What is the "Residential Nil Rate Band" and will it affect me?
Have you heard about the impending Residential Nil Rate Band? Last year, the government announced that starting from April 2017, some homeowners with estates valued at less than £2 million will benefit not only from the current Nil Rate Band of £325,000 per person, but an additional Residence Nil Rate Band of £100,000 per person, (rising to £175,000 by April 2020), on their death. For a married couple or those in a civil partnership, this means that up to £1 million of their estate can be passed on, without attracting any inheritance tax fees.
There are conditions, however. For the Residence Nil Rate Band to take effect, the property in question must be passed on to either a child or a grandchild of the deceased. In addition, the property must also have actually been the deceased's main residence at some point, even if they subsequently moved to a smaller house or into a care home.
As with the existing Nil Rate Band, the Residence Nil Rate Band can be passed to the surviving partner if not used on the death of the first, making a possible maximum total of £1 million.
Where estates are valued over £2 million, the Residence Nil Rate Band will decrease by £1 for every £2 over this value.
Although this is great news for most of us, those who have set up a discretionary trust in the past should be careful. A discretionary trust was initially a useful way of passing on a person's Nil Rate Band to their children or grandchildren, before the law changed in 2007. For those with estates valued under £2 million, this clause could interfere with the application of the new Residence Nil Rate Band. However, for those with estates valued over this amount, a discretionary trust may remain the sensible financial option.
How to ensure your grandchildren receive their inheritance
A recent survey by insurance company Sunlife has revealed that a large number of grandparents intend to leave part of their estate to their grandchildren, but surprisingly, don't trust their own children to ensure that these instructions are carried out.
The results of the survey showed that seven in ten grandparents plan to leave their grandchildren an inheritance. 55 percent of those grandparents are looking for ways in which they can protect this aspect of their legacy, without having to rely on their children to pass it on, according to their final wishes.
In some instances, such a legacy is not as straightforward as simply leaving a sum of money in a will. It may be that the grandparents wish to leave a property such as the family home instead – the problem being that children under the age of 18 are not legally able to own property.
One way to get around this problem is to leave assets in trust for the grandchildren. When doing so, it is vital to consider an appropriate age for the child to receive the inheritance, so that they are mature enough to use it wisely. An age contingent trust such as this is normally written into the will.
It is worth remembering however, that any assets left in a trust may incur an inheritance tax charge every ten years, of up to six percent of the value of the trust, above the IHT threshold.
The key to ensuring that your grandchildren will benefit from your estate as you would want, is to take control now and have a will and trust drafted, which both reflect your wishes and family circumstances. Through effective estate planning, it may also be possible to identify ways to reduce any inheritance tax payable on your assets.
#iwcprobate #bereaved #probate
Not everyone is happy to receive an inheritance. They may not need the property or money. It may be more trouble than it’s worth (due to tax or the cost of maintenance), or there could be issues between the deceased and the beneficiary that mean the latter is not happy to receive anything from the former, no matter what it is. Whatever the reason, is it possible to say no when a will is executed?
The answer is that if you inherit something, you can’t simply say you don’t want it and walk away. But there are other things you can do to ensure the money, property, or possessions don’t reach you.
One way to get around the problem is for the beneficiary to gift their inheritance to someone else – another family member. This could, however, still cause problems when it comes to inheritance tax or capital gains tax, so it may not be the perfect solution.
Another option would be for the beneficiary to completed a deed of variation, which would then alter the will so that another person receives the inheritance, or it is put into a trust if that makes more sense. Certain conditions must be met in order to do this, but it is possible.
Things become slightly more difficult when the will has provided for a minor, or even an unborn baby. This is because those who are affected by the will have to be the ones to request the variation. A minor can’t do that and neither, obviously, can an unborn child.
A deed of variation can significantly reduce your tax bill, and it can, if worked out correctly, allow for a large inheritance to be passed to the next generation without it needing to be a gift for which there must be a wait of seven years.
It is best to speak to an expert if you are considering this course of action.
"Government increasing taxes on death" says probate expert
Government proposals to alter fixed rate probate fees to a banding system has been called "inheritance tax by the back door" by probate specialist, Tony Crocker of IWC.
The fixed fee for probate applications rose recently – a move, said the government, which was deemed necessary to fund additional administrative work carried out by the Probate Service.
These new proposals however, which are out for consultation until 1 April, would see probate fees being charged on estates valued in excess of £50,000 according to a banding system. Fees would then start at £300 for estates valued between £50,001 and £300,000; up to £20,000 for estates valued above £2 million.
Currently, estates under £5000 are not subject to probate legislation and the government plans to raise this threshold to £50,000, meaning that according to its figures, over half of estates would pay no probate fee at all.
IWC questions the validity of this view however, with the average London house price now standing at over £500,000. It is these house prices, the company claims, which will cause problems for executors faced with paying money up front for probate fees, funeral fees and inheritance tax at 40% – and not enough money in the deceased's bank account to cover them. These executors will be forced to offer up the remaining funds themselves or, as the government suggests, to take out a short term bank loan, until the property sells and they can recoup the funds – which of course will attract interest rates and affect their credit rating.
Although packaged as a move to assist those dealing with smaller estates, IWC's Tony Crocker says that, in its bid to raise £250 million for the Exchequer, the government is actually "giving with one hand and taking with the other".
For anyone who suspects that their next of kin may find themselves struggling financially with these new proposed changes, they may be able to avoid probate altogether, by placing their property into trust, now.
In our next blog post, we'll outline how trusts can be a means of avoiding probate, how to create a trust and what happens to it after your death.
#iwcprobate #bereaved #probate
Sometimes it’s the little things that can cause someone to decide to make a will. It’s one of those things that has been put off and put off, down on the to do list for another day. But every now and then something will happen that will bring writing a will right back to the forefront of the mind once more, only this time it’s followed by the determination to actually do something about it.
And it doesn’t have to be anything life changing that prompts this sudden need either.
A recent survey says that for one in five under 40 years olds it was the first grey hair that did it – that first grey hair sent them into a panic, made them think of their own mortality, and got them to finally write a will. It may seem strange, even a little silly, possibly somewhat vain, but however you feel (and maybe you even agree), the fact that they then went on to write a will is good enough. Wills are essential.
But it’s not just the greys that have forced people to realise just how necessary writing a will really is. Wrinkles do a similar job, as do unexplained pains in the back, knees, hips – anywhere associated with movement problems in the elderly. In fact, anything that makes us feel old, any reminder of how many years have passed (looking at childhood photographs, re-visiting old houses – even if we don’t go inside but simply drive by – and realising that the children of friends and relatives are children no more for example) can all have the same effect.
Apart from those things that make us feel old, big life changes can also prompt the need to write a will, and that’s as it should be. Marriage, having children and buying a house are three of the main happy ones, and the death of a friend or family member of around the same age is the big sad one. but even smaller things such as learning about inheritance tax and the problems it can cause can make people start to think. Will writing triggers are all around us.
When asked why they hadn’t made a will up to that point, most people responded with either that they hadn’t thought about it, or that they hadn’t had time. Others said it was because they had nothing to leave (were they sure about that?) or because they were simply too young to die. None of these are good reasons not to have written a will.
How Much Are You Expecting To Inherit
Did you know that one in ten people over 40 have planned to fund their entire retirement in an inheritance? In fact, the average amount that people in their early 40s expect to inherit from family is just over £180,000. Perhaps you’re one of them.
But it’s all guesswork for the most part. Unless the conversation between parents, grandparents, or whoever has the money, and the person expecting to receive it has taken place, nothing is guaranteed. And even then, wills can be changed.
So for the most part when the time comes for those people to inherit, they often receive much less than they had expected, thanks to a lot of over-estimating. In some cases this can simply be a little disappointing. In others it can cause serious financial problems.
The reality of inheritance is that the average amount left to the people in this age bracket is just under £70,000 (this is after tax and any care home costs associated).
The problem in the sums seems to be mainly due to lack of communication. Only around 40% of 40-50 year olds had actually discussed the whole inheritance issue with their loved ones. The other 60% made assumptions which turned out to be very wrong indeed. It could be that they have over valued any property involved, or underestimated just how much care their parents will need – and how much it costs – as they grow older. This can easily eat away at an inheritance, and quickly too.
The repercussions of these miscalculations can sometimes mean that retirement plans have to be delayed indefinitely, and a vision of having the time and the means to finally enjoy one’s hobbies, go travelling, or simply have a comfortable life can disappear forever.
If you are planning to use an inheritance to fund your retirement, you should talk to those you expect to leave you the money as soon as you can. You need to be able to make long term plans, and having this information is essential. You may need to source alternative additional funds, and the earlier you find this out the better.
Knowing the figures involved will also be helpful when it comes to calculating inheritance tax, and perhaps even reducing that bill whilst your parents (for example) are still alive. And to ensure they have written a will in the first place.
Will pension drawdown increase inheritance tax liability?
The introduction of pension freedom earlier this year has led many people to ask: “Will unused pension drawdown increase the amount of my inheritance tax liability?”
Now, individuals aged over 55 are being given what is known as a “pension pot”, worth thousands of pounds in addition to regular state pension, to provide them with an income meant to see them through their retirement.
Providing an alternative to annuities, this pension pot has provided a debate as to whether individuals would be better off simply drawing down funds from the pot, as opposed to taking out an annuity to provide a regular income during retirement.
The pension pot has caused concern since its introduction, with many wondering what would happen to any remaining funds in the event of their death.
With the tax man taking 40% of the value of all assets above the nil rate band, an additional sum worth potentially thousands of pounds could have tipped many over the edge of liability. Thankfully, in the recent Autumn Statement, it was announced that inheritance tax would in fact not be payable on any unused pension drawdown funds.
The Treasury has said: “The government will legislate to ensure a charge to IHT will not arise when a pension scheme member designates funds for drawdown but does not draw all of the funds before death. This will be backdated to deaths on or after 6 April 2011”.
This clarity will provide welcome relief to many, who feared that they would need to spend all of the money before their death – a risky business when the funds are designed to provide a regular income for perhaps up to thirty years or more.
#iwcprobate #bereaved #probate
#iwcprobate #bereaved #probate
How much money can be released without probate?
It is up to the executors of a will to handle the financial dealings of the deceased person. Often, this means they have to apply for probate in order to begin to settle their estate.
On being provided with the death certificate; banks, building societies and other financial institutions will automatically freeze the deceased’s accounts until probate has been granted – a process which can often take months or even years, depending on the value and complexity of the estate.
This can obviously cause problems when the undertaker needs to be paid and the inheritance tax bill settled, all before the funds in their entirety are released.
Until recently, banks allowed executors to access a certain amount of money from the late person’s estate, so that at least part of these bills could be paid. This amount usually ranged between £15,000 and £20,000, dependent on the institution. In recent weeks however, some of the more well-known banks have agreed to raise this limit, to allow more funds to be accessed which in turn, may help loved ones who are left with a financial burden.
Lloyds Bank has raised its limit from £25,000 to £50,000, whilst RBS has raised its limit from £15,000 to £25,000.
Whilst this may seem a great deal of money however, families are increasingly feeling the pinch when it comes to laying their loved ones to rest. With the average funeral now costing around £7000, growing numbers are turning to loans and other forms of credit, to pay the undertaker. It makes sense therefore, for adults to consider paying into a funeral plan whilst they still can, to ease the financial strain when they’ve gone.
#iwcprobate #bereaved #probate
Worried about inheritance tax.
It may shock you to learn that if you have been named the executor of a will, then you may well be held responsible for paying any inheritance tax (IHT) due on the deceased's estate, BEFORE you have received any money from probate.
If the deceased was a single person and their estate is valued at above £325,000, then you can expect to pay 40% of the value above this amount, if no tax reliefs are applicable. If they were the surviving partner of a marriage, the amount, known as the nil rate band, is doubled to £650,000. This means that thousands of pounds may be required to pay off the inheritance tax debt, before you receive a penny from the proceeds of the estate.
It may be that there are enough cash savings held within the estate to pay off this debt, in which case HMRC might allow you to make a direct payment to them, straight from the deceased's savings account(s). However, if there is not enough cash available, it will be up to you to make up the shortfall. Although you will be able to recoup the money when probate has been granted, you must find a way to pay the debt up front. You might choose to borrow the money from within the family or borrow it from the bank. Banks are very familiar with this scenario and, as they know the loan will be settled relatively quickly, they are often amenable.
A slightly better scenario arises when the bulk of the estate is made up of property. In this instance, HMRC will normally allow probate to be granted and the inheritance tax debt to be paid in installments over a maximum period of ten years. Be careful though – this extended term brings with it additional interest to be paid on the outstanding balance.
In some cases, the estate may be held principally in the form of shares. Technically, probate must still be granted and the inheritance tax debt paid before any shares can be sold. However, HMRC often offers some flexibility here and you may be able to discuss the possibility of HMRC waiting until the shares have been sold, in order for you to pay the IHT bill, so long as it is considered a priority when allocating proceeds from the estate.
#iwcprobate #bereaved #probate
New IHT Family Home Allowance
A new monthly record for the amount of Inheritance Tax taken by HM Revenue and Customs was set this April. The take of £397 million stands well in excess of the average monthly take of £260 million over the last ten years. Furthermore, the Inheritance Tax of £1 billion collected by HMRC for the three months to the end of May is the highest figure for any three month period since 2007, when £1.1 billion was taken in the three months to the end of August.
Although the government has announced reforms which it says should reduce the Inheritance Tax burden, some commentators believe that the proposed reforms are too complex and could distort the housing market.
As currently proposed, a new 'family home allowance' of £175,000 per parent will be added to the current individual IHT tax-free allowance for bequests made to children or grandchildren which include a main home. As a spouse or civil partner can pass on their tax-free allowance to their spouse or civil partner, this means that the IHT tax-free threshold can therefore rise to up to £1 million for estates including a main home left to children or grandchildren by a married couple or civil partners.
The basic IHT tax-free allowance of £325,000 is otherwise unaffected by the proposals.
Some commentators have observed that the proposals would add unnecessary complexity to the system and be of benefit only to those whose wealth is tied up in the family home.
It has also been noted that that as the proposals do not appear to apply to lifetime gifts, they may have the effect of deterring elderly people from downsizing for fear of increasing the amount of Inheritance Tax due on their estates. This could lead to some elderly people feeling that they are effectively trapped in houses that are now too large for their needs. Moreover, a reluctance on the part of elderly people to downsize could put further pressure on the already stretched supply of family homes in many parts of the country.
It is believed that there will be some restrictions on the proposed allowance, with the maximum amount of the family home allowance being reduced on a sliding scale for estates worth between £2 million and £2.35 million. Estates worth £2.35 million and above would not benefit from the allowance.
Critics of the proposals say that a better, simpler and fairer way to reduce the IHT burden would have been to increase the tax-free threshold for all estates.
It remains to be seen what effect, if any, the cost of implementing the current proposals might have on other IHT reliefs, but concern has been expressed that pressure may be put on other important IHT reliefs such as agricultural property relief and business property relief.