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Inheritance Tax and Estate planning: Why is it so important?

UK Inheritance Tax (IHT) receipts are currently at an all time high, hitting a record £5.4bn in 2018/19, and only look set to grow again in the coming year.

The nil-rate band (NRB), now in its tenth year of being frozen at £325,000, is key when it comes to protecting your estate and accumulated wealth from Inheritance Tax.

However, as the value of assets continues to rise and the nil-rate band remains static, many are finding that a larger proportion of their estate is vulnerable to the ‘inheritance tax trap’.

 

It’s never too soon to start planning

Many individuals fail to recognise the importance of Inheritance Tax and Estate planning; whether because they are reluctant to think that far ahead, or because they assume that IHT will not affect them.

However, planning is key to protecting your wealth and to making sure it is passed on in the most tax-efficient manner possible.

Inheritance Tax does not only impact the richest among us, nor is it a tax that should be ignored simply because of your age. After all, no-one wants to end up paying more to the tax-man than is necessary.

Above £325,000, IHT is payable on your chargeable estate. This would include gifts you made within seven years of your death.

However, even under the current rules, there are still steps you can take to minimise your future liabilities.

 

Strategies to minimise your Inheritance Tax liabilities

1. Will – Having a valid Will in place will ensure that your estate and assets are distributed in accordance with your wishes and in the most tax-efficient way. In the absence of such, the rules of intestacy will apply, which may not be tax-efficient.

 

2. Residence Nil Rate Band (RNRB) – The RNRB is an additional allowance to the NRB. It is only available if you pass your main residence to direct descendants. The current RNRB is £150,000 per person but is set to rise to £175,000 from 6 April 2020.

 

3. Spouse or civil partner exemption – Married couples and registered civil partners with an unused NRB, on the death of the first spouse, can have this utilised by the second spouse on their death. This means married couples and registered civil partners can effectively benefit from a joint nil rate band of £650,000. This rule also applies for the RNRB, increasing the tax-free amount available to a maximum of £950,000. Its also worth bearing in mind, that IHT is not payable on anything left to a spouse or civil partner who has their permanent home in the UK. Nor is it payable on lifetime gifts made to them.

 

4. Annual exemption – During your lifetime, the first £3,000 of any gifts made in a tax year can be made without any Inheritance Tax consequences. If your exemption from the previous tax year was unused or partly used, you can carry forward the unused amount. Therefore, such gifts do not form part of your 7 year ‘clock’.

 

5. Potentially Exempt Transfers (PET’s) – This is a gift to an individual that becomes exempt from IHT, if the person making the gift survives 7 years after making the gift. If the person making the gift dies within this period, the PET becomes chargeable to IHT.

 

6. Investment – There are certain investments that become IHT-free after two years, as they qualify for Business Relief (BR).

 

7. Charitable donations – You can reduce the rate at which IHT is payable, to 36 per cent, by leaving at least 10 per cent of your estate to charity. The donation is not subject to IHT and is not included in the taxable value of your estate.

 

8. Pension funding – Pensions sit outside your estate and will not count towards your IHT threshold. Consequently, they are a means of leaving money to your beneficiaries and ensuring they keep as much of it as possible. Conditions apply depending on how old you are when you die and the type of pension you have in place.

 

9. Trusts – Trusts can be extremely useful when looking to pass on assets in a tax-efficient way. Assets within a Trust, in certain circumstances, can be excluded from your estate for IHT purposes. This will ultimately help to minimise your liability. Trusts are complicated, so seek professional advice if you are considering this strategy.

 

Author insight…

Barry Jefferd, Tax Partner at George Hay, comments:

“Perhaps reluctant to think so far ahead, many people don’t actively seek assistance with estate and inheritance tax planning”

 

“As a consequence, the government is undoubtedly receiving tax that, with proper planning, wouldn’t need to be paid.”

 

“Inheritance tax and estate planning is well worth doing, to protect as much of your wealth as you can and to ensure it is passed on in the most tax-efficient way possible.”

 

How can George Hay help?

Here at George Hay, we share your concerns about paying IHT and the complexities that accompany the regime. With our years of experience, knowledge of your circumstances and careful tax planning, those complexities can easily be overcome. 

If you’d like to speak to one of our team about Inheritance Tax and Estate planning, call 01480 426500 or email huntingdon@georgehay.co.uk

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probate fees delayed

Probate fee increases delayed due to Brexit debates

Early last month, we brought you an update on the proposed changes to Probate fees. The new fees were expected to come into effect from 1 April 2019, pending parliamentary approval.

The Ministry of Justice (MoJ) intends to replace the current flat-rate fee for probate with one that is determined by the value of the estate (revisit our last post for a reminder of the proposed new probate fees, here).

At the time, the proposals had been approved by the House of Lords and were set to go before the House of Commons.
 

Probate fee changes delayed in latest development

Now though, the changes have been delayed due to pressure on parliamentary time. This is largely as a result of Brexit debates and motions.

The proposals are currently still awaiting an approval motion in the Commons. The MoJ have confirmed that, once approved, the regime will take effect 21 days later. 

Depending on parliamentary time, the new fee structure is unlikely to be enforced until late April, at the earliest.

As it stands, no date has been set for a parliamentary motion. This, combined with the potential for MP’s to object, could further delay the introduction of the new charges.
 

In the meantime…

In the meantime, the MoJ has confirmed that the current probate fee structure will remain in place. This is true, too, of the current registration process.

There has, however, been confusion among advisers, who were expecting the rules to apply from this week.

HMRC has reported a high level of calls from advisers asking about the current process to register an estate for Inheritance Tax (IHT) through HMRC. This is a process which typically precedes any registrations for probate.

We can safely say that our expert advisers were not included in the cohort of callers, as we were fully aware of what was happening.

However, to help advisers HMRC is relaxing its position on the IHT registration process.

‘Probate registries will accept applications before processing by us as long as they are assured the IHT forms from us will be coming shortly.’ an HMRC spokesman confirmed.

This is identical to the transitional rules that were suggested when the last proposed increase (which never happened) in 2017 was announced.
 

Our thoughts…

Our Probate Director, Barry Jefferd, said: 

“It is acknowledged that the new fees are in effect a tax. Whilst any delay is welcome, the announcement was made just 4 days prior to when the increase was due to take effect.”

 

“The position could be helped if they used date of death to apply the charges, instead of the date of application. It is totally disgraceful that, upon a bereavement, the relatives do not know how much they will need to pay.”

We will continue to monitor any further developments in respect of these proposals and report on them as appropriate.

We would encourage anybody who is concerned about the fee increases to seek professional advice at the earliest opportunity.

You can find more information about our Probate offering here.

Article authored by Barry Jefferd, Head of GH Probate Limited.

GH Probate is the trading style of GH Probate Limited. Registered in England and Wales number 9630102. Registered Office: St George’s House, George Street, Huntingdon, Cambridgeshire PE29 3GH.
Authorised to carry out the reserved legal activity of non-contentious probate in England and Wales by the Institute of Chartered Accountants in England & Wales.

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New probate fees spell sizeable expense for bereaved

In November 2018, plans to increase probate fees were reinstated. This was just under two years after they were initially put on hold in response to harsh criticisms.

The earlier proposals promoted much higher fees than those currently under scrutiny. However, after failing to pass through Parliament before the general election in June 2017, they were withdrawn.

For the current proposals to become law, they must be formally approved by both Houses of Parliament.

They proposals have been approved by the House of Lords and will now go before the House of Commons. Should the House of Commons approve the proposals, the new fees are expected to take effect from April 2019.

The new fee structure will consist of a sliding scale of charges (see below). The charge will be determined by the value of the estate, rather than the flat-fee system currently in operation.

The revenue generated as a result will, according to the Government, subsidise the costs associated with running the HM Courts & Tribunals Service.

The proposals are as follows:

 
Value of estate (before Inheritance Tax) and proposed fee

Up to £50,000  (£0)                                                                   
£50,000-£300,000 (£250)                                                              
£300,000-£500,000 (£750)                                                            
£500,000-£1m (£2,500)                                            
£1m-£1.6m (£4,000)                                                                         
£1.6m-£2m (£5,000)                                                                         
More than £2m (£6,000)

           

New probate rules may create problems with cashflow

The ‘fees’ have raised concerns amongst professional bodies, charities and agents, as well as those who are recently bereaved.

The fee will need to be paid upfront, before probate is obtained. As a result, the sliding scale has the potential to cause big cashflow problems for some families.

In a written statement to Parliament, the Ministry of Justice (MoJ) stated that the fees represent ‘a fair and more progressive way to pay for probate services’ and that it does not believe the fees will ever be ‘unaffordable’.

However, it has since become apparent that the Government has not properly assessed the cost to high-value estates of administering probate after April.

Consequently, bereaved families without easy access to their loved one’s assets face the prospect of getting into debt. This will leave many contending with unnecessary pressure, at an already difficult time.

Emily Deane, Technical Counsel at Society Trust & Estate Practitioners (STEP), said: “Recently bereaved families are now having to rapidly calculate whether they would be worse off once the new probate fees come in and, if they are, they are either rushing to apply for probate before April, or else risk paying the higher amount.”

It is not yet clear whether the new rules will apply based on the date of death, or the date of application.

However, with taking the pressure off of bereaved families in mind, STEP suggests that the new probate fees should apply only to those estates where the individual is deceased after the implementation date, rather than to any probate application submitted after this date.

 

The ‘fee vs. tax’ argument

There has been fervent debate about whether the charges are ‘fees’, or whether they are in fact a ‘tax’.

We agree with the many who have labelled the charges a ‘stealth tax’, given that the increases do not correlate with the level of work required to process an application.

The work undertaken, by the Probate registry, does not differ between an estate worth £50,000 and an estate worth £2m.

In fact, more paperwork is sent to the Probate Office for a smaller estate as for larger estates some of the work is carried out by HMRC’s Inheritance Tax office.

 

Will higher probate fees facilitate a more efficient service?

Justice Minister, Lucy Frazer, has said that the increases will help to improve the efficiency of the service.

We have already seen the Government introduce online applications as part of the reforms; a move they believe will make the process quicker and simpler for bereaved families.

This may well be the case initially, but we would argue that it may not always be more efficient in the long-run.

The online system undoubtedly has a place and for simple estates, it may be a great aid, but more complex estates can rapidly become difficult to administer and executors can find themselves personally liable for any mistakes that are made.

 

Why choose GH Probate?

We offer a comprehensive, non-contentious, service without any need to involve a third party. As a result, the whole process is simplified. 

GH Probate Ltd can assist with as many, or as few, functions of the executor role as you wish. Our specialist team have vast experience in this area and we undertake the role with the utmost sensitivity and discretion.

By using GH Probate Ltd, you can rest assured that everything will be carried out correctly, with compassion and discretion, and delays will be minimised. We only charge for what we do; we do not add on a percentage fee based on the value of the estate. Our team work with you and will ensure that you are always kept up-to-date on how an estate is progressing.

We would encourage anybody who is concerned about the fee increases to seek professional advice at the earliest opportunity.

You can find more information about our Probate offering here.

Article authored by Barry Jefferd, Head of GH Probate Limited.
GH Probate is the trading style of GH Probate Limited. Registered in England and Wales number 9630102. Registered Office: St George’s House, George Street, Huntingdon, Cambridgeshire PE29 3GH.
Authorised to carry out the reserved legal activity of non-contentious probate in England and Wales by the Institute of Chartered Accountants in England & Wales.

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7 things we think you should know as the ISA turns 20…

The Individual Savings Account (ISA) was first introduced back in April 1999, meaning that this year marks its 20th anniversary.

Online investment broker, Hargreaves Lansdown, estimates that approximately £8.7trn has been invested in the tax-free accounts during that time.

ISA’s can be a flexible way to save and invest whilst enjoying significant tax benefits, especially for higher earners and the range of investment options has evolved drastically since 1999. However, as ISA’s have evolved, many also feel that they have become increasingly complex and difficult to get to grips with.

Wherever you look for information on ISA’s, you’ll likely come across strong arguments for and against investing in them; some will perhaps even tell you that the ISA is dead!

The truth is though, that they are very much still alive and kicking. Whilst this is the case, it’s worth considering whether there might be reasons that an ISA is right for you.

Whilst you mull that over – here are 5 things we think you should know about ISA’s:

 

1 – Back to basics

When it comes to ISA’s, it’s all too easy to forget the basics. An ISA is a type of savings account. You can earn interest, dividends and capital gains from an ISA without ever being taxed.

The maximum amount you can save into an ISA for the 2018-19 tax year is £20,000. This limit is enforced by the UK government and is likely to remain for at least the next two years.

This means that, annually, you can protect up to £20,000 of your savings in a ‘tax-free wrapper’. There are several different ISA products available on the market and you can choose to split your annual contribution between these, in whatever proportion you’d like.

However, you can only contribute to one of each type of ISA, in each tax year.

Each year, there is a deadline by which you should have utilised as much of your allowance as possible; the 5 April, which also marks the end of the tax year. On the 6 April, your £20,000 ISA allowance will refresh.

 

2 – Use it or lose it

If you have an ISA, it’s important to remember that any allowance remaining at 5 April 2019 will be lost. You cannot carry over your unused allowance from year to year, so you should always look to use up as much of it as you can before the end of the tax year. When it’s gone, it’s gone!

 

3 – Brexit, bank rates and the PSA

Benjamin Franklin once said, “nothing in life is certain, except death and taxes” and to some degree, he’s right. With Brexit on the horizon, threatening an economic slowdown, and the potential for taxes and bank rates to increases, ISA’s could be a safe bet amidst major change.

When we consider the dip in the number of people opting to save into an ISA, in recent years, the Personal Savings Allowance (PSA) is often identified as the reason for this.

The PSA, which came into effect on 6 April 2016, means that basic-rate taxpayers can now earn up to £1,000 in savings income tax-free. Higher-rate taxpayers can earn £500.

Ultimately, many people realised that they could opt for a non-ISA savings account, avoiding the relatively low interest rates, but still benefit.

However, the key thing to remember here is that there is no telling what will happen to the personal savings allowance and how long it will last. As for ISA’s, they will likely always be tax-free, and the rules are less vulnerable to change.

 

4 – The best time to invest

Around this time each year, along with many other accountants and financial advisers, we begin to encourage our clients to think about end-of-year tax planning and, as part of this, using up any remaining ISA allowance.

However, that isn’t to say that final few days of March is the best time to top-up your ISA or quickly deposit that £20,000 you’ve been sitting on.

If on the 6 April 2019, you have £20,000 ready to deposit… do it. If you sit on it or keep it in another non-ISA account until later in the year, then you’re effectively paying tax on your savings when you needn’t.

If you don’t have £20,000 ready to deposit in April, move over what you can and top it up throughout the year.

 

5 – Instant access or fixed-rate?

If you’re considering an ISA, know the difference between instant access and fixed-rate.

  • Fixed rate ISAs lock your money away for a set period but tend to pay marginally higher rates of interest. If you later decide to take money out, you’ll pay an Early Access Charge. These are better if you have a lump sum to invest.
  • Instant access ISAs let you access your savings throughout the tax year. You can also contribute as you earn. Interest is not fixed though, so if rates fall so may your returns.

 

6 – Pick of the bunch

Do your research before you jump in and invest all your hard-earned cash in an ISA. There are a range of investment options available, but not all of them will be the right fit for you. ISA’s currently on the market include the;

  • cash ISA;
  • stocks and shares ISA;
  • Innovative Finance ISA;
  • Lifetime ISA;
  • Help-to-Buy ISA; and
  • Junior ISA.

Each is accompanied by its own set of rules and so you should familiarise yourself with these before you decide where best to house your money.

 

7 – Is it worth it?

Though ISA’s certainly have their drawbacks and could do with some improvement going forward, they can still afford significant tax benefits.

When it comes to your savings and investments, it’s often not wise to put all your eggs in one basket. An ISA could be one of several investments for you, but one that guarantees £20,000 of your money will be safely set aside, tax-free, until you require access to it.

It is worth bearing in mind that ISA’s are often more beneficial for higher-earners. In particular, those who are likely to exceed the PSA limit or are nearing becoming additional rate taxpayers, and so won’t get a PSA.

Regardless, though, if you are keen to maximise your opportunity to save ‘tax-free’, then ISA’s certainly remain a valid option.

 

If you’re currently looking to start a rainy-day reserve, ISA’s should still be a consideration. You may just need to work a little harder to find the right account, with a reasonable interest rate. Contact us today for advice on how to secure the most tax-efficient home for your hard-earned money.

You can also read more about the tax-break on inherited ISA’s that thousands of people are missing out on, here.

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Government pursuing new probate fee structure

Back in March 2017, we brought you news of the Ministry of Justice’s (MoJ) plans to implement a new banded structure for probate fees, to subsidise the costs associated with running the HM Courts & Tribunals Service.

The proposals were heavily criticised, on the basis that a significant increase would disproportionately affect ‘asset-rich but cash-poor’ individuals. These are typically people that, despite having money tied up in other assets, do not have immediate access to funds.

Because of the backlash and concerns about passing the necessary legislation in time, the measures were put on hold ahead of last year’s general election.

Revisiting the plans

Now, just under two years later, probate fee increases are back on the table after the Government announced, last month, that they would be revisiting the plans.

The plans are subject to parliamentary approval but the new fees are expected to come into effect in April 2019.

A grant of probate is issued, by the probate registry, to the executor/s named in a will. A grant of letters of administration is issued to the administrator/s in the event that no will exists.

This confirms their authority to deal with the assets making up the deceased’s estate – for example, bank accounts and property.

Currently, probate fees are based on a ‘flat-fee’ system. Personal applications are charged at £215 and those made by accountants, on behalf of an individual, at £155.

Under the latest proposals, fees will be assigned based on a sliding scale. This means that the amount payable will depend on the value of the estate in question. 

Probate fee increases

From April 2019, those estates that are worth £50,000 or less will not incur a fee for probate. This threshold has increased from £5,000 and over 25,000 estates are expected to be exempt from fees as a result. However, anything over £50,000 will soon incur fees ranging from £250, up to £6,000.

The banded fees, based on the value of the estate before Inheritance Tax (IHT), are as follows:

Value of estate (before Inheritance Tax)                          Proposed fee
Up to £50,000                                                                          £0
£50,000-£300,000                                                                  £250
£300,000-£500,000                                                                £750
£500,000-£1m                                                                         £2,500
£1m-£1.6m                                                                              £4,000
£1.6m-£2m                                                                              £5,000
More than £2m                                                                        £6,000

Likely impact of the increases

The MoJ appear not to be concerned about the impact that these increases may have on individuals. In a written statement to parliament, it declared that the new tiered fee structure represents ‘a fair and more progressive way to pay for probate services’. In addition, it does not believe the fees will ever be ‘unaffordable’.

However, those that are not exempt may find themselves facing an extortionate bill well beyond the realms of what they can afford, at an already emotionally challenging time. This is particularly true of those individuals we mentioned earlier, who are ‘asset-rich but cash-poor’.

The truth of the matter is that, with property values at historically high levels, the number of estates falling into a higher band is likely to be quite large.

Furthermore, the MoJ’s statement in itself is rather misleading. The new fees will not only cover the cost of obtaining probate but will, for the most part, subsidise the running costs of the courts and tribunal service.

The real sting in the tail, and the reason many have already labelled it a ‘stealth tax’, is that the fees do not even correlate with the level of work required to process an application.

The work undertaken, by the Probate registry, does not differ drastically between an estate worth £50,000 and one worth £2m.

There is no doubt that the new measures will add further complexity to estate planning. It may also lead some individuals to take uninformed and unnecessary risks, in an attempt to avoid the fees.

Next steps

The Government has said it plans to publish guidance for executors. The guidance is expected to address how to cover the cost of fees, and what support will be in place should they be unable to pay these before probate is granted. However, this guidance remains to be seen.

We would encourage anybody who is concerned about the latest proposals to seek professional advice at the earliest opportunity.

You can find more information about our Probate offering here.

Article authored by Barry Jefferd, Head of GH Probate Limited.

GH Probate is the trading style of GH Probate Limited. Registered in England and Wales number 9630102. Registered Office: St George’s House, George Street, Huntingdon, Cambridgeshire PE29 3GH.

Authorised to carry out the reserved legal activity of non-contentious probate in England and Wales by the Institute of Chartered Accountants in England & Wales

 

 

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