Fiducia Wealth Management
Posted in Inheritance Tax, Wealth Management on 03.02.20

Death happens to the best of us. It’s one of those unavoidable facts of life. But it’s also something for which we can plan.

Inheritance tax liability on the other hand, doesn’t have to befall us all. However, failure to exercise proper care during our lifetime can result in a very painful and costly situation for our beneficiaries, who may feel resentment, melancholy and a genuine feeling that they have missed out at the expense of another. This frustration is often vented towards HMRC, an organisation considered to be lacking any real empathy or compassion when it comes to sensitive family matters.

So, the question arises as to how we can we make changes now to reduce the amount of wealth lost for the next generation. One of my favourite quotes comes from a former Chancellor of the Exchequer, Roy Jenkins, who said, “Inheritance Tax is a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue”.

Most individuals are aware that one simple way to reduce the value of your Estate is to give money away and then survive another seven years. Simple, right? But what if that money were required in the future for long-term care or if one party to a marriage passes away, leaving a shortage of income? There are two ways of looking at this predicament: from the perspective of an individual who has ample capital and income and who can genuinely afford to remove assets from his or her Estate, or from the position of an individual who can maintain a standard of living (should their present situation remain unchanged) but might struggle financially if there were a change in their circumstances.

These are the circumstances when one might question whether you can afford to trust your heirs. Trust does not necessarily encompass any element of dishonesty but elements outside of your control, which may impact you in the future. As an example, picture the scenario where a gift is made from a mother to an adult son, let’s call him Norman, who quite sensibly used the money to pay-off his mortgage and, because of having more ‘free income’, as is often the way, he then incurs some additional debt. His mother unfortunately declines physically and must go into long-term care, which means additional expense.

If there is insufficient money to pay for this, to whom does the mother turn for payment of the fees? If the gift were given within two years of requiring care and there is no other money, it is feasible that the local authority could ‘go after’ Norman for repayment of the money under the ‘deliberate deprivation’ rules. However, Norman had already taken on new expenditure which means re-mortgaging his house could cause him and his family financial hardship.

This raises two further issues regarding the deliberate deprivation rules and gifts with reservation of benefit. Assuming the mother did not have to go into care until three years after the gift was made, this is outside of the two-year window so Norman could argue that it was not contemplated that his mother would have to go into care and he therefore does not have to pay towards the cost of care for his mother. On the flipside, having worked all her life, does Norman really want to see his mother go into a state-funded care home with a lesser level of comfort, facilities and care?

The answer in our imaginary case is ‘no’ and Norman felt obliged to re-mortgage his property and pay for his mother’s care.

Sadly, our hypothetical case study does not end well. The additional expense of the re-mortgage created tension in the household and Norman’s wife Melissa declared she was never happy with Norman’s decision and has decided to divorce him and run off with his best friend Nigel. Melissa now has a significant claim on his assets, potentially including the gift made to him by his mother.

Even worse, although Norman’s mother did not go into care until five years after the gift was made and the fact care fees were paid for four years (i.e. two years beyond the 7-year window), the gift has been challenged by HMRC who are claiming that the gift had been made with ‘reservation of benefit’. The case is currently under review and is causing Norman a high degree of stress, particularly given the ongoing divorce proceedings

This case study has been designed to highlight potential issues and pitfalls. There are many Estate planning solutions but for those who do not practice in this area of the market, deciding on the best course of action and at what point, can be a real challenge.

Potential solutions may include:

  • The use of Trusts, while maintaining some access to the money.
  • Using pension benefits to pass assets to beneficiaries without incurring any inheritance tax.
  • Reviewing Wills to optimise the use of available nil rate bands and residence nil rate bands.
  • Making use of all available exemptions.

If you feel you could benefit from a free consultation with an inheritance tax specialist feel free to contact Daniel Kern using the details below.

Fiducia Wealth Management
Posted in Inheritance Tax, Wealth Management on 03.02.20

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The information contained in website is for guidance only and does not constitute advice which should be sought before taking any action or inaction. The information is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly no responsibility can be assumed by Fiducia Wealth Management Limited, or any associated companies or persons, its officers or its employees, for any loss occasioned in connection with the content hereof and any such action or inaction. Professional financial advice is necessary for every case.

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