Planning process

Big picture – Estate Inventory

Planning framework

Planning environment

General principles of tax planning

Planning tools

Tax-efficient will planning matrix

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Client’s objectives & instructions – getting the lay client involved

Fact-finding – Estate Planning Inventory

CLT PET & NRB analysis

Preliminary IHT calculations

IHT exemptions & reliefs analysis

Assembly of records & number crunching

Isolate the problem

Identify the planning constraints

Develop a solution

2

Ensuring continued welfare and lifestyle of S

Ensuring S can continue to live in the matrimonial home

Capital preservation for children from earlier marriage

Business / Farm succession planning

Asset protection

Flexibility

Professional wealth management

3

Beneficiary - exempt or non-exempt

Assets – excluded property or attract relief e.g. APR/BPR

Property and interest gifted to the beneficiary

Trustees powers

Tax treatment corresponding with form of trust

Boundaries of lawful tax planning

Potential tax traps

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5

Stability of APR/BPR and change in rates?

NAO Report

Change in approach by the courts

HMRC’s armory in combating tax avoidance

Ramsay principle

GAAR

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To suggest that successful tax avoidance = structuring to avoid a tax which Parliament intended to impose is a contradiction in terms – Lord Hoffmann

Tax avoidance & tax mitigation

Tax planning - making sensible use of the available exemptions and reliefs provided for in the tax legislation

Fishers Executors v CIR [1926] & the GAAR

The rule of law - There is nothing in the GAAR to prevent ingenious tax planning per se

Automatic percentage reduction in value of property transferred

Agricultural value  Agricultural property

Location  Occupation condition

Ownership condition  Farmhouses

Rates  Problem areas

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Reduction in ‘net value’ of ‘relevant business property’ transferred

Conditions

Business & exclusions

Business consisting wholly or mainly of making or holding investments

Relevant business property & rates

Excluded assets

Ownership

Net value

Deduction of debts

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Special rules apply to the valuation of specific and residuary gifts where

- part of T’s estate is exempt &

- includes property attracting APR/BPR

Where T’s will establishes a NRBDT and he leaves residue to S if he owned property attracting 100% APR/BPR then his will operates so that

- part of the benefit of the APR/BPR accrues to the NRBDT and

- the remainder of the relief is attributed to property passing spouse exempt to S

This results in APR/BPR being wasted

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Specific gift made to a chargeable beneficiary

Re-cycling

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Where T dies leaving part of his NRB unused then on S’s death her PR’s can make a claim under s.8A for her NRB to be increased by the proportion of T’s unused NRB

Therefore if T leaves everything to S or to a life interest trust created by his will for S then on her death S’s PR’s can take advantage of two NRB’s

s.8A sets out various formulae for calculating T’s unused NRB and the increased NRB available to S’s PR’s on her death

S can take portions of an unused NRB inherited from any number of spouses or civil partners

However S’s death estate cannot benefit by more than the full value of one additional NRB

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Freezing the value of an asset likely to grow by a greater percentage than the percentage increase in the NRB between the death of T and S

Prevention of T’s share of the equitable interest in the family home being collapsed into residue

Ring-fencing of capital value for the benefit of children of an earlier marriage

NRB maximisation by- avoiding S’s NRB being wasted where T has one NRB and S already has two and- sheltering of more than 2 NRB’s

Taxation

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A discretionary trust can be constituted by

1. appropriating assets to that value to the trust (including T’s share of the equitable interest in the matrimonial home (his ‘share’) or

2. with a debt or charge instead

Three options where T’s share is worth less than the NRA

1. the balance of the NRA legacy can be waived

2. further assets can be appropriated

3. the money owed to the trust fund can be left outstanding as a debt from S (i.e. the ‘debt’ or ‘charge’ scheme)

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The NRA legacy is satisfied by a debt owed to the NRA trustees by either:

1. S (where residue passes outright to her) or

2. the trustees of the residuary trust fund (where residue has been left on trust for S)

On T’s death S promises to pay the NRA personally to the trustees by giving them an IOU, and in return receives the whole of T’s unencumbered residuary estate but incurs a debt that is deductible against her chargeable estate for IHT on death

To be deductible from S’s estate on her death the debt must

1. be incurred for full consideration in money or money’s worth &

2. not infringe the artificial debt rules contained in s.103 FA 1986

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The NRBDT is set up by means of a non-recourse charge created by T’s executors over assets in his estate

The terms provide that neither the executors nor any beneficiary to whom the charged property is assented is personally liable to make repayment

The executors:1. impose an equitable charge over either

(i) the property; or(ii) T’s equitable interest in the property (i.e. so S does not

incur a debt); and2. transfer the charge to the NRA trustees in satisfaction of the NRA

legacy

The assets transferred (by assent) to S are reduced in value by the charge on T’s property

 

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s.144 allows a distribution to be made under s.142(1) within 2 years of death without any charge to IHT out of assets settled on discretionary trusts by T’s will

Therefore where T1. gives his estate (or some part of it) to his trustees to hold on discretionary trusts2. under his will conferred wide powers of appointment on

trustees exercisable in favour of a specified class of beneficiaries (leaving it to trustees to distribute his estate or

declare further trusts of trust property)3. trustees exercise the power within 2 years of T’s death and4. no-one obtained a life interest within that time

then tax will be chargeable as if the gifts/trusts were made by T on his death and the appointment will not be subject to the RPR

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As a general rule all trusts set up on or after 22 March 2006 are subject to the ‘relevant property regime’ with 4 exceptions (the ‘Special Trusts’)

a trust created on death for a disabled beneficiary (‘DPT’) (s.89(4))

a trust for a bereaved minor (‘BMT’)

a trust for the benefit of a minor who becomes absolutely entitled to capital between the ages of 18 and 25 (‘18-25 Trust’)

a trust created on death with an immediate interest in possession (life interest), known as an immediate post- death interest trust (‘IPDI’)

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4 types of interest qualify

1. a deemed life interest in a trust for a disabled person under s.89(2)

2. a deemed life interest in a ‘self-settlement’ (i.e. trust) created by a potentially disabled person under s.89A

3. an actual life interest in settled property (other than an interest within 1 or 2 above) to which a disabled person has become entitled on or after 22nd March 2006

4. an actual life interest in a ‘self-settled’ trust (other than an interest within 1 or 2 above) into which settled property was transferred on or after 22nd March 2006

which

(i) meets the requirements of potential disability set out in s.89A(1)(b) &

(ii) secures that if the capital is applied for the benefit of any beneficiary it is applied only for the benefit of the settlor

Tax treatment

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To qualify the trust must satisfy the conditions set out in s.71A(3)

No IHT is payable

1. during the bereaved minor’s infancy

2. on becoming absolutely entitled to capital on or before 18 or

3. where the minor dies before 18

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Trust must satisfy the conditions in s.71D & no IHT is payable

1. until beneficiary becomes 18

2. where beneficiary becomes absolutely entitled to capital before 18 or

3. if power of advancement exercised before beneficiary becomes 18 to defer capital entitlement beyond 25 however trust property becomes subject to RPR from date of exercise of power

If trust continues between 18 & 25 will be an exit charge at rate of 0.6% for each year (up to a maximum of 4.2%) where

1. beneficiary is not absolutely entitled to capital until 25 or

2. between 18 & 25 capital is advanced to him (or for his benefit) which includes deferral of capital entitlement beyond 25

When beneficiary absolutely entitled at 25 or capital is advanced to him between 18 & 25 will be an exit charge at 0.6% for each year after 18 resulting in maximum exit charge of 4.2% if capital vests at 25

20

An IPDI exists & will be taxed under s.49A where 3 conditions satisfied

the trust was effected by will or under the law relating to intestacy

the life tenant (e.g. S) became beneficially entitled to the life interest on T’s death and

the trust must not be for bereaved minors and the interest is not that of a disabled person which requirement must have been satisfied at all times since S became beneficially entitled to the life interest s.49A

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To S (who is an exempt beneficiary) either- outright (by making an absolute gift) or- on a life interest trust (an IPDI)

To children and grandchildren of any age (to skip a generation) of- chargeable property outright up to the amount of T’s unused NRB which will then become depleted - assets qualifying for business /agricultural property relief &- excluded property

To children who are minors on- a bereaved minor’s trusts (a ‘BMT’)- an 18-25 trust - an immediate post-death interest trust (an ‘IPDI’) or- a discretionary trust

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When creation of a life interest is coupled with wide ‘overriding powers of appointment’ trustees can appoint property comprised in trust on to new trusts, and in favour of different (and additional) beneficiaries

Inclusion confers maximum flexibility on trustees over

1. disposition of trust property 2. payment of income 3. advancement of capital 4. creation (or ‘appointment’) of new trusts for benefit of beneficiaries

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If trustees exercise their power to terminate an IPDI during S’s lifetime in favour of an individual absolutely that would cause S to make a PET

For GWR surrender / termination of an IPDI is treated as if life tenant had made a gift FA 1986 s.102ZA

Therefore if S may benefit from the assets previously subject to the IP the GWR rules apply

A PET will be made should S cease to have a reservation of benefit on the date the reservation was released

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36% rate of IHT

Charitable giving condition  Donated amount

Baseline amount  ‘Donated amount’ must be at least 10% of the

‘baseline amount’

The election  

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