Without a doubt 2008 was an interesting year to be an investor and has left many people wondering what they should be doing with their finances. If neither the economy nor markets can be second guessed then what we need are some ideas on how to look after our wealth and often quite straight forward financial and tax planning hold the key.

So what sort of things should be considered and by when?

In general much planning is driven by the 5th April and if not done by that date it falls away for that Tax Year. Scheduled below are a few Tax Year sensitive ideas:

• Personal pension contributions
• ISA contributions
• IHT annual exemptions
• Use of annual Capital Gains Tax allowance
• IHT gifting out of income
• Charitable donations
• Child Trust Funds (Birthday sensitive)

When looking at planning it is often important to look across two to three generations to maximise wealth management, so typically grandparents through to grandchildren.

Here is a simple family case study that illustrates the benefits of “cross family” wealth management.

Case Study

Lord and Lady Blair are in their sixties and enjoy a substantial indexed linked Civil Service pension. Lord Blair was in government for many years, whilst Lady Blair has recently just left the Bench, after a distinguished legal career. They admit to having more income then they know what to do with, plus a substantial investment portfolio pregnant with gains from some well chosen stocks recommended by friends. The Blairs have four children and eight grandchildren and have an estate considerably in excess of the nil rate band; they are looking for some ideas to reduce the ever increasing burden of tax in the UK, which they had not foreseen.

Some thoughts….

The Blairs have not used this or the previous Tax Year’s annual IHT exemption of £3000 each, so they are able to give £12,000 in total to their children, with an immediate Inheritance tax saving of £4,800. At the same time the Blairs are able to give each of the grandchildren £250 each under the small gifts exemption, with an immediate inheritance tax saving of £800.

The gifts are funded by the Blairs encashing shares and using their full CGT exemption of £9,600 each, effectively saving CGT of £3,456 between them.

As the Blairs have lots of surplus income they decide to make additional gifts out of income to their children and grandchildren amounting to £30,000 and ask their good friend Gordon to come up with some ideas. Gordon is a thrifty Scot and thinks the children and grandchildren should save their money as he is worried about the state of the public coffers and whether there will be enough money to go around in the future. Gordon suggests that all the children and grandchildren should use the gifts to make a pension contribution, as the government will put some tax money into the plan even if the grandchildren do not have any income. So the four children and eight grandchildren put the Blairs’ gifts into a pension. Each invests £3,600 and gets tax relief of £720, equivalent to an income tax saving of £8,640 across the family.

There is a bit of money left over so Gordon suggests that the balance of the Blairs’ gifts be saved in the grandchildren’s own names as they all have their own personal and CGT allowances, so the savings should  be pretty much tax free until they leave University and hopefully get jobs. Gordon reminds the Blairs of a little savings scheme he is aware of for children born after September 2002, where anybody can save money for the grandchildren up to £1,200 per child, per annum with the money locked up tax free until the child is 18.

The results….

• Lord and Lady Blair effectively save £3,456 in CGT
• Lord and Lady Blair enjoy immediate IHT savings of £5,600
• The Blair “clan” obtain a minimum income tax benefit of £8,640
• Wealth for the benefit of the children and grandchildren amounting to some £52,640 is being invested as tax efficiently as possible

Without any planning Lord and Lady Blair would have left just £26,400 to their family after IHT, instead of twice that amount being invested as demonstrated above.

The case study for the Blair family is a good example of how wealth can be preserved or maximised across generations regardless of what is happening in the Stock Market and highlights the dangers of “silo” based investing by individuals. Often families need to take a genuinely independent and holistic approach to their financial affairs and engage a financial planner and not rely on an investment manager to look at the “big picture”.

By Richard Bertin ACA CFP
www.asquith.co.uk

A few weeks ago, I met with a new client in his City office to discuss his making a Will. He had a young family and was happily married.

He admitted that he had only made the appointment under pressure from his accountant as he thought the meeting was unnecessary as if he should die without making a Will, his wife would surely ‘get everything’ anyway.

Had he not signed a Will and died, his wife would certainly not have received ‘everything’. The current position is that if you die as a married person with one or more children but without a Will, your spouse will get the first £125,000 free of inheritance tax (‘IHT’) plus your personal chattels and an income interest in half of what is left of your estate. Your children will get the other half of what is left of your estate outright at 18 in equal shares and also the underlying capital of the surviving parents’ income share on that parents’ death. If you die as a married person without children then your spouse will get the first £200,000 free of IHT plus the personal chattels and half of what is left of your estate outright with any surviving parent(s) taking the other half of your estate outright.

For most married couples, with or without children, dying without a Will is likely to throw up unfortunate consequences both from a practical and a taxation perspective, not to mention the additional stress suffered by your spouse and other dependants by not knowing how you wished your assets to be distributed. My client for example is the main bread winner. His estate is currently valued at considerably more than the threshold below which an estate will have no IHT to pay(commonly known as the nil rate band (‘NRB’)), for 2008/9 it is £312,000. If an estate – including any assets held in trust and gifts made within 7 years of death – is more than the threshold, IHT will be due at 40% on the amount over the NRB. My client felt strongly that his wife should inherit everything outright rather than him only giving her an income interest. It was important to him that the family’s lifestyle should be maintained, at least in the short term, and that financial stress should not be heaped on top of the trauma of them losing a husband and father.

As my client wanted to leave his entire estate to his wife, under current legislation, there is also a full IHT exemption available to them on death as both are UK domiciled. Furthermore, as from 9 October 2007, spouses are now able to transfer their NRB allowance so that any part of the NRB that is not used when the first spouse dies, can be transferred to the surviving spouse on their death. What this means in practise for my client is that on his death there is no IHT to pay and when his wife dies, the unused proportion of his NRB may be added to her own NRB which will reduce the IHT liability on her estate when it passes to the children.

I asked what would happen, however, if both my client and his wife died in a common accident? Of course everything should go to the children he suggested. There are tax consequences of leaving assets to children in a trust under a Will, depending on what age they receive these assets. Put simply, a child can receive assets that are IHT free on the death of a parent or step parent under their Will or on intestacy so long as the child becomes absolutely entitled to that property at 18. If this is too young and an age entitlement of between 18 and 25 is more suitable, there will be a charge to IHT if the property leaves the trust when the child is between 18 and 25. The maximum charge in this case will be 4.2%. Should an age beyond 25 be more appropriate, then the child’s share in trust will be subject to a charge to IHT of up to 6% of its value every 10 years as well as an exit charge when the property leaves the trust. The option to keep the age contingency flexible is also worth considering like for example giving a child an income interest initially with capital passing at a later age, but this did not appeal to my client who favoured the simplicity and tax efficiency of his children receiving an equal share of his estate at 18.

My final question to him was whether had he considered what should happen to his estate should he, his wife and children die in a common accident. Unsurprisingly, he had not. We agreed that another meeting was necessary to cover this and other points that we had not had time to discuss like appointing guardians, executors and trustees, disposing of chattels and cash gifts. These will be covered in Part 2 of this article in the next edition of this newsletter.

My client recognised that it is the responsibility of every spouse and parent to make a Will and we therefore agreed that his wife would join him at the next meeting to make her own Will.

By Millie Brenninkmeyer
millie@wenstan.com

In the Chancellors’ Pre-Budget speech on the 24th November 2008, the Chancellor talked of “extraordinary challenging times” and “exceptional economic circumstances” that have hit the UK economy. He also acknowledged that the Britain’s economy is weaker than predicted when he announced the last budget in March 2008.

Public borrowing is likely to be in the order of £100 billion in 2008/09. The peak of borrowing is likely to be in 2009/10 when the predicted level will reach £118 billion.

The highlight of the speech was the announcement of an immediate tax cut. The Chancellor said we need “action now to boost economic activity”. He immediately cut the rate of VAT from 17.5% to 15% effective from 1 December 2008.  However the VAT rate will be returning to 17.5% on 1 January 2010. The Chancellor hopes to encourage consumer spending with the cut in VAT.

However there is to be a new higher 45% rate of tax for earnings over £150k, but this will not come into effect until April 2011, shortly after the expected General Election.

Personal allowances will be restricted for incomes between £100K and £140K, and abolished for incomes above £140K.

With effect from April 2011 there will be a 0.5% increase in both employers’ and employees’ national insurance contributions, and the starting thresholds for NICs will be put in line with that for income tax.

However the Chancellor did announce that small businesses will be able to agree with HM Revenue & Customs a payment schedule for all taxes which suits their cash flow. In addition the planned rise in the small company’s rate to 22 per cent has been deferred for a year.

Another very welcome announcement which Mr. Darling did not mention in his speech was the indefinite postponement of the so-called ‘income splitting’ rules that would have affected many entrepreneurial family businesses.

Large and medium-sized companies will also welcome the announcement that dividends from foreign subsidiaries are to be exempted from tax. This will hopefully stimulate growth within UK companies and buck the recent trend of companies relocating outside of the UK to countries with a favorable tax treatment of foreign dividends.

The main changes announced in the pre budget report can be summarized as follows

Income tax rates and allowances

• For 2009-10, the main rates of income tax will be the 20% basic rate and the 40% higher rate.
• A new 45% rate of income tax will be introduced and will apply to taxable non-savings and savings income above £150,000 from 6 April 2011.

Personal allowances

• The personal allowance for those aged under 65 will increase from £6,035 to £6,475 for the 2009/10 tax year.
• For those aged between 65 and 74, the allowance is increased to £9,490 and for those aged 75 and over the allowance rises to £9,640
• From 2010-11 the basic personal allowance will be reduced in two stages for those with gross incomes above £100,000 and £140,000.

National Insurance Contributions (NICs)

• The starting point for employers’, employees’ and self-employed NICs in 2009-10 will increase in line with inflation to £110 per week. The upper earnings and profits limits for Class 1 and 4 NICs respectively will increase from £770 to £844 per week.
• As previously announced, for 2009-10 the upper earnings limit for primary Class 1 NIC will be aligned with the level at which people start to pay higher rate income tax.

Value Added Tax (VAT)

• The Pre-Budget Report saw the standard rate of VAT reduced temporarily by 2.5% to 15%. The reduced rate of 15% applied with effect from 1 December 2008 until 31 December 2009. On 1 January 2010 the rate will revert to 17.5%.
• The zero rate and 5% rate of VAT are unaffected by the changes.

Corporation tax – small companies’ rate

• The planned increase on 1 April 2009 of the small companies’ rate of corporation tax from 21% to 22% has been deferred until 1 April 2010.

Trading losses

• The Government today announced a measure which will apply to both companies and unincorporated businesses making losses from carrying on trades, professions or vocations.

Pensions

• The Annual Allowance (the amount an individual taxpayer can contribute to a UK registered pension with tax relief) and the Lifetime Allowance (the amount up to which taxpayers can take benefits from their pension funds without incurring a tax charge) will be frozen from 6 April 2011 at £255,000 and £1.8m respectively until 5 April 2016.

This is the first pre-budget report that has effectively set tax rates and allowances for up to 7 years in advance and if you should need any further guidance or advice then please contact Gareth Short at Wingrave Yeats on 0207 495 2244 or email Gareth at gshort@wingrave.co.uk

The Power of Financial Planning

This week, in case you hadn’t noticed, is Financial Planning Week. During Financial Planning Week, members of the Institute of Financial Planning are running events throughout the country to highlight the importance of Financial Planning. We at Asquith are putting on our own seminar on 11 September.

So, what is Financial Planning, who is it for, and why do we think that it is important?

The funny thing is that the finance part of it is not the most crucial element. The most important element is the planning side. And plans are pretty useful things. All great achievements have plans behind them - all great businesses have their business plans, all great explorers have their expeditions mapped out, all successful generals have their stratagems and a great financial future is no exception. Of course, you can have a great financial future without putting in place a plan, but we feel that putting in place the plan increases the likelihood of securing that great future.

What we at Asquith seek to do when we first meet with you is to help to elucidate those things that matter most to you in your life, the goals that you have, when you want to achieve them and how much they cost. This is the discovery stage of our process.

We then create your own bespoke plan. Our expertise on the finance side of things then comes into play in the review of your existing situation, the creation of the plan and its subsequent implementation. All your investments, pensions, insurances, mortgages and tax planning will now begin to work in harmony and will be aligned with your goals. This is the planning and implementation stage of our process.

Just as businesses continually review their business plans to ensure that targets are met and that its performance is up to scratch, so you and your Financial Planner should continue to monitor the plan over the years to make sure that all is on track to meet your goals and make appropriate adjustments as circumstances or goals change. This is the monitoring stage of our process and we hope that our relationship with anyone we work with will evolve into a fruitful long term partnership.

In terms of who Financial Planning is for - we feel that everyone can benefit from Financial Planning - not just the rich, and that there is no time like the present to begin your Financial Planning - the sooner the better. You can build a Financial Plan on your own or work with a Financial Planner to help you. The important step is to begin to focus on what it is that matters to you in life and incorporate those desires into a plan. If you don’t create a plan, you run the risk of drifting through life and not seeing your most important goals realised.

We think that the benefits of good Financial Planning may include the following:

• Giving you the freedom not to worry about financial matters
• Giving you a better quality of life by allowing you to concentrate on the things that are important to you
• Increasing or preserving your wealth and reducing your tax
• Permitting you to have a much clearer view of your future
• Creating a greater level of interest and knowledge in financial matters
• Educating and empowering you to feel in control of your life

And what have we been able to do for our clients? Well, take one of our clients, a partner at a City accountancy firm, as an example. When he came to us, we helped him and his wife to formulate their goals, which included:

• Early retirement
• Maintaining their existing standard of living throughout their lifetime
• Ability to provide for their children’s education and to help them onto the property ladder
• Not being a financial burden on their family in the future
• A review of their existing financial arrangements

We were able to:

• Provide peace of mind that retirement could be taken at age 55, with a higher standard of living than currently enjoyed
• Increase the budgeted amount to be provided to the children for help on the property ladder
• Reduce tax bills
• Create more tax efficient income in retirement
• Give peace of mind that they would not be a burden on their family in the future

So ask yourself this question: have you in the last few years reviewed your existing situation and thought of your plans for the future, plus how best to achieve these? If not then perhaps it is time to start investing in “you” by taking time out to create your own Financial Plan.

By Ben Westaway ACA

Asquith & Partners LLP
www.asquith.co.uk

First, the bad news. For every pound your assets exceed the inheritance tax (IHT) nil-rate band of £312,000, or £624,000 for a married couple, the taxman will take 40 pence when you die.

The good news, however, is that by careful planning during your lifetime you can stay one step ahead of the taxman and dramatically reduce the amount he takes, meaning more of your hard earned wealth can be enjoyed by those you leave behind.

And the even better news is that the type of planning in question is, with the right advice, relatively straightforward and a great way of making sure you remain extremely popular with those you wish to provide for as it involves, for the most part, giving stuff away.

At its simplest, it is always worth considering making use of the exemptions and reliefs available. These may be small, but there is no point in wasting them:

• You can make gifts of £3,000 per tax year free of IHT consequences. Any unused exemption can be carried forward for one year so that a married couple can give away up to £12,000 in one go.
• You can make gifts up to £250 to as many people as you like in one tax year, without them being liable for IHT.
• You can make gifts on marriage or civil partnership. Parents can each make gifts of £5,000, grandparents may make gifts of £2,500 and anyone else £1,000.

If you want to make gifts of larger amounts, you can give away as much as you like and there will be no IHT to pay if you survive the gift by seven years.

If you die within the seven year period, the gift will become chargeable to IHT but the rates of tax are often reduced if you have survived for three years or more.

If the gift is a particularly generous one and exceeds the nil-rate band, the recipient and donor need to consider how any IHT would be paid. For example, Mr White gives his son John £500,000 to buy a new home but dies within two years. John will have to pay IHT at 40% on the difference between £500,000 and the nil-rate band of £312,000, ie £75,200. John and Mr White should have considered taking out term life cover on Mr White’s life to cover the potential IHT liability. Such life cover is normally relatively inexpensive.

While making an outright gift is simple, it is often inappropriate. Your children or grandchildren may not be ready to be responsible for large sums of money. The money could be at risk from claims from creditors, or spouses on divorce. You might want to be able to determine how the gift is used. For these reasons, trusts have traditionally been a popular vehicle for passing wealth down the generations while protecting the assets.

Changes to the IHT legislation have made it harder to use trusts in this way, but there are still opportunities available if you take specialist advice:

• Make gifts of your IHT nil-rate band to a trust every seven years. A married couple can (on present figures) make gifts to trust of £624,000 every seven years without IHT consequences.
• Make gifts of surplus income to trust. You can make gifts of any amount of income to a trust without IHT consequences, if you can show that you do not need the income for your normal living expenses and that the gifts are part of your regular expenditure.
• Fund a trust by interest free loan. This is a good way to freeze the value of assets that are likely to grow in value while retaining access to the capital, if needed. For example, Mr Black lends £400,000 to the trustees of a new trust who invest the sum with a view to capital growth. While the value of the loan remains in Mr Black’s estate for IHT, any growth will be in the trust and will not be subject to IHT on Mr Black’s death. If Mr Black needs access to the capital, the trustees can make repayments up to the value of loan tax free.

Sometimes taxpayers wish to make gifts that do not fall within these categories.

Mr and Mrs Green have sold a property portfolio for £3 million. They can make gifts of their nil-rate bands to trust, but any excess transferred to trust will be subject to immediate IHT of 20%, £950,400! There would also be further tax charges every ten years and on distributions to beneficiaries. How can they pass more of their wealth down to their children while protecting the assets? A “Family Limited Partnership” allows them to make the gift while retaining a degree of control. Family members have economic rights to the partnership assets while the decision-making power rests with a “general partner”. This is a complex structure so is only appropriate when substantial sums are involved, but can be a valuable solution for families in this position.

While there are opportunities for reducing the IHT bill by careful lifetime giving, this area can be a minefield. Recent changes to the IHT legislation prevent individuals achieving IHT savings while retaining a benefit from their assets. For example, those who try to pass a share of the family home down the generations without taking advice can find themselves remaining liable for IHT on the whole value of the house, or becoming liable for an ongoing income tax charge. There are also other tax considerations, such as liability for capital gains tax if the assets gifted are standing at a gain. Taxpayers need to take professional advice to ensure that they do not fall into these traps.

Lisa-Jane Fawcett
Speechly Bircham LLP

As one gets older often the greatest remaining asset is the family home. Personal demands or diligent estate planning may have eroded or shifted other wealth; however the home still sits there for surviving family, less a 40% slug to the Treasury. The irony here is that we are trained to see our home as a “tax free investment”, only to leave a potentially large slice on the table for the tax man when we pass away.

It is the desire of many of our parents or grandparents to access the capital tied up in their homes to meet family demands for nursing care, enhanced lifestyle or Inheritance Tax mitigation or a mixture thereof.

It is perhaps alien to spend a lifetime of repaying or avoiding debt and then in your twilight years consider hocking the home, but sometimes it may make sense. As a retrospective, the property inflation rate in the South West of England for detached properties has pushed a detached property worth say a £1million pounds ten years ago to just under £2.75million, during a period of relatively benign inflation and low interest rates. This equates to a compound return of approximately 11% per annum. (Source: Nationwide Building Society UK House Index Detached Property South West Q1 1998-Q1 2008)

So, ten years ago assuming no surviving spouse and no IHT planning the estate would have paid tax of £314,000 on the value of the house after deducting the IHT nil rate band. Ten years on, the nil rate band has climbed by about 3.3% per annum compound, leaving the same family writing out a cheque for some £980,000.

It is difficult to predict future property inflation; in fact some may expect a period of property deflation. So, if we assume that the next ten years is completely flat for both property inflation and inheritance tax bands and rates we can see the potential benefits of releasing some equity from parental homes for IHT planning, regardless of any specific potential cash-flow or lifestyle demands.

In essence the example below depicts the position of a widow/er or couple releasing 30% of the equity of their property, in this case the £2.75million home referred to above, and rolling the interest up at an indicative 7% per annum compound for say 10 years. It is assumed that the loan and interest are then repaid at that point with then, the death of the homeowner/s. In the example below, it is further assumed that the equity released is structured in a tax efficient way to be either outside of the estate or exempt from IHT if within the estate( entirely achievable with planning). In such circumstances the equity released only needs to achieve a net return of some 1.75% per annum, because the loan and rolled up interest are offset against the estate for IHT purposes

The example above is illustrative and assumes that there are some other assets in the estate that utilise the nil rate IHT band. Furthermore, it assumes that the equity released achieves an annualised compound return of 5% over the ten year period, a pretty conservative target.

It is worth putting some flesh on the bones in respect of equity release mortgages. The market for such arrangements still exists, despite the woes of the credit crunch. The typical minimum age acceptable to a lender is aged 60 and borrowing levels vary with age. Similar to annuities, the older you are, the more you get, simply because nobody lives for ever!

Practically, the area of “Lifetime Mortgages” or “equity release” is a specialist one and has a role to play in family wealth management, across generations and arguably is equally as appropriate for consideration for the wealthy and not just those short of cash in retirement.
Please note that the above article is based upon Asquith & Partners’ understanding of current regulations, taxation and legislation, which are subject to change without notice.

THIS IS A LIFETIME MORTGAGE. TO UNDERSTAND THE FEATURES AND RISKS, ASK YOUR ADVISER FOR A PERSONAL ILLUSTRATION.

Richard Bertin
Asquith & Partners LLP
www.asquith.co.uk

What do you think of when you’re considering making provision for your loved ones?  Life assurance?  Critical illness cover?  These certainly need to be considered.  But not many people would say to me ‘a Power of Attorney’. 

Recently I heard of a case that put the matter into perspective.  A husband had gone into hospital for significant but seemingly routine surgery.  Tragically, however, he suffered unexpected complications and was left with severe brain damage.  The shock for the family was bad enough but then there was the question of what could be done with his assets.  The family home was also owned jointly – could it be sold if need be? 

The problem that this family has suddenly discovered is that if a person loses mental capacity, no-one automatically has authority to deal with that person’s own assets and some jointly owned property such as real estate.  This can cause a great deal of inconvenience and worry, especially if there are dependents.

Unfortunately it seems that no-one had told the family about making a Power of Attorney.  This enables you to give authority to someone else to act on your behalf.  However, unlike general Powers of Attorney, a Lasting Power of Attorney (LPA) will continue to be effective even if you lose mental capacity.  Therefore, if you want your spouse and/or another family member to be able to make decisions on your behalf in the event of mental incapacity, you may need to make one.

If you’ve already made an Enduring Power of Attorney (EPA) then you probably don’t need to make a LPA unless you wish to choose different attorneys or make other changes – any EPA validly made before 1 October 2007 (the date when EPA’s were replaced by LPA’s) will remain valid and will need to be registered by the attorneys if the EPA-maker is becoming mentally incapable.  Registration at this time is essential – EPA attorneys do not have authority to act under an unregistered EPA if the EPA-maker has lost mental capacity. 
Even if you have made an EPA, there are a number of new features about the LPA regime that might be of interest to you.

Firstly, there are two different types of LPA: a Property and Affairs LPA and a Personal Welfare LPA.  With a Personal Welfare LPA, it is now possible to choose an attorney or attorneys to make welfare and healthcare decisions on your behalf.  This can include refusing life sustaining treatment on your behalf if you wish.

Secondly, you can now name replacement attorneys in the same document.  So you may wish to appoint your spouse to act on your behalf in the first instance and then someone else, perhaps a child, to take over in the event that your spouse pre-deceases you or is unable to act.

You can place restrictions on your attorney’s actions if you wish – for example, no authority to deal with finances unless you are incapable of making these decisions yourself – but there are traps for the unwary: restrictions need to be clear and carefully worded otherwise they can make the LPA unworkable and possibly invalid. 

It is also now possible to include non-binding guidance to your attorneys in the LPA itself.
A new feature of LPA’s is that you need at least one ‘certificate provider’ to sign the form to confirm that you understand the purpose and scope of the LPA.  Lawyers and registered healthcare professionals are among those who may act as certificate providers but so can individuals who have known you personally for at least two years.

Unlike EPA’s, LPA’s can only be used if they have been registered with the Court of Protection first.  Therefore to ensure that the LPA can be used immediately it is required, it needs to be registered.  Normally you need to choose at least one person to receive written notification that an application to register the LPA is about to be made – this is meant to be an additional safeguard.  In contrast to EPA’s, you need not have family members being notified if you wish!

Unfortunately, the couple that I mentioned had not made EPA’s or LPA’s.  This means that the wife will now have to make a time-consuming and costly application to the Court to be appointed as her husband’s Deputy and may have to make further Court applications to deal with his assets – she is likely to find this frustrating and the Court’s continuing involvement intrusive. 

The great benefit of LPA’s is that they put you in the driving seat – you choose who makes decisions on your behalf, not the Court or a doctor – and with a registered LPA, your attorneys can start making decisions on your behalf at any time you need them to, for your and your family’s benefit, in case the worst happens.  As my example demonstrates, you are never too young to make one.
Helena Luckhurst
Speechly Bircham LLP

Although the rate of capital gains tax, in relation to gains arising from the disposal of any asset after 5th April 2008, will generally be 18%, the Chancellor has, in response to the lobbying of bodies representing industry and commercial associations, introduced a valuable relief for the owners of unincorporated trading entities and of trading companies which will tax the first £1 million of disposal gains at a rate of only 10%.

This new relief, known as entrepreneurs relief, will be available to sole traders, partners of trading firms, and also to shareholders of trading companies, provided that the trade, partnership interest or share holding has been owned for at least twelve months prior to the sale. A further condition for relief in the case of shareholders is that they are also directors or employees of the company concerned, and own at least 5% of the ordinary share capital and voting rights.

It is important that entrepreneurs should plan their affairs to ensure the maximum availability of the 10% rate in the event of a future sale. For example, an individual owning 100% of the shares of a  trading company may choose to make a CGT- free transfer of 50% of the holding to a spouse or civil law partner, so that if a third party sale takes place more than twelve months hence, the £1 million band taxable at 10% will be available to both partners. As trading company shares generally qualify for CGT holdover relief, it is also possible to gift shares to children and other close relatives without crystallising a CGT liability, and where the beneficiaries possess more than 5% and satisfy the other conditions for relief for more than 12 months before a third party sale takes place, they too can enjoy the 10% rate in respect of up to £1 million of gains.

However, whenever shares are gifted to family members for CGT or Inheritance Tax planning reasons, care must always be taken to ensure that the beneficiary has made a suitable Will.  In addition, when passing shares to family members, it is often advisable to draw up a binding Shareholders Agreement, and to review the adequacy of existing pre-emption provisions in the company’s Articles. Such precaution will ensure that, in the event of an unexpected separation, divorce or death, a valuable shareholding and the associated voting power does not pass out of the ownership of the immediate family into possibly hostile hands. Suitable “tag-along” and “drag-along” provisions in the Articles or Shareholders Agreement will ensure that, in the event of a third party offer for the company, each shareholder will act in accordance with the wishes of the majority.

The trustees of a family life interest trust can qualify for the new entrepreneurs relief where the other conditions for the relief are satisfied (including that the beneficiary is a director or employee of the company), and in many cases the creation of trusts for family members may be the best means of achieving CGT and Inheritance tax objectives whilst keeping the shares within the effective ownership and control of the immediate family.

By John Phelan
Wingrave Yeats
www.wingrave.co.uk

Following the Chancellor’s pre-Budget Report last October, the headlines read “Darling doubles IHT relief” and “IHT breakthrough for hardworking families”.

But don’t be fooled. 

The announcement in October was not that the IHT nil rate band is being doubled.  Rather, to the extent it is not used up by the first spouse to die, it will automatically transfer to the surviving spouse so that the first £600,000 (or, from 6 April, £624,000) of a married couple’s joint estate will pass to the children, tax free.

For well advised married couples, this gives little or no cause for cheer.  They will have structured their Wills so that both nil rate bands were fully utilised in any event.  At best, perhaps the Chancellor’s announcement should be seen as a Government seal of approval to their existing Will-based IHT planning.

But to leave it there would be folly, not least because, under the Government approved approach to IHT planning, everything over and above £600,000 of a married couple’s joint wealth is taxed at 40%.  So, on an estate worth £5million, the taxman receives £1.76million, leaving the children with just £3.24million. 

So, what should you do if you are worth more than £600,000 and wish to leave more of your hard earned wealth to your children when you die, and less to the taxman?

The first thing to do is review your Will.  Not only does a Will carry out the crucial role of directing who should receive your assets when you are no longer alive, and when, but it also offers a fantastic one-off opportunity to save significant amounts of IHT.  In particular, an opportunity to save IHT on the family home.

For example, it is often overlooked that if, under your Will, you leave your share of the family home to your husband or wife in trust, the value of the home is immediately reduced by up to 15% for IHT purposes.  So, on a home worth £2million, this simple step automatically saves £120,000 of IHT for the benefit of the children.  Of course, it has no impact on the sale value of the property should it ever be sold.

In addition, the Will can be structured so that if the family home - or, indeed, any other asset - grows in value between the first death and the second death, that growth in value is sheltered from IHT.  This requires special provisions to be inserted into the Will so that steps can be taken on the first death to ensure the tax savings are achieved.

Also, if you own business assets, such as a family trading company, or farmland, it is important for IHT planning reasons that your Will takes this into account by leaving these assets to a trust on your death, rather than to your spouse outright.   The IHT savings arising as a result of owning such assets and having the right type of Will in place can be really quite dramatic.  

Finally, your Will should ensure that your assets pass to trustees for the benefit of your heirs on the surviving spouse’s death so that your wealth is sheltered from the 40% IHT rate in your heirs’ hands and also better protected from any unwanted third party claims suffered by your heirs, such as from creditors or even spouses on divorce.

Once your Will has been reviewed and, if necessary, modified so that it shelters more than just the first £600,000 from IHT, it is normally worth exploring the possibility of seeking to reduce the value of the assets passing under your Will by making gifts to the younger generations now, tax free, rather than waiting until death when the tax rate is 40%.

You can give away as much as you like during your lifetime and, provided you survive seven years, there will be no IHT to pay on those gifts. 

If, quite understandably, making outright gifts to your children, or grandchildren, fills you with horror, then you can retain control of the purse strings by transferring assets into trust and naming yourself as one of the trustees.  The amounts which may be gifted into trust are usually limited to £600,000 every seven years for a married couple, or to the amount of your annual surplus income, although with specialist advice these limits can sometimes be extended or even eliminated altogether.

In summary, the sooner you review your Will and put an IHT planning strategy in place, the more IHT you will save and the more relieved you will be that you looked behind the headlines.

William Begley
Partner
Speechly Bircham LLP
www.speechlys.com

Ask a room full of people the above question and undoubtedly you will get a variety of answers, as the question has a degree of complexity or subjectivity about it. Maybe ask an insurance salesman the same question and you will probably find a high commission paying product is the panacea!

Perhaps, the question should be what do you intend to do in retirement?  I think here you are going to get a lot of different answers, because it is all pretty subjective.

Certainly, the diversity of answers is mirrored by the diversity of our own personal or financial circumstances and needs.  Ask the recently married couple the question and the eyes will glaze over.  They are focussed on fun and breeding, or a combination thereof.  Ask the recently cash-strapped divorcee and they may see retirement as the oasis in the desert, dim and distant or maybe just a mirage after all.  Then try the mid forties lawyers and the answer is not soon enough!

It is just human nature for us to have aspirations, beyond just a roof over our heads, food and clothes.  During our working lives these aspirations manifest themselves in the form of larger and grander homes, well (or expensively) educated offspring and the odd luxurious holiday.  So it is no surprise that most of us want to maintain this lifestyle once we have concluded gainful employment.  It also comes as no surprise that the most sensible way to create a “retirement plan” is to build a plan that gets us through our working lives so that we can determine how much money we are going to have (or need) when we stop work and have funded that stage of our life.

There are bound to be changes to our personal circumstances, some positive, some negative as we journey through our lives.  Children born today in the UK can expect to live well into their eighties. These same children born sixty years ago were told they might expire in their late sixties. So a combination of medical innovation and self awareness, be that of smoking or the benefits of exercise, are adding years to our lives.

Arguably, workers retiring in the fifties and sixties weren’t such a burden on the State, as they tended to die relatively shortly after they “stopped economic production”.

However, we are just exiting a phase that looks slightly different to the past War retirees. Many workers have enjoyed the fruits of “Corporate” not State funded final salary pension schemes. Such arrangements have generally shielded the workers from having to worry too much about providing for themselves in retirement.  At the same time legislation was introduced in 1998 allowing individual to take pension benefits from age 50, rather than 60. Over the last ten years the UK has seen more and more people taking early retirement benefits from their final salary pension schemes. A cocktail of volatile equity returns and members demanding monthly pension payments, plus a healthy dose of early tax free cash has somewhat dulled the appetite for corporate UK to keep its final salary schemes open in the future. I believe the next phase of retirement planning has perhaps “less fat” on the meat going forward.

The current generation approaching retirement may well have benefited from generous employer funded pension schemes plus apparently unabated growth in the value of their homes over the last fifteen years. The legislation of the late eighties has however, been reversed with the pension age pushed back to 55 from 50, and with many large employers providing employees with flexible retirement dates up to age 75,early retirement may no longer be an option for the younger generation.

One of the greatest undermining factors in building a Retirement Plan is taxation. The impact of tax on savings is a creeping stealth like one. Putting politics to one side, developed countries are finding it increasingly more difficult to balance their books.

In December 2006, HM Treasury published its then latest annual report entitled “long term public finance report: an analysis of fiscal sustainability”, as part of the chancellor’s Pre-Budget Review.

The report looked at the cost of providing pension and healthcare over the long term. One of the conclusions was that government expenditure as a percentage of Gross Domestic Product would rise significantly and over just the next thirty years the tax burden would increase by over 7%.

 The statistics highlight anticipated increases in public expenditure, including a whopping 33% increase in Civil Service pension costs. Furthermore, the figures actually highlight the necessary increase in government revenues from taxes to help fund the country.

Perhaps one of the reasons for highlighting the report and statistic is to focus the mind on how much money will be required in retirement, in the knowledge that taxes are not going down in the long term (nor in the short term for that matter).

Here are a few thoughts to think about when working on your own retirement plans. An income of £300,000 per annum will leave with you about £182,000 after tax. So, over the next 20 years, assuming no stealth like tax changes, you will have directly invested about £2.35million with the Chancellor, or about 39% of your gross earnings-forget about tax on your savings or other indirect taxes. You then get to retirement and estimate that you need about £100,000 to live on. Well, that would require a gross income of about £152,000 per annum. The good news here is that your tax take is down to just 34% now-yippee! So assuming, 30 years of stress free retirement you will have invested a further £1million with the Chancellor. Then, when you pop your clogs the Treasury are eagerly awaiting the invitation to the wake!

All is not lost though, as some pre-emptive planning could well be considered. Equalising income between husbands and wives pushes income across two lots of personal allowances. Using up the capital gains exemptions annually is currently worth another £9,200 in tax free income each. At the same time it is now known that capital gains going forward will be taxed at 18%. Thus, with some strategic planning it is entirely possible to plan in advance to mitigate the impact of tax in retirement; it just needs to be thought about and acted on.

So where have we got to? We know that providing income in retirement will require the accumulation of a significant pot of money on which to draw down. We can surmise that an increasing slice of this pot of money is going to be skimmed off by the Treasury. We also know that the Government provides an array of allowances that can be exploited. The important thing is perhaps not to trust to fate but to embark upon the creation of the plan which allows you to do what you want to in retirement and in the time leading up to retirement.

Richard Bertrin
Asquith & Partners LLP
www.asquith.co.uk