms mean new opportunities and new traps – Many will assume they get RNRB when they don’t – Clients don’t know what they don’t know! – So we need to help clients see need for specialist advice – Pro-active advice needed • To flag up traps or hurdles • & potential to save tax with re-thinking/ re-structuring • But may need to “sell” the value of the advice! Page 7
1.4 role of IM Private Wealth in these key tax changes • We in IM Tax Trust & Estates work closely with FPs / IFAs – & Investment managers – building long term client relationships - to help achieve aims • IM can provide integrated legal and tax planning advice – Working with FPs/IFAs, – including “one - off” estate planning advice • IM’s Tax Trust & Estates team – works with other parts of IM Private Wealth – E.g. Family Asset Protection service • for protecting capital, e.g. from gifts, Page 8
2.1 RNRB key basics: Major new IHT Relief New relief for Inheritance Tax (IHT) from 2017/18 • Where deceased owned a home – see 2.3/2.4 – & Left sufficient of estate to direct descendants – see 2.5 – & No need for specific gift – but NB how HMRC treat share of estate – see 2.6 – & Estate value not over £2m – or lose RNRB by tapering – see 2.7 – & Spouses can C/F unused RNRB to second spouse’s estate – see 2.8 – & Real traps for wills, e.g. grandchildren & unmarried families – see 2.9/10 – Page 9 9
2.2 RNRB key basics: Spouses can leave target £1m! • RNRB phased in from April 2017 to 2020/21 – Now £125K in 18/19 – £175K in 20/21 • In 2020/21 – reach the magic £1m. for spouses! – RNRB £175K – + NRB £325K = total £500K each – Married couple £1 million free of IHT • Price: NRB frozen for 12 years to 2020/21 . Page 10 10
2.3 RNRB key basics: owned residences Where deceased owned a home • – Has to have been occupied as a residence at some time – No need to be main residence includes interests in homes held by life interest trust – so aggregable with personal estate • Can be 2 interests – incl trust – but only one property – Downsizing addition if sale on/after 8 July 2015 • Page 11 11
2.4 RNRB key basics: Tip 1 re owned residences Tip 1: Keep net value of client’s home under review – As can lose RNRB if don’t own sufficient equity • E.g. in 2020/21 – £175K – or £350K for 2 RNRB » Can you review value of any property interest(s) • & Cf. with RNRB available each year, – including any brought forward from a spouse? – See 2.8 » Page 12 12
2.5 RNRB key basics – direct descendants • Where sufficient estate left to children & remoter descendants = property interest is “closely inherited” – Widely defined including step-children • spouses and widows of descendants -if do not remarry – Can be closely inherited through some forms of trust : • But not a discretionary trust – Can vary estate or trust within 2 years of death to achieve result • Deed of variation • or deed rearranging trust Page 13 13
2.6 RNRB key basics – No need for specific gift of home No need to have specific gift of property interest • HMRC treat property as inherited as per shares of residuary estate – E.g. 3 x 1/3 share. If Prop £450K 1/3 = £150K – if 1 share does not qualify, – HMRC say only 2/3 prop gets RNRB – = £300K so if 20/21 waste £50K of RNRB. – Cannot put will right through Appropriations – HMRC say - • Tip 2: Ask for copy of will – to see beneficiaries – including any “mixed estate” where some – not all - closely inherit – Review with lawyers – in lifetime, or after death: • Worth a quick estimate of estate that is closely inherited • In case revision to will or variation of estate needed Page 14 14
2.7 RNRB key basics: Tapered withdrawal estates over £2m. • If estate exceeds £2 million – the “taper threshold” – Lose £1 for every £2 over limit – So = no RNRB if estate: • 2018/19 = over £2.25m or £2.5m if double RNRB • “Estate” includes aggregated trust interests – caught for IHT on death, – But disregards all exemptions and reliefs - APR/BPR etc • Effective marginal IHT rate on the top slice over £2m = 60% Page 15 15
2.8 RNRB basics: Dec’d Spouse’s Brought-forward allowance • Brought-forward allowance – If “unused” by Deceased spouses estate • Subject to restriction – tapered withdrawal if 1 st spouse’s estate over £2m. – If one spouse dies after 5.4.17, – then double up RNRB – even if dec’d spouse died pre-6.4.17 » £250K 2018/19 » £350K 2020/21 – Planning issues re whether good to “use” RNRB on 1 st death • See part 4 Page 16 16
2.9 RNRB key basics: Traps re grand-children & stepchildren • Grandchildren: what gifts in will can claim RNRB? – main options: • Outright gift , bare trust (no age contingency) or IPDI – Any age contingency , • Could appoint out absolutely - or on IPDI trusts - to claim RNRB • “Stepchildren”: who are included? – Children of spouse or former spouse – but not children of unmarried partner • So, many wills need to be reviewed • Tip 3: Don’t be afraid to query will terms – e.g. to grandchildren OR “step - children” – & do ask re possible remedies – e.g. variation within 2 years of DOD Page 17 17
2.10 RNRB key basics : Traps re wills for unmarried couples • If want surviving partner to have right to live in home, – no RNRB on first death & no spouse exemption – On 2nd death, ½ share to 1 st partner’s kids = not gifts to stepchildren • So no RNRB when capital goes to those children – Even if “children of the family” & can claim v. estate • The only RNRB on 2 nd partners gift to his/her own children • Perhaps gift ½ share to IPDI for children of first to die – Trustees need overriding power of appointment & clear LoW – Value in good independent Trustee to ensure all protected Page 18
3.1 Planning to maximise benefits of RNRB: Re-thinking planning for RNRB & PDB tax changes • If estate exceeds £2 million: loss of RNRB by “taper” • Effective marginal IHT rate = 60% on top slice over £2m • Pension fund value doesn’t count towards £2m estate limit – & Pension Death Benefit tax changes, from 2015/16 = major new opportunity • to pass on assets tax effectively : • Lump sums, pensions or FAD • Tip 4: Anyone about to start drawing on pension: – STOP – Take advice on RNRB & PDB changes first Page 19
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