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In this issue of our Private Newsletter:

Making Sure You Qualify For The New Inheritance Tax Allowance

The new Inheritance Tax (“IHT”) allowance for the family home is coming into force in April 2017.

It will protect up to an additional £350,000 of a married couple’s estate from IHT, saving their families up to £140,000. However, there are a lot of conditions attaching to the allowance and you may need to take action to make sure you get the full benefit.

The new allowance is called the “Residence Nil Rate Band” or “RNRB”. It attaches to the family home, which must be left to a direct descendant. Direct descendants include children, stepchildren and grandchildren and others.

The RNRB applies to estates where the person dies after 6th April 2017.

Why might you have to amend your Will?

1. If you have children or grandchildren under the age of 25.

The RNRB only applies in a limited numbers of cases mainly:

  • where a direct descendant inherits the property (or a share in it) outright; or
  • where a direct descendant has the right to live in the property rent free, or to have the income from it if it is let out (“IIP”). This also includes the right to income from investments if the property is sold and the proceeds invested.

It is very common to provide that your children or grandchildren will inherit if they get to a certain age, typically 18-25. However, if your direct descendants are under the specified age to inherit set out in your Will when you die, then there will be no immediate right to the asset and the RNRB will not be available.

Our bespoke Wills can address the above requirements to ensure that your estate will benefit from the maximum relief available but still allow inheritance to pass to the beneficiary when they reach your preferred age.

2. If your estate is above £2million

The RNRB is reduced by £1 for each £2 by which the person’s estate is over £2m. This means the RNRB is completely lost at £2.7m for a married couple (£2.35m for a single person). Ordinary exemptions for the purposes of calculating inheritance tax do not apply when considering RNRB. So for instance, if your estate includes assets which will qualify for Business or Agricultural Property Relief, the full value is still included in your estate for this purpose. However, it is only your estate at death which is relevant, so if you have made gifts prior to death (even less than 7 years before you die) they can still bring your estate below £2m.

Depending on the size of your estate, one option is to amend your Wills so that on the death of the first of you, an amount up to the IHT threshold (currently £325,000) is left to your children or to a discretionary trust and the balance to the survivor. There wouldn’t be any tax on the first death and the assets which had been left in this way would not accumulate in the estate of the second spouse, thus helping it not to exceed the £2m threshold. A discretionary trust is flexible and can be set up so that the surviving spouse has access to the funds, and can be established even if there are no cash assets available to transfer to it.

3. If you have left your estate (or part of it) to a trust

This is often done for larger estates because of the long term tax advantages, but is also very common for people for example, who have a disabled child, if they are worried about a child’s marriage or other life events. The suggestion here is to create an IIP for that child, which will enable the RNRB to apply. The IIP can be terminated a few months after the parent has died, leaving in place the trust which the parent originally intended.

It will be obvious from the above that this is a complex area and there are additional possibilities and IHT planning opportunities which are not covered in this article.

Pension Sharing on Divorce

Pensions are often the most valuable assets within a marriage. Sometimes, pensions are even more valuable than the family home, which is why it is important to understand the different options upon divorce.

The values of all pensions need to be taken into account, including the additional state pension but excluding the basic state pension. Not only does this mean pensions built up during the marriage, but all pensions built up during a couple’s working life. This can also include inherited pension pots.

Financial disclosure is an integral part of the divorce process. A couple need to obtain and disclose to each other the Cash Equivalent Transfer Value (“CETV”) of all pensions they hold. The CETV represents the pension fund value upon transfer of a pension to another pension scheme. Settlement advice can only be properly given once there has been full and frank financial disclosure.

There are various options for divorcing couples. The first and most common way to deal with pension assets is by offsetting. Offsetting is where the value of a pension is offset against other assets. So, for example, if one spouse’s pension is worth more than the other’s, the other could receive a larger share in the matrimonial home.

If the assets of the marriage are not large enough to allow an offset, another option would be pension sharing. Normally, a full pension report is obtained from a Pension Actuary and they provide a detailed report on a couple’s pensions with a suggested percentage pension split to equalise income and capital on divorce.

If a spouse is awarded a share of their spouse’s pension, this share is either transferred into a pension in their own name or they may be able to join their spouse’s pension scheme, as a new separate member of that scheme. Some pension schemes will insist that a split share is transferred out.

Pension sharing can be deferred to a later date. This is more common if a spouse is already receiving a pension, but the other has not retired and is too young to receive a pension.

A less commonly used option is pension attachment. This is where a spouse receives some of the other spouse’s pension when it starts being paid to them. However, nothing is received until the retiring spouse has started taking their pension, which makes this option less desirable.

From April 2015, all persons entitled to a pension have been able to withdraw 25% of their pension pot tax free at age 55 (this applies only to personal, defined contribution and money purchase schemes and not final salary schemes). You are able to make further withdrawals up to the value of the whole fund.

However, after the first 25%, you will pay income tax on those withdrawals at the marginal rate. This will allow a party to a marriage to remove large sums of money and spend, invest or save elsewhere. This could have far reaching implications within divorce proceedings as it could mean that the value of the marital assets are depleted or increased, depending on what the pension monies have been used for.

From now on, spouses over the age of 55 will be able to accept lump sums as well as or instead of a pension sharing order that could be drawn down as required.

Holiday Homes – Pleasure or Pain?

Recent changes in legislation have given owners of second or holiday homes plenty to think about.

First, since April this year, if you buy a property which is not intended to be or to replace your main home, you will pay 3% stamp duty in addition to the stamp duty which you would ordinarily have paid. This was intended to deter people from buying holiday homes and buy-to-lets.

This deceptively simple idea has ramifications in practice. HMRC look at the picture “at the end of the day” in which the purchase takes place. If at that time you only own one property, then the surcharge is not payable. However, if at the end of that day you own more than one property, you will have to pay the extra tax.

So, suppose you were downsizing and were buying a replacement property to move into before the old property was sold – in this case you have to pay the extra tax and then reclaim it when the old home is sold. If the original home is not sold within three years of the purchase of the replacement property, then the tax cannot be reclaimed.

Suppose you are helping one of your children to buy a home and instead of lending them the money, you buy a share in the property? Because you already own another property, the additional stamp duty is payable on the whole purchase price even though the property is intended to be your child’s main home.

It is clear that buying a property as a holiday home is going to fall foul of this legislation but you should be aware that you will be caught even if your holiday home is in another country. So, suppose you are moving here from France and you decide to keep your home there and buy a new home here- you will still have to pay the extra.

Turning now to holiday homes within the EU, changes in the law from August last year have given English nationals the opportunity to deal with their foreign property in their English Wills, rather than having to make a separate Will in the country where the property is situated.

English law provides that, on death, foreign property such as houses or land should be dealt with in accordance with the law of the country where it is situated. Most EU countries follow the Napoleonic Code, which means that children and spouses are entitled to fixed shares and you have only limited opportunity to leave your estate as you wish.

However, since August last year, those countries have agreed that if you are a national of another country (such as England, which is a separate jurisdiction from Scotland for this purpose) you can nominate the law of that country to apply instead. Thus, in your English Will, you can state that your French property should be dealt with in accordance with English law, and then you can leave your estate as you please in the usual way.

This new option does not affect the tax consequences of how you leave your estate so you will still need to take local advice, and if you are happy with the stipulations in the relevant country it will still no doubt be simpler to make a separate Will there.

However, for many people this new legislation and the flexibility it offers will be a useful option.

New Arrivals for Myerson Private

Earlier this year, Myerson was delighted to announce that Bik-ki Irving and Helen Thompson had joined the firm from Cheshire-based SAS Daniels.

Bik-ki was previously a Partner & Head of Wealth Planning at SAS Daniels and joined Myerson Private’s Wills, Trusts & Probate (WTP) team as a Partner.

Bik-ki is a member of the Society of Trust and Estate Practitioners (STEP) and is also a member of Solicitors for the Elderly. She specialises on advising in relation to tax-efficient wills and other inheritance tax planning matters.

Helen joined Myerson as a Partner and leads the Contentious Probate team. Helen is a member of the Association of Contentious Trusts and Probate Specialists (ACTAPS) and brings extensive experience of pursuing and settling will and inheritance disputes.

The arrival of Bik-ki and Helen added further strength to the existing Myerson Private team headed by the experienced Amanda Freeman.

All non-contentious WTP lawyers in the team are STEP qualified and along with Helen’s ACTAPS membership, this makes them one of the most experienced and qualified teams in the North West. Bik-ki, Helen and Amanda are all recommended by the Legal 500 (2015 edition).

Please Note:

These articles provide general information only and do not constitute advice. In addition, there may have been changes to the law since the article was published.

You should contact us if you require advice or assistance on any specific legal matter.

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Myerson Solicitors LLP
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