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.
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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.
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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.
Why no will could mean Rik Mayall family loses out on inheritance
The Daily Mail recently reported that the family of the comedian Rik Mayall could be faced with a substantial Inheritance Tax bill because he died without having left a will.
Mr. Mayall, who was married with children, left an estate valued at just under £1.2 million. According to the laws governing succession in England and Wales (the law is different in Scotland),
His widow is entitled to inherit all of his personal property and the first £250,000 of his estate. Mrs. Mayall will also inherit a life interest in half of the remainder of his estate (meaning that she is entitled to the interest generated by that sum but not the capital itself), with the remaining half being split between his three children.
Mrs. Mayall's share of the estate is exempt from inheritance tax, but the portion of it which will be inherited by his children will be subject to inheritance tax if it exceeds the inheritance tax threshold of £325,000. Had there been a will leaving the whole or most of the estate to Mrs. Mayall, little or no inheritance tax would have been payable.
This illustrates the importance of inheritance tax planning. Making a will is a simple, relatively inexpensive but very important element in that process.
A will has two basic functions. Firstly, it ensures that your estate is distributed according to your wishes, rather than whatever the rules of intestacy stipulate at the time of your death . Secondly, it is a valuable element in setting up the most tax-efficient regime for the distribution of your estate, thereby ensuring that as much of your estate as possible passes to those whom you wish to provide for.
As the law currently stands, bequests made in terms of a will by a person to their spouse or civil partner are exempt from inheritance tax irrespective of the size of those bequests. However, if bequests totalling £325,000 or more are made to anyone other than a spouse or civil partner then inheritance tax is chargeable on the amount by which those bequests exceed the threshold of £325,000.00.
Inheritance tax planning is a specialised field. For that reason, we would suggest that you consult a professional tax-planning expert in order to make sure that your loved ones receive the maximum value from your estate.
The world is an uncertain place, and the future unforeseeable, so we would suggest that you do this as soon as possible. Once made, you can change your will and alter your tax-planning regime as time passes.
#iwcprobate #probate #bereaved
Life insurance and inheritance tax planning
The reason for having life insurance is simple: to provide for your loved ones in the event of your passing. However, unless you take suitable precautions it's possible that some of the proceeds of your life insurance policy might end up going to an unintended beneficiary: the taxman.
The reason for this is simple. It's called Inheritance Tax ('IHT'), and it applies to estates worth over £325,000.00. Worse still, IHT is charged at 40%. So that could mean that your loved ones lose as much as 40% of the proceeds of your insurance policy.
You may think that this doesn't apply to you, but rising house prices and a static IHT threshold could mean that your estate falls within the threshold for IHT when the time comes.
If that isn't sobering enough, consider this: a recent survey by Legal & General indicated that over 90% of their whole-of-life policy holders had taken no steps to protect the proceeds of their life policies from IHT. This is backed up by Aegon's own research, which indicates that 94% of whole-of-life policies are bereft of IHT protection. And this research comes on the back of research by Unbiased that estimated £530 million is paid out annually to HMRC by way of IHT charged on the proceeds of life insurance policies.
The problem is worse, says Legal & General, for unmarried couples, as they do not benefit from the same tax allowances that apply to spouses and civil partners. And this is no small problem – approximately 5.3 million adults in the UK fall into the category of unmarried couples.
There is, however, a solution to this problem – have your life insurance policy written in trust rather than have the proceeds of it paid directly to one or more individuals. In this situation, the proceeds of the life policy are paid to trustees, do not form part of your estate and are therefore not counted for IHT purposes.
Apart from the IHT benefits, there's one other advantage of writing your life insurance policy in trust in that the proceeds don't have to go through probate. This means that it's likely that payment will be made to the beneficiaries quicker than if the policy had not been written in trust.
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Planning for IHT liability
Planning for IHT liability is absolutely vital, in order to ensure that your loved ones or chosen charities receive as much as possible from your estate, and the taxman as little as possible.
We cannot emphasise enough how important it is to start planning your estate right now. There are stipulated time periods within English law which have significant bearing on your estate planning and, should you leave it too late, you run the risk of ultimately increasing the amount of inheritance tax to be paid.
For example, the concept of "gifting" has long been recognised as an accepted means of reducing the value of your estate whilst you are still alive – thereby reducing inheritance tax liability after you've gone. Small gifts up to the value of £250 each time can be gifted to as many loved ones as you wish. In addition, a parent can make a £5000 wedding gift, a grandparent can gift up to £2,500 for their grandchild's wedding and anyone else, up to £1000. However, there is a condition attached to these gifts.
As the individual giving a gift to a beneficiary, you must then live for at least another seven years from the date of the gift, if the value of your estate is to be reduced by that amount. Should you not live that long, then your executor will be expected to pay a percentage of the whole IHT liability. This is known as Taper Relief. So, should you die within three to four years of making a gift, then 80 percent of the inheritance tax will be charged. Alternatively, between years six and seven, 20 percent will be charged.
From this then, it should be clear that you need to start planning for IHT liability well in advance. Any delay could cost your loved ones potentially thousands of pounds.
#iwcprobate #inheritancetax #probate
Potential lifeline for those struggling with inheritance tax
With inheritance tax falling due before any inheritance monies are released, this can prove to be a huge financial burden for grieving relatives – particularly when that bill can reach many thousands of pounds.
We have heard horrific tales of relatives resorting to extreme measures in order to raise funds to meet funeral and inheritance tax costs, such as taking out extortionate payday loans. However, the legal press recently gave details of a new, alternative provider who is helping a number of families who have found themselves in this unfortunate financial position.
One such client of HNW Lending needed a loan of £100,000 to pay for the funeral costs and inheritance tax bill of £60,000 on a £2 million Mayfair flat – money which the executors would otherwise have needed to find themselves.
So how does it work? Loans are secured on the property in question and are normally available for repayment over a three or six months term. The application process is relatively fast, with successful applicants receiving their money in around 10 days.
Funding is provided by a number of high net worth individuals rather than a financial organisation and interest rates are negotiated. HNW Lending will complete a valuation of the property concerned and then attempt to identify a lender who will provide funds, secured against the value of that property.
Although this is the latest kid on the block offering funding for this particular type of debt, we anticipate that other alternative lenders will follow suit, to cater for increasing numbers of families facing financial hardship due to funeral and probate issues.
#iwcprobate #inheritancetax #probate
Why put assets into trust?
Many of our clients ask why it would be beneficial for them to place assets in the form of money or property into a trust for their children or other loved ones.
In most cases that we handle, assets are put into trust to benefit children who have not yet reached an age dictated by our client. The trust is set up and managed by one or more trustees, who then have the legal obligation of handling the funds in the trust until such time as they are able to be made available to the beneficiaries.
There are several different types of trust to cater for specific circumstances and financial objectives:
Discretionary trust - a discretionary trust gives trustees absolute control over how the funds should be managed.
Interest in possession trust – an interest in possession trust can give the beneficiary an immediate income from the invested assets, although they will not have immediate access to those actual assets and may be required to pay income tax as usual.
Bare trust – the simplest trust to set up, a bare trust states that the beneficiary will receive specific assets when they reach a certain age.
Trust for a vulnerable person – of course, trusts are not only set up for children. Vulnerable adults may also benefit and this type of trust is perfect for them, particularly as the rate of income tax may be reduced.
Non-resident trust – on occasion, we meet with the added complication that all named trustees live outside the UK. In this instance, a non-resident trust may mean that income tax can be reduced or eliminated altogether.
In addition to providing additional funds for your loved ones, setting up a trust means that the amount you invest in the trust will subsequently be removed from the value of your overall estate, which often helps to reduce the amount of Inheritance Tax which may fall due in the event of your death.
Making gifts to reduce your estate – the rules
One of the most common ways of reducing inheritance tax liability is to make gifts to friends and family during your lifetime in the form of cash or assets.
There are specific rules which apply, which limit the amount you can give away which will affect your estate's inheritance tax liability.
You can legitimately give gifts with a value of up to £3,000 in total in each tax year, with this amount being exempt from inheritance tax. Should you not manage to give away the full £3,000 in a tax year, you can carry forward any unused part to the next tax year. However, it must then be used in that year or the exemption will become invalid.
In addition to this basic guideline, there are other allowable gifts which are exempt from inheritance tax.
For example, wedding or civil partnership gifts up to the value of £5000 may be given to the happy couple by each set of parents. Grandparents or great grandparents can give up to £2,500 and anyone else can give up to £1000.To qualify as a legitimate wedding gift, it has to be given either on the big day, or shortly before the ceremony takes place.
Gifts in the form of money or assets up to the value of £250 can be given to anyone in any tax year. This amount cannot be exceeded and this exemption cannot be used to give to the same person who has received other similar gifts from you in the same tax year for the purpose of inheritance tax reduction.
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